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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-53953
CONVERGENT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1337265
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
(303) 749-3000
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Not Applicable registered
Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Not Applicable
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 [X] No [_]
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 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]
On March 16, 1999, the aggregate market value of Convergent Communications,
Inc. common stock held by non-affiliates was approximately $95.6 million,
based on a price per share of common stock of $5.00.
On March 16, 1999, 27,920,704 shares of the registrant's Common Stock were
outstanding.
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TABLE OF CONTENTS
PART I
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Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 8
Item 3. Legal Proceedings................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................................. 9
Item 6. Selected Financial Data........................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 19
Item 8. Financial Statements and Supplementary Data....................... 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............... 44
Item 11. Executive Compensation........................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management... 50
Item 13. Certain Relationships and Related Transactions................... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K........................................................................ 52
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Note Concerning Forward-Looking Information
Some of the information in this report contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You
should read statements that contain these words carefully because they: (1)
discuss our future expectations; (2) contain projections of our future results
of operations or of our financial condition; or (3) state other "forward-
looking" information. We believe that it is important to communicate our
future expectations to our investors. However, there may be events in the
future that we have not accurately predicted or over which we have no control.
These events may include future operating results, our efforts to address Year
2000 issues and potential competition, among other things. Cautionary language
in this report provides examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. You should be aware that the
occurrence of the events described in this report could have a material
adverse effect on our business, operating results and financial condition.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Convergent Communications, Inc. is a single-source provider of data and
voice communications systems, services and solutions to small and medium-sized
businesses. We design, build, install, monitor and manage data and telephony
networks inside enterprises and provide external network services such as data
transport, long distance service, local service and Internet access. We offer
these products and services on a stand-alone basis or as part of a bundled
offering that can include owning an enterprise's internal data and voice
networks. We are also installing next-generation, converged data and voice
switching platforms in each of the markets in which we operate to efficiently
handle our customers' traffic.
We operate in 35 markets in the United States and, either directly or
through businesses we have acquired, have provided products or services to
more than 60,000 customers in the last 18 months. We had revenue for 1998 of
$61.6 million. During the year ended December 31, 1998, we sold in a private
placement $160 million principal amount of 13% senior notes due 2008 and
warrants to purchase 1,728,000 shares of common stock. Since year end,
affiliates of Sandler Capital have agreed to invest $20 million in our
preferred stock, of which $16 million has been received. As a result of the
investment in our preferred stock we also have met the requirements to
increase the borrowing capacity under our existing Comdisco equipment lease
facility by an additional $20 million.
In the last three years we have:
. increased sales from $98,000 in 1996, to $10.2 million in 1997, and to
$61.6 million in 1998;
. acquired and have integrated or are in the process of integrating 13
companies, adding sales and technical personnel and new products,
services and markets;
. developed and deployed our next-generation converged data and voice
switching architecture, the Enterprise Point-of-Presence (or "E-
POP(TM)") switch, in three markets and positioned ourselves to deploy
our E-POP(TM) switch in all our existing markets over the next 24 to 36
months;
. assembled an experienced support-services management team of
communications experts;
. devoted significant resources to the development, testing and
implementation of our operational and customer support software
platform, the Computer-Telephony Integrated Support System(TM)
("CTISS"); and
. developed, tested and implemented our national, around-the-clock
customer care center.
INDUSTRY OVERVIEW
According to published reports, the revenue from data communications in the
United States last year (including personal computers, data communications,
Internet usage and electronic commerce) grew 35 percent. Total data products
and services revenue was $97.6 billion, with data and network services
accounting for $22.1 billion. Sophisticated data technology solutions such as
wide area networks, dedicated Internet access and virtual private networking
are becoming not only increasingly commonplace at small and medium-sized
businesses, but also a competitive necessity. Increasingly complex service
options are offered by a number of traditional and emerging carriers. In
addition, telephony products are substantially more complex than they have
been in the past because computer functionality has been designed into
traditional business telephone products. Because of this complexity, we
believe small and medium-sized businesses are seeking single-source solutions
providers for their communications needs. We believe other factors that are
leading these businesses to seek comprehensive solutions include:
. the large number of manufacturers of data and telephony equipment and
the variety of options and features available on these products;
. the need to focus on their core operations rather than network and
communications issues;
. rapid changes in technology;
. the proliferation of carriers and diverse emerging carrier options
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. the cost and difficulty of maintaining in-house technical expertise;
. the potential savings associated with outsourcing communications
requirements; and
. the desire to deploy capital resources in their core business rather
than on the purchase and continual upgrade of communications systems.
Small and medium-sized businesses today generally purchase their
communications equipment and services from several, usually local or regional,
suppliers. In this fragmented market, there are few providers of complete data
and voice communications solutions. In general, the small, regional providers
that supply most small and medium-sized businesses are not as sophisticated as
the national systems integrators, outsourcers, data technology companies and
telecommunications providers that have focused on selling products and services
to large enterprises. In addition, few providers offer a complete package of
data and voice systems, services and solutions in the small and medium-sized
market.
THE CONVERGENT COMMUNICATIONS(TM) SOLUTION
We are a single-source provider of technologically advanced data and
telephony systems, services and solutions to small and medium-sized businesses.
Many of the advanced solutions we offer have traditionally only been available
to large companies. We are able to design sophisticated systems and solutions
targeted for our customer base and offer those systems, services and solutions
in each of our markets. We have a highly trained technical staff of 195
individuals.
In addition, our Enterprise Network Solutions (or "ENS") offering provides
our customers with a communications networking solution that reduces the
capital expenditure, technical staffing requirements and risks associated with
quickly evolving communications, data and Internet technologies. With ENS, we
purchase all or a portion of the existing communications system inside our
customer's enterprise, and then become the outsourced service provider for the
customer over a long-term period (typically three to five years). ENS may
include network design, monitoring, maintenance and upgrading during the term
of the contract in addition to providing data and voice transport services.
These contracts typically provide the customer with a fixed monthly expense for
all or most of their communications needs and reduce the customer's total cost
of communications equipment and services.
We believe our expertise in both data and voice systems, services and
solutions, and our willingness to finance the purchase of new systems and/or
own the networks inside of an enterprise (as part of our ENS offering), make us
an attractive single-source provider of communications systems, services and
solutions to small and medium-sized businesses.
OUR STRATEGY
Our strategy is designed to achieve rapid market penetration, strong growth
and recurring revenue. The key elements of this strategy include:
. PROVIDING SINGLE-SOURCE, COMPREHENSIVE SOLUTIONS. We design, build,
install, monitor and manage data and voice networks. We are able to
provide virtually all of our customers' communications systems, services
and solutions and offer equipment financing and maintenance contracts.
This comprehensive approach is designed to reduce the complexity and
expense of communications networks and operations for our customers and
allow us to capture a substantial portion of our customers'
communications expenditures.
. TARGETING SMALL AND MEDIUM-SIZED BUSINESSES. Small and medium-sized
businesses have historically been underserved by large systems
integrators, outsourcers, data technology companies and
telecommunications providers. Because we are focused on this market, we
have developed solutions that are best suited for the financial
resources, growth characteristics, technological sophistication and
other needs of small and medium-sized businesses.
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. Providing Sophisticated Data and Internet Solutions. Most small and
medium-sized businesses do not have the internal capability or capital
required to deploy and manage the latest data and Internet technology,
such as intranets and extranets, even though that technology could be
critical to their success. We are able to provide these businesses with
the type of data and Internet solutions that have previously been
available only to much larger organizations with dedicated information
technology staffs and large information services budgets.
. Upselling Existing Customer Base. We have, either directly or through
businesses we have acquired, done business with more than 60,000
customers in the last 18 months. Most of these customers have purchased
telephone systems and services from us or one of the companies we
acquired. We are now beginning to leverage our relationships with these
businesses and offer advanced data and Internet products and services to
them, including network design and installation, virtual private
networks (a shared dedicated network), web hosting, extranets and
intranets. In addition, as we expand our data capabilities in each of
our markets, we will begin offering ENS to these customers We currently
offer ENS in eight of our 35 markets.
. Improving Margins Through the Rapid Deployment of Our Lower-Cost
Converged Switching Architecture. We have designed a multi-functional
switch (our E-POP(TM)) from commercially available components. This
switch provides greater functionality at a lower capital cost than
traditional switches. The lower capital cost of our converged switching
architecture allows us to deploy switches in all of our markets quickly
and economically. These switches should also improve our operating
margins on our transport services as we switch more of our customers'
traffic ourselves.
. Increasing Higher-Margin Revenue and Reducing Customer Turnover With our
ENS Offering. Our ENS offering allows our customers to focus on their
core business and outsource their entire communications networks,
including the design, ownership, upgrading and maintenance of those
networks. These long-term contracts:
. increase the portion of our customers' communications spending that
we can capture;
. reduce customer turnover and provide a stable, recurring source of
higher-margin revenue; and
. enhance our opportunities to sell systems and service upgrades to
existing customers.
. Leveraging our Operational Support System. We are developing and
implementing a proprietary multifunctional operational support system we
call the Computer Telephony Integrated Support System(TM). CTISS is an
Oracle-based system that integrates all internal support services on a
single platform, permitting customer care, sales engineering, service
management, service delivery, accounting and inventory management
personnel to provide input and work from a single customer record. This
system is intended to provide better customer service and to help
identify opportunities to sell additional products and services.
. Making Selective Acquisitions to Expand Data Expertise and Geographic
Coverage. We have made and will continue to make acquisitions of
companies that have experience in providing data, voice and Internet
systems, services and solutions and companies that will help us expand
geographically.
Sales and Marketing
In the last 18 months, we have provided products or services to
approximately 60,000 customers, either directly or through businesses we have
acquired, and are currently offering our products and services in 35 markets
in the United States. We are selling all our systems, services and solutions,
including ENS, in eight of our markets, and voice systems and services in all
of our markets. We are developing additional data, Internet
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and ENS expertise in the markets in which we do not currently offer those
products and services. We anticipate being able to provide all of our products
and services in an additional six to eight of our markets by the end of 1999,
and in all of our existing markets over the next 24 to 36 months.
Our Sales Team. We market and sell our systems, services and solutions
through our staff of 144 sales representatives in 49 offices in our 35
markets. Our sales force is supervised by area and general managers, each of
whom has responsibility for all sales functions in one of our geographic
regions. A significant portion of the compensation of the sales force is tied
to annual goal and quota programs with incentive bonuses paid based on gross
margin (rather than revenue) targets.
Products and Services. We provide a broad range of products and services on
a stand-alone or integrated solutions basis. Our products and services
include:
. Data Services. We provide professional data services including network
design, maintenance and management and World Wide Web site development
and hosting. We also offer data transport services such as Internet
access and frame relay transmission for computer data and digitized
voice.
. Voice Services. We provide professional telephony services, including
network design, maintenance and management and assist our customers with
adding and moving phone lines. We also sell conventional long distance
and local services.
. Enterprise Network Services. We offer our customers a comprehensive
communications solution that we call Enterprise Network Services, or
ENS. ENS customers sign a long-term contract with us (typically three to
five years) under which we own, manage and are responsible for all or a
portion of the network inside the customer's premises.
. Data Products. We market products, from a large variety of suppliers,
needed to create data networks including routers, hubs, bridges,
multiplexers, switches, servers, personal computers, and other
equipment.
. Voice Products. We are a provider of voice network products such as
private branch exchanges (PBX), key systems (smaller versions of PBX's),
handsets, voice messaging, call management software, facsimile services
and other voice services.
While we provide each of our products and services on a stand alone-basis,
we believe the ENS offering to be particularly attractive to small and medium-
sized businesses because it:
. lowers the total cost of network ownership for our customer;
. reduces our customers' risks and burdens associated with owning,
operating and maintaining their data and telephony networks;
. conserves our customers' capital in exchange for a stable, monthly
expense; and
. reduces the need for our customers to employ costly and difficult-to-
recruit information technology personnel.
We intend to market ENS both to our existing customer base as well as to new
customers through direct marketing programs.
Financing. We provide financing options to our customers for their data and
voice products. We believe that these services enhance our ability to attract
customers and to act as their single-source provider. As of February 28, 1999,
Convergent Capital Corporation, our financing subsidiary, had provided $2.7
million in financing in connection with our sales of data and voice products.
Customer Care
Our Customer Care Staff. We maintain highly integrated sales and customer
care support functions. Our customer care specialists are trained in all
aspects of the systems, products and services offered in their market. Our
customer care staff currently consists of 83 employees.
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Integrated Care Approach. We provide extensive customer care training to
each of our employees who has customer contact, allowing us to provide high
quality service in every aspect of our operations. This integrated approach
allows us to pursue our goal of providing best-in-care service starting with
the initial customer contact and continuing throughout the life of the
account.
Commitment to Superior Service. We strive to provide superior service
through our well-trained staff and our commitment to:
. Acting Immediately. Our employees are specialists who will begin
troubleshooting immediately to resolve any problem and seek to reach a
conclusion and fix a problem during the initial contact. The regional
customer care centers are staffed nine hours a day, five days a week to
handle the anticipated workload, and our national customer care center
provides additional around-the-clock support.
. Providing a Single Point of Contact. Our customers can call a single
toll-free trouble-reporting number for assistance in solving most
communications problems. Because our customer care teams are trained in
a variety of communication systems and services, they are able to assist
customers in solving problems that may involve more than one product or
service.
Network Architecture
Switching Platform. We have designed a switching platform we call an
Enterprise Point-of-Presence (or E-POP(TM)), that we use to carry voice and
data traffic on a single digital connection. Unlike traditional switches,
which are designed to transport only specific types of data or voice services,
our switching platform acts as both a single converged voice and data service
aggregation point for our customers and a dissemination point to facilities-
based providers of data transport, Internet services and long distance and
local services. Our architecture requires substantially less capital to deploy
than the combination of traditional switches necessary to carry the same types
of traffic. We have already installed and are carrying customer traffic over
our E-POPs(TM) in three markets and intend to deploy them in each of our
existing markets within the next two years.
National IP/ATM Network. Our national network, which we will lease to
connect our E-POPs(TM) and carry our customers' data, voice and Internet
traffic will be based on asynchronous transfer mode (or ATM), technology. We
will lease fiber capacity from other carriers and install our equipment at the
connection points. Our national network will also use Internet Protocol (IP)
to identify the packets of information that we transport. Our IP/ATM national
network is designed to transport all data, voice, video and Internet
information at high speed from our E-POPs(TM) to their destinations. We expect
to have seven of our E-POPs(TM) connected via our IP/ATM network by June 1999.
Acquisitions
Since our inception, we have completed 13 acquisitions which have aided in
establishing our operations in 28 of our 35 markets and have added to our
skills and areas of expertise. We are expanding the product and service
offerings available to the acquired sales and field personnel, and are thereby
creating new sales opportunities. We expect to continue to make selective
acquisitions to expand our data and Internet expertise and broaden our
geographic coverage.
The key factors we have and will continue to use in evaluating potential
acquisitions are:
. historical and projected financial performance;
. complementary skills and strengths;
. cross-selling and up-selling opportunities;
. acceleration of our geographic growth or expansion of current markets;
. additions to our sales force and technical personnel; and
. existing customer base.
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The Tie Acquisition. On August 1, 1998, we completed our largest acquisition
to date when we acquired substantially all the assets of Tie Communications,
Inc. for $51.4 million, including $40.0 million in cash consideration plus
other costs and assumed liabilities. Tie was a debtor-in-possession under the
U.S. Bankruptcy Code at the time. We acquired these assets to accelerate our
growth, expand our service offerings and add to our skill base. The Tie
acquisition provided us with 24 new markets and 436 employees with extensive
experience in telephony products and services. The strong consultative sales
organization we acquired from Tie, which remains largely intact, used a
marketing approach similar to our own. The organization's expertise in the
sales and service of complex telephony products complements our strength in
data networking products and services. The acquisition was also attractive
because of the opportunity to market our data, Internet and telephony systems,
services and solutions to Tie's 55,000 telephony customers.
Regulatory Environment
Certain components of our data and telephony products and services are
regulated as telecommunications services and are subject to federal, state,
and local regulation.
Federal Regulation. Convergent Communications(TM), like all carriers
providing interstate or international service, must comply with the
Communications Act of 1934, and the regulations of the Federal Communications
Commission. The Communications Act of 1934 was comprehensively amended by the
Telecommunications Act of 1996, which eliminated many barriers to competition
in the telecommunications market, particularly in the sale of local telephone
service.
The FCC classifies competitive carriers like us as non-dominant, which means
that we are not subject to the onerous regulations imposed on dominant
carriers possessing market power. As a non-dominant carrier, we are subject to
only minimal FCC regulation of our sale of data products. Likewise, we are
subject to only minimal FCC regulation over our sale of enhanced services or
information services. However, the FCC regulates what products may be
connected to the public switched telephone network, and those products we
install must meet the FCC's standards.
Frame relay services are considered a "basic" transmission service subject
to tariffing and other requirements which apply to common carriers. Under the
current regulatory structure, our national IP/ATM network, in contrast, is
exempt from such regulations. However, the regulatory classification of voice
communications using IP or ATM technology is in a state of flux, and there is
a possibility that voice communications using IP or ATM technology will be
subject to considerable regulation in the near future.
Our voice services are more extensively regulated. Although we presently
only provide local and long-distance telecommunications services through
resale of services purchased from, or as an agent on behalf of, other
carriers, we are still subject to various regulations. We must file tariffs
with the FCC where we resell regulated interstate phone service such as
operator services, and, in most cases, must file tariffs with state public
utility commissions where we resell intrastate phone service.
While we are not required to file tariffs for our interstate long distance
services as a result of an FCC order, that order has been challenged, and the
U.S. Court of Appeals of the D.C. Circuit has stayed the order while it
considers the merits of the challenge. As a result, we have filed tariffs with
the FCC for our interstate long distance services. If we are required to
continue filing tariffs for these services, we will incur various costs and
delays in bringing new services to the market.
Operator Services. We provide some operator services which are regulated at
the federal and state level. We are required to disclose our operator service
prices to callers and must file informational tariffs with the FCC containing
detailed and specific information about our rates.
Website Hosting. We provide website hosting for our customers. The FCC does
not regulate website hosting, although the transmission of data through the
Internet is within the jurisdiction of the FCC. We cannot predict what effect
any new regulations would have on this portion of our business. Potential
negative impacts
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could include the increased costs to comply with any regulations which are
imposed and delays in getting new products and services to market.
State Regulation. Some of our resold local and long-distance services are
classified as intrastate and therefore subject to state regulation. In most
states in which we do business, we are required to obtain a certificate of
public convenience and necessity and operating authority for the sale of local
phone services. In addition, we are often required to file tariffs setting
forth the terms, conditions, and prices for services which are classified as
intrastate, particularly local exchange services.
Our Regulatory Status. We are authorized by the FCC to provide resold
international services. We also have tariffs on file with the FCC for
interstate interexchange services, frame relay services and operator services.
In addition to these federal authorizations, we are authorized to provide
intrastate interexchange services in 30 states and are certified to provide
local exchange services in seven states.
Competition
Although several larger data and telephony companies have entered or will
enter our market, we believe that we can compete successfully because:
. we have expertise in providing integrated data and telephony systems,
services and solutions specifically tailored to the needs of small and
medium-sized business;
. our product and service offerings are broad and provide a suitable
solution and price point for our target market;
. we are focused on providing extremely high quality customer service and
technical support;
. we are willing to help the customer finance our network solutions; and
. we intend to continue to offer new systems, services and solutions to
enable small and medium-sized businesses to take advantage of leading
technology.
The telecommunications industry is highly competitive. We expect that we
will face substantial and growing competition from a number of providers of
data networking, data transport, and telephony services. Although we do not
believe that a significant number of other companies are providing Enterprise
Network Services solutions or a comparable range of integrated data
networking, data transport, and telephony outsourcing services to small and
medium-sized businesses, we do face intense competition in each of our
individual product and service offerings. Our competitors include incumbent
local exchange carriers (including the regional bell operating companies
("RBOCs" and GTE), traditional and wireless competitive local exchange
carriers, long distance carriers (such as AT&T and MCI WorldCom), and data
integrators and providers of network services and customer premises equipment
(such as Williams Telecommunications, Inter-Tel and Claricom).
With respect to any individual product or service we offer, we do not
necessarily enjoy any particular competitive advantage over other industry
participants. Indeed, some of these competitors or potential competitors are
or will be able to bundle the same types of product and service components
offered by us. In particular, any telecommunications carrier that offers both
local and long-distance telecommunications services, including any incumbent
local exchange carrier permitted to offer in-region long-distance services,
will be able to offer these services as a single-source provider to customers.
Because we have no present intention of owning fiber optic cable or last mile
connections, some of our competitors will have a lower cost than we do for
long distance or local services.
The RBOCs are also moving more aggressively into data transport. They have
filed petitions seeking to have the FCC deregulate immediately the provision
of packet-switched transport services. Although the FCC denied these
petitions, the FCC has proposed permitting incumbent local exchange carriers
to offer interLATA (local access and transport area) data services through a
separate affiliate. Moreover, Bell Atlantic has petitioned to be allowed to
provide interLATA data transport services in West Virginia; SBC Communications
and Bell Atlantic have announced that they intend to provide more data
networking services to commercial customers; and a number of RBOCs have begun
offering digital subscriber line services.
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A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors with
resources far greater than ours. These business combinations include the
merger of AT&T and Tele-Communications, Inc. ("TCI"), which will allow the
resulting entity to bundle products from each of these companies. The AT&T-TCI
merger follows AT&T's successful acquisition of Teleport Communications Group,
a large competitive local exchange carrier. In addition, several of the
largest local phone companies have proposed to merge, including Bell Atlantic
with GTE and SBC Communications with Ameritech.
Technological developments may allow other companies to provide a single-
source solution in competition with our product offerings. For example, Sprint
has announced its development of an "Integrated-On-Demand Network" which if
viable will allow customers to simultaneously use the Internet, telephone, and
fax machine through use of the same phone line. Hardware manufacturers are
also designing multi-function switching platforms similar to our E-POP(TM),
possibly allowing other start up providers to use a similar lower-cost
architecture. We would also, however, intend to take advantage of these
developments in technology.
To the extent that competitors begin bundling components of the Enterprise
Network Services (including data networking and the provision of customer
premises equipment) into their own product offerings, we will face additional
competition as a single-source provider of services. Most of our existing and
potential competitors have financial and other resources far greater than
ours, have long-standing relationships with their customers, and have greater
name recognition than we do.
Employees
As of February 28, 1999, we had 1,032 full-time employees, of which 436 were
added as a result of the Tie Acquisition. A total of 53 of the 436 former Tie
employees we hired were represented by the Communications Workers of America
labor union while employed by Tie at locations in California, Minnesota and
New York. The local chapters of the Communications Workers of America have
asked us to enter into collective bargaining negotiations as a result of the
hiring of these employees at these locations.
Item 2. Properties
We lease sales and support facilities in each of our markets. Our principal
corporate and support facilities are also leased, and are located as follows:
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Location Size (sq. ft) Lease Expiration
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Englewood, Colorado......................... 28,488 April 30, 2003
Englewood, Colorado......................... 23,256 November 30, 2000
Englewood, Colorado......................... 16,700 February 28, 2002
Overland Park, Kansas....................... 32,044 November 30, 1999*
</TABLE>
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* The employees located at this facility will be relocated to our offices
which were acquired through the Kansas Communications, Inc. acquisition.
Item 3. Legal Proceedings
We are involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on
our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
This item is inapplicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for our equity securities. As
of March 16, there were 446 record holders of common stock.
We have never paid cash dividends on our common stock. We currently intend
to retain future earnings, if any, to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of the indenture governing
our 13% Series B Senior Notes due 2008 contain restrictions on our ability to
pay dividends or other distributions.
The following tables summarize all equity securities issued or sold by us
during the fiscal year ended December 31, 1998 that were not sold pursuant to
registered offerings:
Common Stock
<TABLE>
<CAPTION>
Underwriters or Class of Number of Exemption
Date Purchasers Shares Consideration ($) Claimed
---- ------------------------ --------- ------------------------ ------------
<S> <C> <C> <C> <C>
Jan 15, 1998............ Investment Banker Fee 12,000 Services performed Section 4(2)
Jan 15, 1998............ Investment Banker Fee 8,333 Services performed Section 4(2)
Feb. 19, 1998........... Employee options 10,000 $10,000 Rule 701
Feb. 20, 1998........... Sellers in an 10,000 100% equity interest in Section 4(2)
acquisition the target company
Mar 10, 1998............ Consultants 75,000 $4,500 plus services Rule 701
Apr. 9, 1998............ Private placement agent 56,250 $67,500 Section 4(2)
warrant exercise
Apr. 9, 1998............ Private placement agent 13,700 $41,100 Section 4(2)
warrant exercise
Apr. 28, 1998........... Sellers in an 100,000 Substantially all of the Section 4(2)
acquisition assets of the target
company
Employees 168,993 deferred compensation Section 4(2)
May 4, 1998............. plan payment
May 22, 1998............ Sellers in an 30,000 100% equity interest in Section 4(2)
acquisition the target company
Jul. 16, 1998........... Sellers in an 340,000 Substantially all of the Section 4(2)
acquisition assets of the target
company
Sep 10, 1998............ Sellers in an 5,000 Additional consideration Section 4(2)
acquisition for purchase pursuant to
earn-out provisions
Sep 11, 1998............ Employee options 2,000 $2,000 Rule 701
</TABLE>
Warrants
<TABLE>
<S> <C> <C> <C> <C>
Apr. 2, 1998....... Accredited 1,728,000 $6,886,400 Rule 144(A) and
investors - Merrill Regulation S
Lynch & Co.; Bear,
Stearns & Co; and
BT Alex. Brown
(underwriters)
Aug. 1, 1998....... Strategic marketing 262,500 (subject Services performed Section 4(2)
services provider to reduction
based on performance)
(65,625 canceled)
Aug. 3, 1998....... Consultant 210,000 Services performed Section 4(2)
(60,000 canceled)
</TABLE>
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
which appear elsewhere in this 10-K. The selected financial data are derived
from our audited financial statements and the financial statements of our
predecessor. Effective December 17, 1996, we acquired
9
<PAGE>
Integrated Communication Networks, L.C., which is referred to as the
"predecessor" for the period prior to the acquisition. Convergent
Communications(TM), since inception, and Integrated Communication Networks,
L.C., since December 17, 1996, are referred to as the "successor." Share and
per share information is not presented for the predecessor as they are not
relevant due to the predecessor's different capital structure.
<TABLE>
<CAPTION>
For the Period For the
For the For the January 1, 1996 Period from For the For the
Year Ended Year Ended through Inception through Year Ended Year Ended
December 31, 1994 December 31, 1995 December 16, 1996 December 31, 1996 December 31, 1997 December 31, 1998
(predecessor) (predecessor) (predecessor) (successor) (successor) (successor)
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating
Statement Data:
Revenue......... $ 988 $1,434 $1,496 $ 98 $10,210 $ 61,600
Cost of sales
before
depreciation... 729 964 1,018 79 7,368 43,703
Selling, general
and
administrative.. 477 405 554 552 10,983 47,862
Depreciation and
amortization... 106 127 124 41 1,453 7,493
----- ------ ------ ------ ------- --------
Total operating
expenses....... 1,312 1,496 1,696 672 19,804 99,058
Interest
expense........ (15) (17) (21) (1) (155) (17,502)
Interest
income......... -- -- -- -- 251 4,632
Other expense,
net............ (49) -- -- -- (156) (248)
----- ------ ------ ------ ------- --------
Net loss........ $(388) $ (79) $ (221) $ (575) $(9,655) $(50,576)
===== ====== ====== ====== ======= ========
Net loss per
share (basic
and diluted)... $(0.07) $ (0.46) $ (1.84)
Weighted average
shares
outstanding
(basic and
diluted)....... 7,775 20,922 27,463
<CAPTION>
As of December As of December As of December As of December As of December
31, 1994 31, 1995 31, 1996 31, 1997 31, 1998
(predecessor) (predecessor) (successor) (successor) (successor)
----------------- ----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Cash and cash equivalents......... $ 23 $ 13 $3,161 $ 667 $ 25,597
Working capital................... 219 (10) 1,890 5,334 28,500
Total assets...................... 1,012 797 9,887 24,922 185,656
Long-term debt, less current
portion.......................... 440 431 423 966 162,485
Total liabilities................. 529 580 1,902 6,194 207,005
Shareholders' equity (deficit).... 483 217 7,985 18,728 (21,349)
<CAPTION>
For the Period For the
For the For the January 1, 1996 Period from For the For the
Year Ended Year Ended through Inception through Year Ended Year Ended
December 31, 1994 December 31, 1995 December 16, 1996 December 31, 1996 December 31, 1997 December 31, 1998
(predecessor) (predecessor) (predecessor) (successor) (successor) (successor)
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other Operating
Data:
Net cash
provided by
(used in)
operating
activities..... $(217) $ 60 $ (31) $ (242) $(6,698) (28,698)
Net cash used in
investing
activities..... (200) (8) (36) (1,446) (11,648) (94,647)
Net cash
provided by
(used in)
financing
activities..... 427 (61) 91 4,849 15,852 148,274
EBITDA(1)....... (218) 65 (76) (534) (8,141) (29,965)
Capital
expenditures... 140 23 36 29 2,042 19,916
</TABLE>
- -------
(1) EBITDA consists of earnings before interest (net), income taxes,
depreciation, amortization and other income (expense). EBITDA is a measure
commonly used in the telecommunications industry to analyze companies on
the basis of operating performance. It is not a measure of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to net income as a measure of performance
or as an alternative to cash flow as a measure of liquidity. Our measure
of EBITDA may not be comparable to similarly titled measures by other
companies.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read along with the Consolidated
Financial Statements and the accompanying footnotes included later in this
Form 10-K. This discussion includes what are called "forward-looking
statements" and are based on current expectations which involve risks and
uncertainties. There is a risk that what we currently expect will not happen
in the future. Because of the uncertainty of many factors, what actually
occurs in the future may be very different from what we project in our
forward-looking statements.
OVERVIEW
Convergent Communications, Inc. is a single-source provider of data and
voice communications systems, services and solutions to small and medium-sized
businesses. We design, build, install, monitor and manage data and telephony
networks inside enterprises and provide external network services such as data
transport long distance service, local service and Internet access. We offer
these products and services on a stand-alone basis or as part of a bundled
offering that can include owning an enterprise's internal data and voice
networks. We are also installing a next-generation, converged data and voice
switching platform in each of the markets in which we operate to efficiently
handle our customers' traffic.
We operate in 35 markets in the United States and, either directly or
through businesses we have acquired, have provided products or services to
more than 60,000 customers in the last 18 months. We had revenue for 1998, of
$61.6 million. During the year ended December 31, 1998 we completed the sale
of $160 million in 13% senior notes and warrants. Since year end, affiliates
of Sandler Capital have agreed to invest $20 million in our preferred stock,
of which $16 million has been received. As a result of the investment in our
preferred stock, we also have met the requirements to increase the borrowing
capacity under our existing Comdisco equipment lease facility by an additional
$20 million.
We began offering Enterprise Network Services in December 1997 and as of
December 31, 1998, had entered into long-term Enterprise Network Service
contracts with 18 customers with an aggregate of approximately 1,537 computers
and handsets. We expect these contracts will provide us with approximately
$2.4 million in annual contract revenues, and over their terms we expect they
will produce total revenues of approximately $14.6 million. Although these
contracts may be canceled by the customer, cancellation requires payment of a
fee designed to reimburse us for all or substantially all of our costs
incurred in entering into the contract.
During 1998 we made several strategic acquisitions, the latest and most
significant of which was the acquisition of substantially all of the assets of
Tie. With the acquisition of these assets we have accelerated our growth by
adding 24 new markets and 436 employees with extensive experience in telephony
products and services and by gaining the opportunity to cross-market our data
products and services, including Enterprise Network Services, to Tie's 55,000
telephony customers.
We expect that this expansion will require additional capital expenditures
and direct operating costs and expenses. As a result, we expect our net losses
to increase. However, as our customer base grows and we are successful in
offering all of our data services and products, we believe revenue will
increase faster than operating expenses and will generate positive cash flow.
11
<PAGE>
Description of Financial Components
We classify our business into five business segments: data services, voice
services, Enterprise Network Services, data products and voice products. The
following table outlines the components of revenue and the related cost of
sales, excluding depreciation, by business segment:
<TABLE>
<CAPTION>
Revenue Cost of Sales (excluding depreciation)
------- --------------------------------------
<S> <C>
Data Services
. Professional . engineer and technician compensation and
web design, data network benefits
monitoring and support and
data network planning and
design......................
. Network . leased line facilities charges connecting a
provision of frame relay (ATM customer to a long distance or local network
and IP switching), Internet
access and web hosting.......
. capacity charges that long distance and local
carriers, Internet providers and others impose
to use their switches, ports, servers and other
equipment
</TABLE>
------------------------------------------
<TABLE>
<S> <C>
Voice Services
. Professional . engineer and technician compensation and
voice network monitoring and benefits
support, and voice network
planning and design..........
. Network . leased line facilities charges connecting a
long distance service, local customer to a long distance or local network
telephone service and public
phone service................
. capacity charges that long distance and local
carriers, Internet providers and others impose
to use their switches, ports, servers and other
equipment
</TABLE>
------------------------------------------
<TABLE>
<S> <C>
Enterprise Network Services
. long-term contracts (typically . costs associated with all of the data and
three to five years) under which voice products and services we offer
we own, manage and are
responsible for all or a portion
of the network inside the
customer's premises..............
</TABLE>
------------------------------------------
<TABLE>
<S> <C>
Data Products
. sale and installation of data . cost of data network equipment
network equipment...................
. installation of data network equipment
</TABLE>
------------------------------------------
<TABLE>
<S> <C>
Voice Products
. sale and installation of voice . cost of voice network equipment
network equipment..................
. installation of voice network equipment
</TABLE>
12
<PAGE>
Selling, general and administrative expenses have increased significantly
and will continue to increase as we recruit additional management and support
personnel necessary for continued growth. The Tie acquisition contributed
substantially to this increase.
. Sales and marketing expenses include commissions paid in connection with
our sales programs, marketing salaries and benefits, travel expenses,
trade show expenses, consulting fees and promotional costs. Also
included are the costs of acquiring a customer such as telemarketing,
brochures and targeted advertising and promotional campaigns. We expect
these expenses to increase as we add additional sales and marketing
personnel and further implement our business plan.
. General and administrative expenses primarily consist of salaries and
related expenses of management and support services personnel, occupancy
fees, professional fees and general corporate and administrative
expenses. We also include non-capitalizable costs associated with the
development, support and expected growth of our operational support
software platform.
Depreciation and amortization expense includes depreciation of property,
network and equipment, including assets used for our internal use and assets
being used by our customers under Enterprise Network Services contracts.
Amortization expense includes the amortization of intangible assets, primarily
goodwill, that resulted from business acquisitions. Depreciation and
amortization will increase in connection with our capital deployment
strategies and as a result of increased amortization of intangibles resulting
from future acquisitions.
Results of Operations
Management evaluates and makes operating decisions about each of our
operating segments based on a number of factors. Two of the more significant
factors we use in evaluating operating performance are: revenue and gross
margin before depreciation. We do not account for assets by business segment
and, therefore, depreciation and amortization are not factors used by
management in evaluating operating performance.
<TABLE>
<CAPTION>
For the period from
Inception Year ended December 31,
through December 31, ----------------------------------
1996 1997 1998
---------------------------------------------------------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Data services......... $ -- --% $ 585 6% $ 3,620 6%
Voice services........ 58 59 2,203 22 22,299 36
Enterprise Network
Services............. -- -- 6 -- 2,003 3
Data products......... 40 41 6,658 65 20,892 34
Voice products........ -- -- 758 7 12,786 21
------------ -------- --------- ----- --------- -----
Total revenue....... $ 98 100% $ 10,210 100% $ 61,600 100%
============ ======== ========= ===== ========= =====
Cost of sales (excluding
depreciation):
Data services......... $ -- $ 51 $ 1,509
Voice services........ 40 1,224 13,383
Enterprise Network
Services............. -- 3 695
Data products......... 39 5,601 18,642
Voice products........ -- 490 9,474
------------ --------- ---------
Total cost of sales
excluding
depreciation....... $ 79 $ 7,369 $ 43,703
============ ========= =========
Gross margin before de-
preciation:
Data services......... $ - $ 534 $ 2,111
Voice services........ 17 979 8,916
Enterprise Network
Services............. -- 3 1,308
Data products......... 1 1,057 2,250
Voice products........ -- 268 3,312
------------ --------- ---------
Total gross margin
before
depreciation....... $ 18 $ 2,841 $ 17,897
============ ========= =========
</TABLE>
13
<PAGE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998
Revenue increased by $51.4 million in 1998 to almost six times 1997 revenue.
The increase in revenue was due to our expansion from eight markets at
December 31, 1997 to 32 markets at December 31, 1998. This expansion was
primarily due to the six acquisitions we completed during the year and
internal growth of our operations and sales staff. The most significant
acquisition was the acquisition of substantially all of the assets of Tie
Communications, which occurred in the third quarter of 1998. The Tie
acquisition resulted in most of the significant increase in voice product
revenue and an even greater increase in voice services revenue. The increase
in data products is primarily a result of the development and growth of
existing markets and a full year of operations in 1998 compared to a partial
year of operations in 1997 for those markets we entered in late 1997. As a
result of the Tie acquisition, and our strategy to increase our services
offering, our overall revenue mix shifted from 27% in services in 1997, to 45%
in services in 1998.
Cost of sales excluding depreciation increased $36.3 million from 1997 to
1998. Cost of sales (excluding depreciation) as a percentage of total revenue
declined slightly from 72% in 1997 to 71% in 1998. Cost of sales (excluding
depreciation) related to sales of services, as a percentage of service
revenue, increased from 46% in 1997 to 56% in 1998 while cost of sales
(excluding depreciation) related to product sales, as a percentage of product
revenue, remained relatively constant, increasing from 82% to 83%. The
increase in cost of sales (excluding depreciation) as a percentage of service
revenue was primarily due to a shift in product mix to services such as long-
distance which have a higher related cost of sales (excluding depreciation).
Selling, general, and administrative expenses increased $36.9 million from
1997 to 1998, but decreased as a percentage of revenue from 108% in 1997 to
78% in 1998. As with most companies in their early stages of formation, our
selling, general and administrative expenses have been disproportionately
high, compared to revenue. We expect selling, general and administrative
expenses to continue to decrease as a percentage of revenue as we expand our
customer base and begin selling additional products and services in each of
our markets.
The $36.9 million increase was primarily a result of:
. the expansion from 8 to 32 markets;
. the completion of six acquisitions;
. an increase from 165 employees at December 31, 1997 to 877 at December
31, 1998 (436 of which were hired as a result of the Tie acquisition);
and
. continued growth of the support services organization required to
support expanding field operations, which accounted for approximately
$20.2 million or 42% of the total.
Depreciation and amortization expense increased approximately $6.0 million
from 1997 to 1998. This increase is a direct result of an increase of $22.7
million in property, network and equipment from the end of 1997 to the end of
1998. In addition, goodwill increased $42.6 million and other intangible
assets increased $1.7 million as a result of the six acquisitions completed in
1998. The increase in property, network and equipment is largely due to:
. the expansion from 8 to 32 markets (mainly through acquisitions);
. the development and deployment of our next generation convergent data
and voice switching architecture, the E-POP(TM), in three markets;
. continued development of our operational support system;
. the increase in assets managed under Enterprise Network Services
contracts; and
. office equipment and furniture related to the growth of our support
services organization
Interest expense increased by approximately $17.3 million as a result of the
April 1998 issuance of the $160 million principal amount of 13% Senior Notes
and warrants. Approximately $1.2 million of this increase relates to accretion
of the debt discount resulting from the value assigned to the warrants and
amortization of debt issuance costs neither of which are cash expenses.
Interest expense also increased as a result of assumed
14
<PAGE>
indebtedness from acquisitions, as well as capital purchases through our
equipment leasing facilities with Comdisco and Sun Financial, Inc.
Interest income increased approximately $4.4 million as a result of the
temporary investment of the proceeds of the offering of the 13% Senior Notes,
prior to use in our business.
Other expense (net) increased by approximately $92,000 and primarily
consisted of losses on disposal of assets and miscellaneous other non-
operating types of expenses.
Period Ended December 31, 1996 Compared to the Year Ended December 31, 1997
Revenue increased $10.1 million from 1996 to 1997. The 1997 revenue includes
a full year of operations. In comparison, there were only 15 days of revenue
generating operations in 1996. Also, we completed five acquisitions in 1997,
which added $2.9 million in revenue and expanded our operations from one to
eight markets.
Cost of sales (excluding depreciation) increased $7.3 million from 1996 to
1997. Cost of sales (excluding depreciation) as a percentage of revenue
declined from 81% in 1996 to 72% in 1997 because of a change in our service
offering from public telephone services in 1996 to sales of other data and
voice products and services in 1997.
Selling, general and administrative expenses increased $10.4 million from
1996 to 1997. The increase was primarily a result of:
. the expansion from one to eight markets.
. the completion of five acquisitions.
. an increase of 143 employees from 22 at December 31, 1996 to 165 at
December 31, 1997.
. building our support services organization to support anticipated growth
in field operations which accounted for approximately $7.3 million or
67% of the total selling, general and administrative expenses for 1997.
Depreciation and amortization expense increased approximately $1.4 million
from 1996 to 1997. This increase is because of the increase in assets
purchased and developed in our expansion from one to eight markets and
capitalized costs associated with the development of our operational support
system. Also, an increase in goodwill as a result of the five acquisitions we
completed in 1997 caused an increase in the amortization of goodwill.
Interest expense increased by approximately $155,000 as a result of assumed
indebtedness from acquisitions and capital purchases through our equipment
leasing facility with Sun Financial Group, Inc.
Interest income increased approximately $251,000 as a result of the
temporary investment of funds received in our private equity offerings in
February and October of 1997.
Other expense (net) increased by approximately $156,000 and primarily
consists of losses on disposal of assets and miscellaneous other non-operating
types of expenses.
Liquidity and Capital Resources
Since inception, we have funded a significant portion of our operations
through financing activities. Our private placements of debt and equity
securities generated net proceeds of $152.4 million in 1998, $17.3 million in
1997 and $4.4 million in 1996. Our principal uses of cash are to fund working
capital requirements, capital expenditures, business acquisitions, and the
operating losses incurred during the start up phase in each new market we
establish or acquire.
As of December 31, 1998, we had current assets of $73.0 million, including
cash and cash equivalents of $25.6 million, restricted cash of $20.8 million,
and working capital of $28.5 million. In addition, we also had $30.5 million
in non-current restricted cash. The majority of our restricted cash, along
with the interest we earn
15
<PAGE>
on this cash, will be used to make the interest payments through April 2001 on
our 13% Senior Notes. We invest excess funds in short-term investments until
these funds are needed for capital investments, acquisitions and operations of
the business.
Cash Flows From Operating Activities:
Operating activities used cash of approximately $28.7 million for the year
ended December 31, 1998 and $6.7 million for the year ended December 31, 1997.
While this represents an increase of $22.0 million from 1997 to 1998, the
percentage increase in cash used in operating activities is significantly less
than the percentage increase in net loss. In addition, cash used in operating
activities was 65% of revenue in 1997 compared to 46% of revenue in 1998. The
majority of the increase from 1997 to 1998 was due to an increase in trade
accounts receivable of approximately $11.0 million and a $40.9 million
increase in the operating loss which were partially offset by an increase in
trade accounts payable of approximately $12.4 million, an increase of $5.2
million of accrued interest expense, and non-cash expenses such as
depreciation and amortization and other changes in working capital. Cash used
in operating activities during the year ended December 31, 1997 was primarily
due to our net loss of $9.7 million partially offset by non-cash expenses such
as depreciation and amortization and changes in working capital.
Cash Flows From Investing Activities:
Investing activities used cash of $94.6 million during the year ended
December 31, 1998 and $11.6 million during the year ended December 31, 1997.
Cash used in investing activities during 1998 consisted of restricted cash
investments in U.S. government securities of $50.9 million, business
combinations of $42.4 million and capital expenditures of $6.9 million. These
cash uses were partially offset by maturing short-term investments of $7.4
million. Cash used for investing activities during the year ended December 31,
1997 consisted of $7.4 million used for short term investments, $2.0 million
in capital expenditures and $1.5 million for business combinations.
In August 1998, we completed the acquisition of substantially all the assets
of Tie Communications, Inc. The purchase price consisted of $40.0 million in
cash and the assumption of certain liabilities, which, with legal and
professional and other costs resulted in a total purchase price of
approximately $51.4 million. We have also incurred substantial integration
costs and will incur additional integration costs in 1999.
Cash Flows From Financing Activities:
Financing activities provided cash of $148.3 million for the year ended
December 31, 1998 and $15.9 million for the year ended December 31, 1997. Cash
provided by financing activities during 1998 consisted of approximately $152.4
million in net proceeds from the sale of the 13% Senior Notes and outflows of
approximately $4.3 million in payments on long-term borrowings. In 1997 cash
flows from financing activities consisted of $17.3 million in net proceeds
from the sale of shares of our common stock and warrants which was partially
offset by approximately $1.4 million in debt repayments.
On March 17, 1999, we executed an agreement pursuant to which various
affiliates of the Sandler/21st Century Group agreed to purchase 800,000 shares
of Convertible Preferred A Stock and warrants to purchase 1,000,000 shares of
our common stock. We sold 640,000 shares of Convertible Preferred A Stock and
warrants to purchase 800,000 shares of our common stock on March 17, 1999 for
total consideration of $16.0 million. The balance of the shares and warrants
are required to be purchased for $4.0 million no later than March 31, 1999.
Each share of Convertible Preferred A Stock is currently convertible into five
shares of our common stock. The Convertible Preferred A Stock will
automatically convert into common stock upon a public offering which provides
gross proceeds to us in excess of $50.0 million. At the public offering, each
share of Convertible Preferred A Stock will convert into a minimum of 5 and a
maximum of 7.14 shares of common stock, depending on the price of common stock
in the public offering. Each warrant entitles the holder to purchase one share
of our common stock at an exercise price of $10.00 per share for a period of
five years. The proceeds from the first closing, net of related offering
costs, were approximately $15.3 million. One of our directors, Michael
Marocco, is a principal of several of the entities in the Sandler/21st Century
Group.
16
<PAGE>
On April 2, 1998, we completed the offering of our 13% Senior Notes, which
consisted of $160.0 million of promissory notes and warrants to purchase
1,728,000 shares of common stock. At the closing, we deposited $56.8 million
of the proceeds in a collateral account. The amount in the collateral account
along with the interest earned, will be sufficient to pay the first six
interest payments on the 13% Senior Notes, the first of which was made on
October 1, 1998. We received approximately $95.6 million after deducting
offering costs of approximately $7.6 million and funding the collateral
account. The 13% Senior Notes contain certain covenants that restrict our
ability to incur additional debt and to make certain payments, including
dividends.
In November 1997, we entered into a three year Program Agreement with
Comdisco, Inc. through which we can receive up to $50 million of equipment
lease financing. At December 31, 1998, $10 million of financing was available
to us under this facility of which approximately $7.6 million was being
utilized. As a result of the sale of our Convertible Preferred A Stock, we
have met all of the requirements for an additional $20 million to become
available under this Program Agreement. The Program Agreement expires on June
30, 2000.
We have an agreement with Sun Financial Group, Inc., a subsidiary of GATX
Capital Corporation, which was used to finance our internal capital needs
under which $4.4 million was outstanding on December 31, 1998. We also have a
$1.8 million fleet agreement with GE Capital Fleet Services for financing
purchases of company vehicles which had not been utilized as of December 31,
1998.
Subsequent acquisition: In February 1999, we acquired the assets and assumed
certain liabilities of Kansas Communications, Inc. ("KCI"). KCI was a
telecommunications equipment provider and integrator. The purchase price
consisted of $1.5 million in cash, $4.5 million in notes payable due between
July 1999 and February 2000, 30,000 shares of our common stock and assumed
liabilities of $2.5 million. Upon the completion of an equity or debt
financing with net proceeds in excess of $25.0 million, $3.5 million of the
notes payable will become due.
General:
We have significant debt in relation to our equity. At December 31, 1998, we
had $168 million in debt and $21.0 million in shareholders' deficit. Our
relatively high leverage could negatively affect our operations in a number of
ways, including:
. reducing our ability to obtain additional financing when desired for
acquisitions and expansions;
. reducing our funds available for other corporate purposes, because of
the significant interest payments required by our indebtedness; and
. reducing our flexibility to respond to downturns in the economy or in
our business.
Our business plan will continue to require a substantial amount of capital
to fund our expansion of existing and acquired markets. Our business plan
includes the following:
. establishment of our nationwide IP/ATM network connecting our E-POPs(TM)
. funding the development of our enterprise networks (which includes
providing our customers with all necessary hardware, software,
transmission facilities and management services)
. deploying E-POPs(TM) in all of our markets
. continuing to develop customer care and sales organizations
. continuing development of CTISS
. funding operating losses and debt service requirements
We will also continue to evaluate acquisitions and investments in light of
our long-range plans. Completing additional acquisitions and investments could
require us to spend our cash and we would need to raise additional capital
sooner.
We estimate that our existing funds, the proceeds of our March 1999 sale of
preferred stock, our available borrowing and lease financing capacity and the
proceeds from the exercise of our warrants which will expire in July 1999 will
be sufficient to meet our capital requirements for approximately the next 12
to 18 months.
17
<PAGE>
Following the exhaustion of such funds, we will need to raise additional funds
from other sources. In addition, we could require additional capital sooner
due to material shortfalls in our operating and financial performance or if we
are more aggressive in our expansion than currently contemplated. We cannot be
certain that we will be successful in raising sufficient debt or equity
capital to fund our operations on a timely basis on acceptable terms. If
needed financing were not available on acceptable terms, we could be compelled
to alter our business strategy or delay or abandon some of our future plans or
expenditures or miss an interest payment on our debt. Any of these events
would have a material adverse effect on our financial condition and results of
operations.
Recently Adopted Accounting Standards
Effective January 1, 1998 we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
established standards for reporting and display of comprehensive income and
its components. Comprehensive income generally includes changes in separately
reported components of equity along with net income.
We have adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" for the
year ended December 31, 1998. We have disclosed the business segments that we
operate in along with the financial information that management uses in
measuring the operating performance of those segments and for allocating
resources to each segment as required by this statement. The adoption of this
statement had no affect our results of operations, financial position or cash
flows.
The American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
SOP 98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires cost of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. We have adopted SOP 98-5 for fiscal year ended December 31, 1998.
The amount of start-up costs written off as a result of the adoption of this
SOP was not material.
Effects of Inflation and Interest Rates
Management does not believe that its business is impacted by inflation or
interest rates to a significantly different extent than businesses in general.
However, there can be no assurances that inflation or interest rate changes
will not have a material effect on the our operations in the future.
Impact of the Year 2000
The "year 2000 issue" generally describes the various problems that may
result from the improper processing of dates and date-sensitive calculations
by computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. Those computers and software
will need to be upgraded or replaced to accept four digit dates to distinguish
dates in the 21st century from dates in the 20th century. The problem could
result in system failures or miscalculations and cause disruptions in
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness. We have created a task force (consisting of
representatives from our information technology, product management, sales and
marketing, finance and legal departments) that evaluates our internal and
external systems as they relate to year 2000 issues. We have reviewed our
critical internal systems, including our systems for customer billing,
customer service and financial reporting. We have obtained year 2000 readiness
certifications from most manufacturers and suppliers of our internal systems.
Any internal systems which were identified as having a potential problem have
already been replaced or are in the process of being replaced. Except for
portions of two systems relating to order entry procedures which we acquired
in our last two acquisitions (Tie Communications and KCI), we believe that our
internal systems are year 2000 ready. We are in the process of moving all of
the information from the acquired systems to our year 2000 ready system, which
should be completed by the third quarter of 1999.
18
<PAGE>
We continue to assess internal non-information technology systems and
external systems, including systems used by manufacturers and suppliers of
computer equipment, software programs, telephone systems, data systems, systems
comprising our enterprise networks and equipment used to provide services to
our customers.
To date, we have not identified any year 2000 issues with third-parties which
could have a material adverse effect on our business. We may identify a
significant internal or external year 2000 issue in the future which, if not
remediated in a timely manner, could have a material adverse effect on our
business, financial condition and results of operations.
Costs. Other than time spent by our personnel which could be spent on other
matters, we have not incurred any significant costs in identifying year 2000
issues. We do not anticipate any significant further costs in identifying year
2000 issues. Programming costs associated with conforming the two non-ready
systems are estimated to be approximately $300,000. We are currently evaluating
an upgrade to a third party off-the-shelf product, that would replace the two
non-ready systems as well as providing order entry, logistics, call center,
sales force automation and contract management functionality. The estimated
costs of the upgrades are estimated to be between $4 million and $6 million. We
have prepared contingency plans, including manual order entry procedures, and
identification of potential software modifications, in the event that there are
delays in moving the information from the non-ready systems to our year 2000
systems. Costs associated with our contingency plans could include the hiring
of additional personnel to process orders and implement software modifications.
The exact amount of the costs associated with our contingency plans cannot be
determined at this time as a result of not knowing the number of additional
personnel that may need to be hired.
Risks of Year 2000 Issues. Based on our assessments to date, we believe that
we will not experience any material disruption as a result of year 2000 issues
in internal systems or information processing. However, almost all of our
systems and products relating to our internal and external systems and products
are manufactured or supplied by third parties which are outside of our control
of those third party systems and products will be year 2000 ready. If some or
all of our internal or external systems and products fail, or if any critical
systems are overlooked or are not year 2000 ready in a timely manner, there
could be a material adverse effect on our business, financial condition or
results of operations. In addition, if a critical provider of services, such as
those providers supplying electricity, water or other services, or a vendor or
manufacturer supplying products sold to our customers, experiences difficulties
resulting in disruption of services to us or the sale of malfunctioning
products to our customers, there could be a material adverse effect on our
business. Potential risks include (i) the disruption of utility services
resulting in a closure of the affected facility for the duration of the
disruption, (ii) the inability to process customer billing accurately or in a
timely manner, (iii) the inability to provide accurate financial reporting to
management, auditors, investors and others, (iv) litigation costs associated
with potential suits from customers and investors and (v) delays in
implementing other projects as a result of work by internal personnel on year
2000 issues.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This item is inapplicable.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Convergent Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Convergent Communications, Inc. at December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period January 1,
1996 to December 16, 1996, the period from inception (March 1, 1996) to
December 31, 1996 and the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As explained in Note 1 to the financial statements, the Successor Company
purchased all of the net assets of the Predecessor Company as of December 17,
1996. The transaction was accounted for as a purchase whereby the purchase
price was allocated to the assets and liabilities of the Predecessor based on
their estimated fair values as of December 17, 1996. Accordingly, the
financial statements of the Successor Company are not comparable to those of
the Predecessor.
PricewaterhouseCoopers LLP
Denver, Colorado
March 5, 1999, except for
Note 16, as to which the date is March 17, 1999
20
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 667,344 $ 25,597,461
Short-term investments............................. 7,371,303 --
Restricted cash.................................... -- 20,800,000
Trade accounts receivable, net of allowance for
doubtful accounts of $21,389 and $1,908,811,
respectively...................................... 2,075,150 17,661,220
Inventory.......................................... 230,809 6,826,732
Prepaid expenses, deposits and other current
assets............................................ 218,349 2,134,210
----------- ------------
Total current assets............................. 10,562,955 73,019,623
----------- ------------
Property, network and equipment...................... 5,448,183 28,139,460
Less accumulated depreciation........................ (610,386) (4,882,832)
----------- ------------
Total property, network and equipment............ 4,837,797 23,256,628
Restricted cash...................................... 405,816 30,549,658
Goodwill, net of amortization of $475,052 and
$2,967,283, respectively............................ 6,392,600 46,526,288
Other intangible assets, net of amortization of
$358,486 and $1,470,363, respectively............... 1,728,575 10,281,016
Investments and other assets......................... 994,426 1,225,626
Leases receivable, net of current portion............ -- 796,790
----------- ------------
Total assets..................................... $24,922,169 $185,655,629
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable............................. $ 2,040,457 $ 15,061,514
Accrued compensation............................... 1,467,587 4,583,140
Accrued interest................................... -- 5,214,133
Other accrued liabilities.......................... 691,781 8,666,182
Deferred revenue and customer deposits............. 61,545 5,211,748
Current portion of notes payable................... 163,220 603,919
Current portion of capital leases.................. 804,138 5,179,251
----------- ------------
Total current liabilities........................ 5,228,728 44,519,887
Long-term notes payable, less current portion........ 378,761 153,730,573
Long-term capital leases, less current portion....... 586,950 8,754,054
----------- ------------
Total liabilities................................ 6,194,439 207,004,514
=========== ============
Commitments (Note 8)
Shareholders' equity (deficit):
Preferred stock, 1 million shares authorized , none
issued............................................ -- --
Common stock, no par value, 100 million shares
authorized, 26,859,000 and 27,848,270 issued and
outstanding, respectively......................... 24,004,297 27,486,554
Warrants........................................... 4,773,751 11,719,399
Treasury stock..................................... -- (501,674)
Deferred compensation obligation................... -- 501,674
Accumulated other comprehensive income............. (16,864) --
Unearned compensation.............................. (204,750) (150,150)
Accumulated deficit................................ (9,828,704) (60,404,688)
----------- ------------
Total shareholders' equity (deficit)............. 18,727,730 (21,348,885)
----------- ------------
Total liabilities and shareholders' equity
(deficit)..................................... $24,922,169 $185,655,629
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
period from For the period
January 1, from Inception For the year ended
1996 through through December 31,
December 16, December 31, -------------------------
1996 1996 1997 1998
------------- -------------- ----------- ------------
(Predecessor) (Successor) (Successor) (Successor)
<S> <C> <C> <C> <C>
Data and voice service
revenue................ $1,495,977 $ 57,754 $ 2,794,777 $ 27,922,022
Data and voice product
revenue................ -- 39,387 7,415,247 33,678,089
---------- ---------- ----------- ------------
Total revenue....... 1,495,977 97,741 10,210,024 61,600,111
---------- ---------- ----------- ------------
Cost of sales, excluding
depreciation........... 1,018,494 79,459 7,368,509 43,703,183
Selling, general and
administrative......... 554,109 552,092 10,982,769 47,861,785
Depreciation and
amortization........... 124,086 40,698 1,453,019 7,493,613
---------- ---------- ----------- ------------
Total operating
expenses........... 1,696,689 672,249 19,804,297 99,058,581
---------- ---------- ----------- ------------
Operating loss.......... (200,712) (574,508) (9,594,273) (37,458,470)
Interest expense........ (20,588) (884) (155,450) (17,501,512)
Interest income......... -- -- 251,290 4,632,420
Other income (expense).. -- -- (156,346) (248,422)
---------- ---------- ----------- ------------
Net loss............ $ (221,300) $ (575,392) $(9,654,779) $(50,575,984)
========== ========== =========== ============
Net loss per share
(basic)................ $ (0.07) $ (0.46) $ (1.84)
========== =========== ============
Weighted average shares
outstanding (basic).... 7,774,651 20,921,569 27,463,469
========== =========== ============
Net loss per share
(diluted).............. $ (0.07) $ (0.46) $ (1.84)
========== =========== ============
Weighted average shares
outstanding (diluted).. 7,774,651 20,921,569 27,463,469
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Predecessor
<TABLE>
<S> <C>
Balance, December 31, 1995........................................... $ 216,833
Net loss allocated to members....................................... (221,300)
Contributions from members.......................................... 214,128
---------
Balance December 16, 1996............................................ $ 209,661
=========
</TABLE>
Successor
<TABLE>
<CAPTION>
Accumulated
Deferred Other
Common Common Treasury Compensation Unearned Comprehensive Accumulated
Shares Stock Warrants Stock Obligation Compensation Income Deficit
---------- ----------- ----------- --------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1,
1996............. -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Conversion from
Subchapter S
corporation..... -- (401,467) -- -- -- -- -- --
Initial sale of
stock to
founders........ 7,500,000 450,000 -- -- -- -- -- --
Sale of stock in
private
placement....... 4,739,525 4,587,525 152,000 -- -- -- -- --
Offering costs.. -- (411,310) -- -- -- -- -- --
Stock issued in
acquisition of
ICN............. 3,500,000 3,500,000 -- -- -- -- -- --
Compensation.... -- 282,267 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- (173,925)
---------- ----------- ----------- --------- -------- --------- -------- ------------
Balance, December
31, 1996......... 15,739,525 8,007,015 152,000 -- -- -- -- (173,925)
Sale of stock in
private
placement....... 9,060,475 15,845,915 3,414,560 -- -- -- -- --
Offering costs.. -- (2,780,400) 777,291 -- -- -- -- --
Stock issued to
SONeTech........ 375,000 375,000 -- -- -- -- -- --
Stock issued in
acquisitions.... 875,000 2,112,500 -- -- -- -- -- --
Exercise of
stock options... 950,000 261,750 -- -- -- (204,750) -- --
Stock
purchases....... (200,000) (12,000) -- -- -- -- -- --
Compensation.... 59,000 194,517 -- -- -- -- -- --
Warrants........ -- -- 429,900 -- -- -- -- --
Other
comprehensive
income:
Unrealized loss
on securities... -- -- -- -- -- -- (16,864) --
Net loss........ -- -- -- -- -- -- -- (9,654,779)
---------- ----------- ----------- --------- -------- --------- -------- ------------
Balance, December
31, 1997......... 26,859,000 24,004,297 4,773,751 -- -- (204,750) (16,864) (9,828,704)
Common stock
issued for:
401(k) match.... 137,994 435,894 -- -- -- -- -- --
Payments to
consultants..... 20,333 55,000 -- -- -- -- -- --
Correction of
private
placement....... 20,000 -- -- -- -- -- -- --
Business
combinations.... 480,000 2,266,400 -- -- -- -- -- --
Exercise of
stock options... 87,000 16,500 -- -- -- -- -- --
Exercise of
warrants........ 69,950 129,235 (20,635) -- -- -- -- --
Compensation.... 173,993 579,228 -- -- -- 54,600 -- --
Deferred stock
compensation.... -- -- -- (501,674) 501,674 -- -- --
Warrants issued
in private
placement....... -- -- 6,886,400 -- -- -- -- --
Warrants issued
to consultants.. -- -- 79,883 -- -- -- -- --
Other
comprehensive
income:
Reclassification
adjustment for
loss included in
net loss........ -- -- -- -- -- -- 16,864 --
Net loss........ -- -- -- -- -- -- -- (50,575,984)
---------- ----------- ----------- --------- -------- --------- -------- ------------
Balance, December
31, 1998......... 27,848,270 $27,486,554 $11,719,399 $(501,674) $501,674 $(150,150) $ -- $(60,404,688)
========== =========== =========== ========= ======== ========= ======== ============
<CAPTION>
Total
-------------
<S> <C>
Balance, March 1,
1996............. $ --
Conversion from
Subchapter S
corporation..... (401,467)
Initial sale of
stock to
founders........ 450,000
Sale of stock in
private
placement....... 4,739,525
Offering costs.. (411,310)
Stock issued in
acquisition of
ICN............. 3,500,000
Compensation.... 282,267
Net loss........ (173,925)
-------------
Balance, December
31, 1996......... 7,985,090
Sale of stock in
private
placement....... 19,260,475
Offering costs.. (2,003,109)
Stock issued to
SONeTech........ 375,000
Stock issued in
acquisitions.... 2,112,500
Exercise of
stock options... 57,000
Stock
purchases....... (12,000)
Compensation.... 194,517
Warrants........ 429,900
Other
comprehensive
income:
Unrealized loss
on securities... (16,864)
Net loss........ (9,654,779)
-------------
Balance, December
31, 1997......... 18,727,730
Common stock
issued for:
401(k) match.... 435,894
Payments to
consultants..... 55,000
Correction of
private
placement....... --
Business
combinations.... 2,266,400
Exercise of
stock options... 16,500
Exercise of
warrants........ 108,600
Compensation.... 633,828
Deferred stock
compensation.... --
Warrants issued
in private
placement....... 6,886,400
Warrants issued
to consultants.. 79,883
Other
comprehensive
income:
Reclassification
adjustment for
loss included in
net loss........ 16,864
Net loss........ (50,575,984)
-------------
Balance, December
31, 1998......... $(21,348,885)
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
period from For the period
January 1, from Inception For the year ended
1996 through through December 31,
December 16, December 31, -------------------------
1996 1996 1997 1998
------------- -------------- ----------- ------------
(Predecessor) (Successor) (Successor) (Successor)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss....................................................... $(221,300) $ (575,392) $(9,654,779) $(50,575,984)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 124,076 40,698 1,453,019 7,493,613
Amortization of deferred financing costs and accretion of debt
discount...................................................... -- -- -- 1,162,465
Provision for uncollectible accounts........................... 3,802 -- -- 196,532
Stock compensation expense..................................... -- 282,267 194,517 633,828
401k contributions through the issuance of stock............... -- -- -- 435,894
Warrants issued for the payment of consulting fees............. -- -- -- 79,883
Loss from sale of equipment.................................... 312 -- 50,751 --
Other.......................................................... -- -- 40,000 --
Change in working capital (net of acquisitions):
Trade accounts receivable..................................... 61,535 (97,741) (1,527,544) (10,969,753)
Inventory..................................................... -- -- (230,809) (2,068,102)
Prepaid expenses, deposits and other current assets........... 1,107 (51,697) (43,420) (870,269)
Trade accounts payable........................................ 10,341 56,278 1,326,723 12,357,189
Accrued compensation.......................................... -- -- 1,467,587 2,591,776
Accrued interest.............................................. -- -- -- 5,214,133
Deferred revenue and customer deposits........................ -- -- 61,545 3,299,802
Other accrued liabilities..................................... (10,544) 103,731 161,127 2,321,332
--------- ---------- ----------- ------------
Net cash used in operating activities.......................... (30,671) (241,856) (6,698,283) (28,697,661)
Cash flows from investing activities
Additions of property and equipment............................ (35,742) (28,713) (2,042,203) (6,877,095)
Acquisitions, net of cash acquired............................. -- (1,157,304) (1,542,208) (42,364,328)
Short-term investments......................................... -- -- (7,388,167) 7,388,167
Restricted cash................................................ -- -- (405,816) (50,943,842)
Leases receivable.............................................. -- -- -- (1,174,302)
Intangible and other assets.................................... (115) (259,637) (269,425) (675,206)
--------- ---------- ----------- ------------
Net cash used in investing activities.......................... (35,857) (1,445,654) (11,647,819) (94,646,606)
Cash flows from financing activities
Proceeds from senior notes and warrants, net................... -- -- -- 152,377,955
Payments on notes payable...................................... (9,214) -- (317,927) (1,397,043)
Payments on capital leases..................................... -- -- -- (2,940,834)
Proceeds from borrowings....................................... 100,000 -- -- 109,206
Proceeds from initial capital contributions.................... -- 450,000 -- --
Proceeds from sale of common stock, net........................ -- 4,398,897 17,257,366 --
Payment of note to former owner of ICN......................... -- -- (1,000,000) --
Cash paid to retire indebtedness of predecessor company........ -- -- (132,380) --
Proceeds from exercise of stock options and warrants........... -- -- 57,000 125,100
Repurchase of common shares.................................... -- -- (12,000) --
--------- ---------- ----------- ------------
Net cash provided by financing activities...................... 90,786 4,848,897 15,852,059 148,274,384
--------- ---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents............ 24,258 3,161,387 (2,494,043) 24,930,117
Cash and cash equivalents at beginning of period................ 13,438 -- 3,161,387 667,344
--------- ---------- ----------- ------------
Cash and cash equivalents at end of period..................... $ 37,696 $3,161,387 $ 667,344 $ 25,597,461
========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
<TABLE>
<CAPTION>
For the
period from For the period
January 1, from Inception For the year ended
1996 through through December 31,
December 16, December 31, -----------------------
1996 1996 1997 1998
------------- -------------- ----------- -----------
(Predecessor) (Successor) (Successor) (Successor)
<S> <C> <C> <C> <C>
Supplemental disclosure of
other cash and non-cash
investing and financing
activities:
Acquisition of equipment
through the assumption
of capital lease
obligations............. $ -- $ -- $1,674,596 $13,038,529
Interest paid............ $18,190 $ -- $ 144,782 $11,124,914
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
References in these footnotes to "Convergent Communications(TM)," "us,"
"we," and "our" refer to Convergent Communications, Inc. and its subsidiaries.
Convergent Communications, Inc. is a single-source provider of data and
voice communications systems, services and solutions to small and medium-sized
businesses. We design, build, install, monitor and manage data and telephony
networks inside enterprises and provide external network services such as data
transport long distance, and local service and Internet access. We offer these
products and services on a stand-alone basis or as part of a bundled offering
that can include owning an enterprise's internal data and voice networks. We
are also installing a next-generation, converged data and voice switching
platform in each of the markets in which we operate to efficiently handle our
customers' traffic. We provide the following products and services:
. Data Services
. Voice Services
. Enterprise Network Services
. Data Products
. Voice Products
In November 1996, we consummated a private placement offering (the "Private
Placement") and on December 17, 1996 we acquired all of the assets of
Integrated Communication Networks, L.C. ("ICN") in exchange for cash, notes
and shares of common stock. This acquisition has been treated as a business
combination accounted for by the purchase method of accounting. The
accompanying consolidated financial statements include the accounts of ICN
from December 17, 1996, the effective date of the acquisition. For purposes of
identification and description, ICN is referred to as the "Predecessor" for
the period prior to the acquisition. In these financial statements the term
"Successor" is used to refer to us since our inception and to ICN since
December 17, 1996 (see Note 3).
Our ultimate success depends upon, among other factors, establishment of our
nationwide network, funding the development of our enterprise networks,
continuing to develop our customer care and sales organizations, integrating
acquired businesses, attracting and retaining customers, continuing to develop
and integrate our operational support system and other back office systems,
responding to competitive developments, continuing to attract, retain and
motivate qualified personnel, and continuing to upgrade our technologies and
commercialize our services incorporating such technologies. There is no
assurance that we will be successful in addressing these matters and failure
to do so could have a material adverse effect on our business prospects,
operating results and financial condition. Our business plan will continue to
require a substantial amount of capital to fund our expansion of our existing
and acquired markets. As we continue to expand our business, we will seek
additional sources of financing to fund our development. If we are
unsuccessful in obtaining such financing, we would be compelled to alter our
business strategy or delay or abandon some of our future plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying consolidated financial statements include our accounts and
the accounts of our wholly owned subsidiaries. All intercompany amounts and
transactions have been eliminated.
Use of Estimates:
Our management is required to make estimates and assumptions in order to
prepare the financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
26
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and also affect the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents:
We consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Short-term Investments:
Short-term investments are classified as available-for-sale securities at
December 31, 1997. Gains or losses on the sale of short-term investments are
recognized on the specific identification method. Unrealized gains or losses
are treated as a separate component of shareholders' equity until the security
that the unrealized gain or loss was recorded on is sold. Other than in
restricted cash, we had no short-term investments at December 31, 1998, as
none of our investments had original maturities greater than three months.
Restricted Cash:
Restricted cash primarily represents funds held in collateral accounts for
paying semi-annual interest payments on the 13% Senior Notes through April 1,
2001. The cash is invested in U.S. Government Securities, which mature semi-
annually on October 1 and April 1 through April 1, 2001 (see Note 7).
Restricted cash also represents cash used to collateralize letters of credit,
which are held as collateral for certain of our office leases, capital lease
obligations and performance bonds. The amounts invested are classified as held
to maturity and carried at amortized cost which approximates fair value.
Fair Value of Financial Instruments:
The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
short-term borrowings approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amounts
reported for long-term debt other than the 13% Senior Notes approximate fair
value based upon management's best estimates of what interest rates would be
available for the same or similar instruments. The 13% Senior Notes are
publicly traded securities. The quoted fair market value and the carrying
amount of the 13% Senior Notes at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Fair Market
Amount Value
------------ -----------
<S> <C> <C>
13% Senior Notes....................................... $160,000,000 $76,800,000
============ ===========
</TABLE>
Property, Network and Equipment:
Property, network and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets or the lease term if shorter, which range from two to five years.
Expenditures which significantly increase asset values or extend useful lives
are capitalized. Maintenance and repairs are expensed as incurred. When
property, network and equipment is retired, sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and
resulting gains and losses are reflected in operations.
Inventory:
Inventory primarily consists of new and refurbished equipment for resale and
is valued at the lower of cost or market using the first-in, first-out method.
We evaluate the need for reserves associated with obsolete and excess
inventory.
27
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets:
Intangible assets consist of the following:
. Goodwill represents the excess purchase price over the net assets
acquired in acquisitions and is being amortized over ten years.
. Customer lists were obtained through business combinations and are being
amortized over five years.
. Debt offering costs represent costs incurred in connection with an
offering of 13% senior notes (see Note 7) and are being amortized over
the term of the notes, ten years.
. Deferred finance costs are costs associated with obtaining certain
financing arrangements and are amortized over the life of the financing
arrangement, three years.
. Site location contracts are exclusive rights to operate public
telephones at various locations we acquired through business
combinations. The site location contracts are being amortized over the
average lives of the contracts, primarily three years.
. Software license fees represent proprietary rights to software
associated with our public telephones which are being amortized over
five years, the estimated life of the related equipment.
We periodically evaluate the carrying amount of our intangible assets based
on undiscounted cash flows, or other indicators of fair value, to determine
whether adjustments to these amounts are required.
Long-Lived Assets:
We evaluate the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires an evaluation of indicators of impairment and
future undiscounted cash flows to be generated by those assets. Impairment is
measured as the amount by which the asset's carrying amounts exceed the future
discounted cash flows estimated to be generated by those assets. We do not
believe an impairment exists as of December 31, 1998.
Investments:
Investments consist of ownership interests of less than 20% in unrelated
entities and are accounted for using the cost method.
Software:
We capitalize certain costs of developing software for internal use. Such
costs are amortized on a straight line basis over three years, which is the
estimated useful life of the software. In March 1998, the AICPA issued
Statement of Position No. 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance regarding the conditions under which the costs of internal-use
software should be capitalized, and is effective for financial statements for
years beginning after December 15, 1998. We do not expect the adoption of SOP
98-1 to have a material effect on our financial statements.
Revenue Recognition:
Revenue is recognized for product sales when the product is shipped.
Revenues from non-recurring services are recognized when the services are
provided. Revenue for long-term service and maintenance contracts is
recognized over the term of the contract as the services are provided. Revenue
from reselling of long distance service is recognized at the time of
performance based on customer usage.
28
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Revenue:
Deferred revenue represents the unearned portion of revenue related to our
long-term service and maintenance contracts, which is recognized over the term
of the contract, generally one year.
Income Taxes:
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in net earnings
in the period in which the tax rate change is enacted. We establish a
valuation allowance when it is more likely than not that a deferred tax asset
will not be recovered.
Stock-Based Compensation:
We use the intrinsic value method under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for our
employee stock-based compensation plans. We account for options and warrants
granted to non-employees in accordance with Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"),
which requires that we recognize an expense based on the fair value of the
option or warrant at the time of grant.
Concentrations of Credit Risk:
We sell products and services to small to medium sized businesses on open
account and do not obtain collateral for our receivables. We believe our
reserves for potential credit losses are adequate and we perform on-going
credit evaluations. To date, we have not experienced any significant credit
losses.
All of our cash, cash equivalents and investments are maintained at a single
financial institution, certain accounts are over insurable limits. The
investments consist of high-quality commercial paper.
Reclassifications:
Certain reclassifications have been made to the prior year data to make it
consistent with the 1998 presentation. These reclassifications had no impact
on net loss.
Recently Adopted Accounting Standards:
Effective January 1, 1998 we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
established standards for reporting and display of comprehensive income and
its components. Comprehensive income generally includes changes in separately
reported components of equity along with net income.
We have adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" for the
year ended December 31, 1998. We have disclosed the business segments that we
operate in along with the financial information that management uses in
measuring the operating performance of those segments and for allocating
resources to each segment as required by this statement (Note 10). The
adoption of this statement had no effect on our results of operations,
financial position or cash flows.
The American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities"("SOP 98-5").
SOP 98-5 provides guidance on the financial reporting of start-
29
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
up costs and organization costs. It requires cost of start-up activities and
organization costs to be expensed as incurred and is effective for financial
statements for fiscal years beginning after December 15, 1998, early adoption
is encouraged. We have adopted SOP 98-5 for fiscal year ended December 31,
1998. The amount of start-up costs written off as a result of the adoption of
this SOP was not material.
3. Acquisitions:
Integrated Communication Networks, L.C. In December 1996, we acquired
Integrated Communication Networks, L.C. (ICN), a public telephone service
provider. We paid $1,232,300 in cash, issued a $1,000,000 promissory note and
issued 3,500,000 shares of our common stock valued at $3,500,000 for total
consideration of $5,732,300. The note was paid in January 1997.
Communication Services of Iowa, Inc. In April 1997, we acquired
Communication Services of Iowa, Inc. (CSI), an Iowa reseller of telephony
keyboard PBX telephone equipment to businesses. We paid $100,000 cash, issued
a $100,000 one-year promissory note at 8% and issued 50,000 shares of our
common stock valued at $50,000 for total consideration of $250,000. The note
was paid in March 1998.
A.T.T.ex Corporation. In September 1997, we acquired A.T.T.ex Corporation
(A.T.T.ex) of Des Moines, Iowa, a telecommunications service company that
provided direct telephony service support to corporate customers. The purchase
price consisted of $450,000 in cash and the issuance of 75,000 shares of our
common stock valued at $187,500 for total consideration of $537,500.
Vital Integration Solutions, Inc. In September 1997, we acquired Vital
Integration Solutions, Inc. (Vital) of Des Moines, Iowa and Omaha, Nebraska, a
full service integration solutions provider which specialized in comprehensive
information management and networking solutions. Vital provided its clients
with the hardware, software and integration services necessary to build
information systems and networks. We paid $500,000 in cash and issued 750,000
shares of our common stock valued at $1,875,000 for total consideration of
$2,375,000.
Telephone Communications Corporation. In February 1998, we acquired the
assets and assumed certain liabilities of Telephone Communications Corporation
("TCC") of Vail, Colorado. TCC was a long distance switchless reseller
providing 1+, 0+, 800, and Calling Card services to cities such as Dillon,
Frisco and the Vail Valley. We paid $400,000 in cash, issued a $200,000 one-
year note at 8% and issued 10,000 shares of our common stock which for
purchase accounting purposes were assigned a value of $4.00 per share. We also
assumed a note with National Network Corporation of approximately $287,000,
which was paid in April 1998. Total consideration for the purchase was
$927,000. We negotiated an early discounted payoff of the $200,000 note in the
total amount of $180,000 (including accrued interest of $2,250) in May 1998.
Network Computer Solutions, LLC. In February 1998, we acquired the assets
and assumed certain liabilities of Network Computer Solutions ("NCS") of
Greenwood Village, Colorado. NCS provided network integration services. We
paid $500,000 in cash, issued 100,000 shares of our common stock which for
purchase accounting purposes were assigned a value of $4.00, assumed
liabilities of $438,372 and paid a finders fee of $150,000 for total
consideration of $1,488,372.
Communication Services of Colorado. In May 1998, we completed a merger with
Communication Services of Colorado ("CSC") of Englewood, Colorado. CSC was a
long distance switchless reseller providing 1+, 0+, 800, and Calling Card
services. The purchase price consisted of $475,000 in cash, the issuance of a
$530,000 one-year note at 8% and assumed liabilities of $341,054 for total
consideration of $1,346,054.
HH&H Communications Technologies, Inc. In May 1998, we completed the
acquisition of the assets and certain liabilities of HH&H Communications
Technologies, Inc. ("CTI"), a voice equipment provider in Texas.
30
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We paid $200,000 in cash, issued 30,000 shares of our common stock, which for
accounting purposes were assigned a value of $4.25 per share, and assumed
liabilities of $151,383 for total consideration of $478,883.
CMB Holdings, Inc. d/b/a Independent Equipment Company. In June 1998, we
completed the acquisition of substantially all of the assets of CMB Holdings,
Inc. d/b/a Independent Equipment Company ("IEC"), an equipment remarketer in
Florida. The purchase price consisted of the issuance of 340,000 shares of our
common stock, which for accounting purposes were assigned a value of $5.00 per
share, for total consideration of $1.7 million.
Tie Communications, Inc. Effective August 1, 1998 we completed the
acquisition of substantially all the assets and certain of the liabilities of
Tie Communications, Inc. ("Tie"). The purchase price consisted of $40.0
million in cash and the assumption of certain liabilities, which with legal
and professional and other costs resulted in a total purchase price of
approximately $51.4 million. Tie was a telecommunications equipment provider
and a nationwide reseller of long-distance service.
We accounted for these acquisitions as business combinations, which were
accounted for by the purchase method of accounting. We valued the acquisitions
at the fair market value of the consideration given. With regard to our common
stock and warrants, we determined the fair market value based upon a number of
factors including a market analysis of publicly traded companies and a
discounted cash flow analysis. An option pricing model was also used to value
our warrants. In connection with the acquisitions, the excess of consideration
given over the fair market value of the net assets acquired is being amortized
on a straight line basis over the estimated life of the intangible assets
acquired which is five to ten years. The accompanying financial statements
include the accounts of the acquired companies from the effective dates of the
acquisitions.
In addition to the business acquisitions previously discussed, we have also
completed purchases of certain assets of other companies as follows:
Big Planet, Inc. In October 1997, we acquired certain assets and assumed
certain liabilities of Big Planet, Inc., of Portland, Oregon. Big Planet is an
Internet service provider (ISP) offering a full range of Internet services,
including Internet access, Web hosting, maintenance, and site design. We paid
$250,000 in cash for the assets and the assumption of certain trade payables.
Sigmacom Corporation. In December 1997, we acquired certain data integration
assets of Sigmacom Corporation. Sigmacom is a systems integrator for corporate
audio, video and data communications, providing state-of-the-art systems that
combine telecommunications and computer network technologies. Sigmacom is also
developing Internet application software for financial institutions such as
credit unions. We paid $875,000 in cash and issued Sigmacom a warrant to
purchase 50,000 shares of our common stock at an exercise price of $7.50 per
share, which expires in December 1999. We valued the warrants, at an aggregate
value of $30,000 utilizing an option pricing model and a number of factors
including a market analysis of publicly traded companies and a discounted cash
flow analysis. We also acquired a minority interest in Sigmacom's software
development business to which we allocated $350,000 of the purchase price.
31
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consideration paid for acquisitions in 1996, 1997 and 1998, and the
allocation of such consideration to the acquired assets and assumed liabilities
is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Cash paid, net of cash acquired........... $1,157,304 $1,542,208 $42,364,328
Common stock issued to the former owners.. 3,500,000 2,112,500 2,266,400
Notes payable and liability to former
owners................................... 1,000,000 100,000 907,500
Receivable eliminated through the
acquisition of ICN....................... 75,000 -- --
Warrants issued........................... -- 55,000 --
---------- ---------- -----------
Total amount to be allocated.......... $5,732,304 $3,809,708 $45,538,228
========== ========== ===========
Allocation to acquired assets and assumed
liabilities:
Goodwill................................ $3,212,608 $3,384,168 $42,544,447
Accounts receivable..................... 50,164 399,700 4,812,849
Inventory............................... -- 115,971 4,586,188
Equipment............................... 1,904,796 355,959 2,945,343
Customer lists.......................... -- -- 1,683,696
Prepaid expenses, deposits and other
current assets......................... 7,262 3,950 669,110
Investments............................. -- 350,000 --
Site contracts.......................... 656,682 -- --
Software license........................ 496,643 -- --
Accounts payable and accrued
liabilities............................ (140,107) (636,747) (6,804,169)
Deferred revenue, net of costs.......... -- -- (1,911,946)
Debt.................................... (455,744) (163,293) (2,987,290)
---------- ---------- -----------
Amounts allocated......................... $5,732,304 $3,809,708 $45,538,228
========== ========== ===========
</TABLE>
On a pro forma basis, as though the above combinations had taken place at the
beginning of the periods presented, revenue, net loss and net loss per share
would have been as follows (unaudited):
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenue............................................ $118,964,021 $109,666,921
Net loss........................................... $(26,068,210) $(59,462,317)
Net loss per share................................. $ (1.19) $ (2.14)
Weighted average shares............................ 21,963,316 27,846,802
</TABLE>
4. Short-Term Investments:
All of our short-term investments as of December 31, 1997 are classified as
available for sale. The investments had an amortized cost basis of $7,388,167
at December 31, 1997 and a fair value of $7,371,303 at December 31, 1997. The
unrealized loss at December 31, 1997 related to these investments which matured
in 1998 was $16,864.
5. Leases Receivable:
Our wholly owned subsidiary, Convergent Capital Corporation ("CCC"), leases
data and telephony equipment to our customers under direct financing leases.
The receivables, which are due over two to five years prepaid expenses,
deposits and, are collateralized by the equipment being leased. The current
portion of leases receivable is included in other current assets. The
components of leases receivable and the future minimum payments receivable are
as follows:
32
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
Receivable in: 1998
- -------------- ------------
<S> <C>
1999............................................................. $ 468,189
2000............................................................. 402,864
2001............................................................. 266,832
2002............................................................. 174,728
2003............................................................. 78,670
----------
Gross receivables.................................................. 1,391,283
Unearned income.................................................... (216,981)
----------
Lease receivables.................................................. 1,174,302
Less: current portion.............................................. (377,512)
----------
Long-term lease receivables........................................ $ 796,790
==========
</TABLE>
6. Property, Network and Equipment:
Property, network and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Office furniture and equipment......................... $2,908,261 $14,057,009
Network equipment...................................... 2,256,942 12,906,012
Leasehold improvements................................. 56,559 938,645
Company vehicles....................................... 226,421 237,794
---------- -----------
5,448,183 28,139,460
Less accumulated depreciation.......................... (610,386) (4,882,832)
---------- -----------
Net property, network and equipment.................... $4,837,797 $23,256,628
========== ===========
</TABLE>
Depreciation expense was $70,739 for the period from January 1, 1996 to
December 16, 1996, $5,365 for the period from inception to December 31, 1996,
$515,317 for the year ended December 31, 1997 and $4.3 million for the year
ended December 31, 1998. We enter into capital leases for various equipment.
Equipment under capital leases is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Network equipment...................................... $ -- $11,865,309
Furniture and equipment................................ 1,674,596 4,020,300
---------- -----------
1,674,596 15,885,609
Less accumulated depreciation.......................... (338,199) (2,906,152)
---------- -----------
$1,336,397 $12,979,457
========== ===========
</TABLE>
33
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Notes Payable and Capital Leases:
Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
13% Senior Notes payable, (i) below................ $ -- $153,630,080
Note payable for acquisition, interest at 8%,
principal and accrued interest due May 1999....... -- 530,000
Note payable assumed in acquisition, interest at
9.75%, payable in monthly installments of $2,257,
through May 2000.................................. -- 35,707
Notes payable for vehicles, interest rates ranging
from 6.9% to 11.2%, payable in monthly
installments totaling $5,848 through June 2002,
(ii) below........................................ 147,746 138,705
Note payable, interest at 4%, payable in monthly
installments of $1,963 through September 2014,
(iii) below....................................... 287,565 --
Note payable for acquisition, interest at 8%,
principal and accrued interest due March 1998..... 106,670 --
------------ ------------
541,981 154,334,492
Less current portion............................... (163,220) (603,919)
------------ ------------
Long term portion.................................. $ 378,761 $153,730,573
============ ============
</TABLE>
- --------
(i) On April 2, 1998 we completed a private offering of $160.0 million of 13%
Senior Notes ("13% Senior Notes") and 640,000 warrants to purchase
1,728,000 of our common shares (the "Warrants") (collectively, the "13%
Notes Offering"). The 13% Senior Notes mature on April 1, 2008 and interest
is payable semi-annually in arrears on April 1 and October 1 of each year
beginning October 1, 1998. At the same time as the closing of the 13% Notes
Offering, we deposited U.S. Government Securities in a collateral account.
The amount deposited in the collateral account together with the interest
earned on those securities, will be enough to pay the first six interest
payments on the 13% Senior Notes. The first payment was made on October 1,
1998. The 13% Senior Notes contain certain covenants that restrict our
ability to incur additional debt and to make certain payments, including
dividends. Each Warrant entitles the holder to purchase 2.7 shares of our
common stock at an exercise price of $.01 per share. The Warrants are
currently exercisable and expire on April 1, 2008. Each Warrant was
assigned a value of $10.76 using an option pricing model, a market analysis
of publicly traded companies and a discounted cash flow analysis. The
proceeds that were attributable to the Warrants were treated as a discount
to the 13% Senior Notes and allocated to shareholders' equity. We received
proceeds approximately of $95.6 million after deducting offering costs of
approximately $7.6 million and making the deposit of $56.8 million into the
collateral account. As of December 31, 1998 the amount outstanding, net of
the unaccreted discount of $6.4 million resulting from the allocation of
the warrants, was $153.6 million.
(ii) In June 1997, we obtained a one-year renewable line of credit with General
Motors Acceptance Corporation in the amount of $538,000 to acquire
vehicles for operations. Advances under the line are payable over a four
to five year term. We have used $155,521 of this credit facility of which
$94,893 was outstanding at December 31, 1997 and $115,803 was outstanding
at December 31, 1998. We do not anticipate additional borrowings under
this facility.
(iii) This note was paid in April 1998.
Scheduled maturities on debt outstanding are as follows:
34
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
Due in: 1998
------- ------------
<S> <C>
1999...................................................... $ 603,919
2000...................................................... 58,388
2001...................................................... 37,918
2002...................................................... 4,187
2003...................................................... --
Thereafter................................................ 160,000,000
------------
160,704,412
Less unaccreted discount.................................... (6,369,920)
------------
Total debt.................................................. $154,334,492
============
</TABLE>
Capital Leases
Some of our equipment and equipment used by our customers is leased under
capital leases. The following is a schedule of the minimum lease payments
under capital leases together with the present value of the minimum lease
payments.
<TABLE>
<CAPTION>
December 31,
Due in: 1998
------- ------------
<S> <C>
1999........................................................ $6,082,644
2000........................................................ 5,440,318
2001........................................................ 3,596,597
2002........................................................ 529,588
2003........................................................ 218,450
----------
Total minimum lease payments.................................. 15,867,597
Less amount representing interest............................. (1,934,292)
----------
Present value of minimum lease payments....................... 13,933,305
Less current portion.......................................... (5,179,251)
----------
Long-term portion............................................. $8,754,054
==========
</TABLE>
Comdisco Facility. In November 1997 we entered into a three year Program
Agreement with Comdisco, Inc. ("Comdisco") which provides for up to $50
million of equipment lease financing. At December 31, 1998, $10 million of the
$50.0 million was available for us to use of which $7.6 million was being
utilized. The Program Agreement expires on June 30, 2000.
The Comdisco facility is collateralized by the equipment being financed. In
addition, we are required to issue a warrant to acquire shares of our common
stock in an amount equal to ten percent (10%) of the facility, divided by the
exercise price per share. The exercise price per share is equal to the price
paid by investors in recent equity offerings, not less than $3.00 per share.
The warrants will be issued in three installments based upon amounts available
under the facility. We issued a warrant in 1997 for the purchase of 333,333
shares of our common stock at an exercise price of $3.00 per share for the
first $10 million of the facility which were valued utilizing an option
pricing model, and a number of factors including a market analysis of publicly
traded companies and a discounted cash flow analysis. The warrants are being
amortized into interest expense over three years.
35
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sun Financial Facility. In May 1997, we entered into a Master Equipment
Lease with Sun Financial Group, Inc. to lease equipment, facilities and
related items for our internal expansion as well as equipment to be used for
customer installations. The facility is collateralized by a $100,000 standby
letter of credit. In connection with the establishment of the facility, we
issued a warrant to Sun Financial Group, Inc. for the purchase of 80,571
shares of our common stock at an exercise price of $3.00 per share. We valued
the warrant utilizing an option pricing model and a number of other factors
including a market analysis of publicly traded companies and a discounted cash
flow analysis. The warrant is being amortized into interest expense over three
years. We had amounts outstanding under this facility of $1.4 million as of
December 31, 1997 and $4.4 million as of December 31, 1998.
8. Commitments:
We lease a portion of our buildings and equipment under operating leases.
Future minimum payments under operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
Due in: 1998
------------
1999........................................................ $ 4,961,985
2000........................................................ 3,943,432
2001........................................................ 3,245,816
2002........................................................ 2,442,580
2003........................................................ 1,076,301
Thereafter.................................................. 205,596
------------
$ 15,875,710
============
</TABLE>
Rent expense under operating leases was $45,874 for the period from January
1, 1996 to December 16, 1996, $17,927 for the period from inception to
December 31, 1996, $431,930 for the year ended December 31, 1997 and $4.3
million for the year ended December 31, 1998.
9. Shareholders' Equity:
In connection with the acquisition of certain assets of Sigmacom (Note 3),
we issued warrants to purchase 50,000 shares of our common stock exercisable
at $7.50 per share through December 1999.
On October 31, 1996, we entered into an exclusive engineering and consulting
agreement with Services-oriented Open Network Technologies, Inc. ("SONeTech")
for engineering services to our internal engineering staff relating solely to
the initial configuration of the architecture of the E-POPTM network strategy
and the development of service logic for our call processing design. We issued
375,000 shares of our common stock in exchange for a 10% equity interest in
SONeTech and an exclusive engineering and consulting agreement. We will be
entitled to reacquire a portion of our common stock that was issued to
SONeTech at the original price of $0.06 per share if SONeTech terminates the
agreement.
In February 1997, we completed the second of two tranches of an offering of
an aggregate of 7,000,000 units. Each of the units consisted of one share of
common stock and one-half warrant to purchase a share of common stock (the
first tranche of 4,739,525 units closed in late 1996). The units were sold at
a price of $1.00 each. One warrant entitles the holder to purchase one share
of common stock for a price of $1.50 per share for five years from the date of
the offering. As part of the offering, we issued warrants to purchase
3,500,000 of our common shares to investors, which are exercisable at $1.50
per share. We also issued warrants to purchase
36
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
741,250 of our common shares to the placement agents, which are exercisable at
$1.20 per share through November 7, 2001.
In October 1997, we completed an offering of 6,800,000 units consisting of
one share of our common stock and one-half warrant to purchase a share of our
common stock. The units were sold at a price of $2.50 each. One warrant
entitles the holder to purchase one share of our common stock for a price of
$3.75 per share, beginning in November 1998 through July 14, 1999. The
proceeds, net of related offering costs, were approximately $15.2 million. We
also issued warrants to purchase 615,860 of our common shares to the placement
agents exercisable at $3.00 per share beginning in May 1998 through November
14, 2002.
In connection with the signing of financing agreements with Comdisco, Inc.
and Sun Financial, we granted Comdisco, Inc. warrants to purchase 333,333
shares of our common stock and granted Sun Financial warrants to purchase
80,571 shares of our common stock. All of these warrants are exercisable at
$3.00 per share. The Comdisco warrants are currently exercisable and expire on
the earlier of (i) November 2007, or (ii) five years following an initial
public offering of our common stock. The Sun Financial warrants are
exercisable beginning in May 1998 and expire in May 2002.
In August 1998, we entered into a consulting agreement under which the
consultant recruited senior management personnel on behalf of our wholly owned
subsidiary, Convergent Capital Corporation. As a result of the services
performed under this agreement, we issued warrants to the consultant to
purchase 125,000 shares of our common stock at $5.00 per share. The warrants
are currently exercisable and expire on August 3, 2008. We valued the warrants
using an option pricing model and recognized consulting expense of $79,883.
Certain holders of our common stock and the holders of certain warrants have
the right to demand that we file a registration statement to register their
shares and the shares underlying their warrants in 1999.
Stock Option Plans:
We have adopted the 1996 and 1997 Incentive and Non-Statutory Option Plans
and the 1998 Stock Option Plan (the "Plans") which authorize us to grant up to
7,400,000 shares of our common stock to employees, consultants and directors
under incentive stock options within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended, and to grant non-statutory stock
options.
The Plans require that the exercise price of options we grant must be at
least equal to the fair market value of a share of our common stock on the
date of the grant and must be exercisable over a period of up to ten years.
However, if an employee owns more than 10% of our outstanding common stock,
then the exercise price of an incentive option must be at least 110% of the
fair market value of a share of our common stock on the date of grant and must
be exercisable over a period of five years. All of our options vest over five
years.
The Plans are administered by our Board of Directors or a committee thereof
which determines the terms of the options granted, including the exercise
price, the number of shares of our common stock subject to the option, and the
terms and conditions of exercise. No option granted under the Plan is
transferable by the optionee other than by will or the laws of descent and
distribution and each option is exercisable during the lifetime of the
optionee only by such optionee.
In May 1997, we accelerated the vesting provisions related to options of
certain employees to purchase 950,000 shares with an exercise price of $0.06
per share and all of the options were exercised. The underlying shares are
subject to a repurchase agreement over a five year period whereby we can
repurchase a portion of the shares upon termination of employment. The amount
available for repurchase is reduced by 20% each year of employment. In late
1997, we repurchased 200,000 shares for $0.06 per share, upon the termination
of one of the exercising employees. The repurchased shares are included in the
authorized but unissued shares of common stock. At December 31, 1998,
approximately 370,000 shares were no longer subject to repurchase.
37
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Grant Date
Shares Price Fair Value
---------- -------- ----------
<S> <C> <C> <C>
Outstanding at March 1, 1996.................... -- $ -- $ --
Granted
At market value.............................. 785,000 1.09 0.20
Below market value........................... 1,025,000 0.06 0.46
Exercised..................................... -- -- --
Cancelled..................................... -- -- --
---------- -------- --------
Outstanding at December 31, 1996................ 1,810,000 0.51 --
Granted
Above market value........................... 2,810,000 1.80 0.26
At market value.............................. 985,000 1.95 0.56
Exercised..................................... (950,000) 0.06 --
Cancelled..................................... (12,000) 1.33 --
---------- -------- --------
Outstanding at December 31, 1997................ 4,643,000 1.69 --
Granted
Above market value........................... 2,638,000 5.63 0.08
At market value.............................. 641,000 3.74 0.87
Exercised..................................... (87,000) 0.19 --
Cancelled..................................... (1,269,500) 2.63 --
---------- -------- --------
Outstanding at December 31, 1998................ 6,565,500 $ 3.25 $ --
========== ======== ========
The following table indicates the number of shares exercisable and the
weighted average exercise prices at December 31:
<CAPTION>
1996 1997 1998
---------- -------- ----------
<S> <C> <C> <C>
Options exercisable............................. -- 345,000 990,100
Weighted average exercise price................. -- $ 1.29 $ 1.66
</TABLE>
At December 31, 1998, the range of exercise prices and weighted average
remaining contractual life for options outstanding was as follows:
<TABLE>
<CAPTION>
Option Price Weighted Average
Number of Shares Range Remaining Contractual Life
---------------- -------------- --------------------------
<S> <C> <C>
2,238,000.......................... $1.00 to $1.10 6.6 years
918,000............................ $2.00 to $2.50 8.6 years
932,500............................ $3.00 8.9 years
959,500............................ $5.00 to $5.50 7.7 years
1,517,500.......................... $6.00 9.8 years
</TABLE>
If the compensation cost for the Plan was determined based on the fair value
at the grant dates for awards using the method prescribed by SFAS 123, our pro
forma net loss and net loss per share would have been as follows:
38
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, -------------------------
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported........................ $(575,392) $(9,654,779) $(50,575,984)
Pro-forma.......................... $(575,808) $(9,703,446) $(50,957,542)
Net loss per share:
As reported........................ $ (0.07) $ (0.46) $ (1.84)
Pro-forma.......................... $ (0.07) $ (0.46) $ (1.86)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, ------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Dividend yield........................ -- -- --
Risk-free interest rate............... 6.06-6.48% 5.65-6.84% 5.38-5.71%
Expected lives........................ 5 years 5 years 5 years
</TABLE>
Because the determination of the fair value of all options granted if we
become a public entity will include an expected volatility factor in addition
to the factors described in the table above and, because additional option
grants are expected to be made the above pro forma disclosures are not
necessarily representative of pro forma effects on net income to be reported
for future years.
We recognized compensation expense for employee stock grants and stock
options of $282,267 for the period ended December 31, 1996, $194,517 for the
year ended December 31, 1997 and $633,828 for the year ended December 31,
1998.
10. Business Segments:
We classify our business into five fundamental areas: data services, voice
services, ENS, data products and voice products. Senior management evaluates
and makes operating decisions about each of these operating segments based on
a number of factors. We do not account for assets by business segment and,
therefore, depreciation and amortization are not factors used in evaluating
operating performance. Two of the most significant factors used in evaluating
the operating performance are: revenue and gross margin before depreciation as
presented below:
39
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, --------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Data services......................... $ -- $ 585,385 $ 3,620,222
Voice services........................ 57,754 2,203,182 22,298,886
ENS................................... -- 6,210 2,002,914
Data products......................... 39,387 6,656,813 20,892,491
Voice products........................ -- 758,434 12,785,598
--------- ------------ ------------
Total.............................. $ 97,741 $ 10,210,024 $ 61,600,111
========= ============ ============
Gross margin before depreciation:
Data services......................... $ -- $ 534,020 $ 2,111,684
Voice services........................ 17,739 979,225 8,915,797
ENS................................... -- 3,266 1,307,685
Data products......................... 543 1,056,705 2,249,700
Voice products........................ -- 268,299 3,312,062
--------- ------------ ------------
Total.............................. $ 18,282 $ 2,841,515 $ 17,896,928
========= ============ ============
Reconciliation to net loss:
Selling, general and administrative... $(552,092) $(10,982,769) $(47,861,785)
Depreciation and amortization......... (40,698) (1,453,019) (7,493,613)
--------- ------------ ------------
Operating loss...................... (574,508) (9,594,273) (37,458,470)
Interest expense...................... (884) (155,450) (17,501,512)
Interest income....................... -- 251,290 4,632,420
Other income (expense)................ -- (156,346) (248,422)
--------- ------------ ------------
Net loss............................ $(575,392) $ (9,654,779) $(50,575,984)
========= ============ ============
</TABLE>
11. Deferred Compensation:
We have a Deferred Compensation plan whereby certain management employees can
elect to defer a portion of their compensation which will be paid in shares of
our common stock at a future date. The plan requires that we issue shares of
common stock into a rabbi trust which will then be distributed to the employee
at a specified date in the future not less than one year from the deferral
date. We have recorded the deferred compensation amount as treasury stock (for
accounting purposes) and as a deferred compensation obligation in the
shareholders' equity section of the balance sheet. As of December 31, 1998,
154,344 shares of our common stock are being held in the rabbi trust.
12. Income Taxes:
We were originally organized as an S corporation under the provisions of
Section 1361 of the Internal Revenue Code. As an S corporation, we were not
subject to tax on our income; rather our shareholders were taxed on their share
of the taxable income, whether or not the income was distributed. Effective
December 5, 1996, we rescinded our S Corporation election under the Internal
Revenue Code and became subject to tax on our income. No pro forma tax benefit
has been provided for either the Convergent or ICN as Predecessor due to their
continuing losses.
The Predecessor was a limited liability company which was treated as a
partnership for taxation purposes.
For federal income tax purposes we had net operating loss carryforwards of
$44.9 million as of December 31, 1998. Section 382 of the Internal Revenue Code
places certain limitations on the annual amount of net
40
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating loss carryforwards which can be utilized if certain changes in
ownership occur. As a result, our ability to use these net operating loss
carryforwards, which will begin to expire in 2011, may be limited.
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 3,461,765 $ 17,057,862
Deferred revenue................................... -- 1,924,474
Accrued vacation and bonus......................... -- 1,342,101
Intangibles........................................ -- 548,919
Allowance for doubtful accounts.................... 8,127 527,977
Property and equipment............................. 112,106 462,333
Self-insurance and warranty liabilities............ -- 448,705
Original issue discount............................ -- 384,006
Valuation allowance................................ (3,581,998) (22,696,377)
----------- ------------
Total net deferred tax assets........................ $ -- $ --
=========== ============
</TABLE>
The increase in the valuation allowance of $3.5 million in 1997 and $19.1
million in 1998 are due to increased losses during each year. We have recorded
a full valuation allowance on the net deferred tax assets due to continuing
losses.
Our actual income taxes differed from the expected federal statutory rate of
34% as follows:
<TABLE>
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, -------------------------
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Statutory tax rate................ 34% 34% 34%
State taxes, net of federal
benefit.......................... 4 4 4
Valuation allowance............... (38) (38) (38)
--------- ----------- ------------
Effective tax rate................ -- % -- % -- %
========= =========== ============
13. Net Loss Per Share:
The net loss available to common shareholders consists of the following:
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, -------------------------
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net loss.......................... $(575,392) $(9,654,779) $(50,575,984)
The weighted average shares
consist of the following:
Weighted average common shares
used for basic earnings per
share........................... 7,774,651 20,921,569 27,463,469
Warrants......................... -- -- --
Stock options.................... -- -- --
</TABLE>
41
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the
period from
Inception
through Year ended December 31,
December 31, -----------------------
1996 1997 1998
============ =========== ===========
<S> <C> <C> <C>
Weighted average common shares used
for fully diluted earnings per
share.............................. 7,774,651 20,921,569 27,463,469
--------- ----------- -----------
Anti-dilutive weighted average
options and warrants not included.. 307,181 7,653,035 13,950,110
========= =========== ===========
</TABLE>
14. Employee Benefit Plans:
We adopted an employee benefit 401(k) plan for all employees effective March
1, 1997. Under the plan, employees may voluntarily elect to have up to 15% of
their salaries deducted from earnings and placed in the plan. We may elect to
match up to 6% of the employee contributions by contributing our common stock
to the plan. Our contributions are determined on a quarterly basis and the
number of shares to be contributed is based upon the estimated fair value of
the stock at the end of each quarter. During 1998 we contributed $182,792 of
our common stock for the year ended December 31, 1997 match and contributed
$253,102 of our common stock for the first and second quarters of 1998. An
additional $800,000 was accrued as of December 31, 1998 for the third and
fourth quarter 1998 match, which will be contributed in 1999.
15. Related Party Transactions:
In August 1998, we entered into a two year agreement with Strategic
Healthcare Solutions, LLC ("SHS") under which SHS was engaged to provide new
customers in the healthcare industry to us. One of our directors is a
principal of Strategic Asset Management which has an ownership interest in
SHS. Under the agreement, we pay SHS a monthly fee and commissions (an
aggregate of approximately $125,000 in 1998). In addition, we issued a warrant
to SHS which entitles them to purchase up to a maximum of 262,500 shares of
our common stock at an exercise price of $6.00. The warrant includes
performance objectives which are reviewed semiannually. If SHS does not meet
those performance objectives, all or a portion of the shares available for
each six-month period (65,625 shares) is reduced. The warrant is not
exercisable until August 1, 2000 and expires August 1, 2003. For the first
six-month period of the agreement which ended February 1, 1999, SHS did not
meet the performance objectives and as a result, the 65,625 shares applicable
to that period were reduced to zero.
Pursuant to the terms of a non-cancelable license fee related to proprietary
telecommunications equipment technology, ICN paid monthly license fees of
$2,500 and management fees of $1,200 to a shareholder of ICN. During the
period from January 1, 1996 through December 16, 1996, ICN incurred costs of
$44,400 under these arrangements.
One of our Directors was a Principal and owner of Shepherd Financial Group.
Shepherd Financial Group received total compensation of approximately $1.5
million and was issued 438,000 warrants to purchase our common stock in
exchange for placement agent services provided to us in connection with
private placements of our common stock in 1996 and 1997. The Director was also
a Principal and owner of Shepherd Capital Group, which was paid approximately
$0.5 million for financial advisory services provided to us during 1997.
16. Subsequent Events:
In January 1999, we entered into a non-binding letter of intent to purchase
substantially all of the assets and assume certain liabilities of Business
Systems Solutions, Inc. ("BSSi"). BSSi is a provider of data network
integration services in Chicago, Illinois. Total consideration for the
purchase will be a maximum of $1.3 million. The acquisition is subject to
completion of due diligence, execution of definitive agreements and various
other approvals.
42
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1999, we acquired the assets and assumed certain liabilities of
Kansas Communications, Inc. ("KCI"). KCI was a telecommunications equipment
provider and integrator. The purchase price consisted of $1.5 million in cash,
$4.5 million in notes payable and 30,000 shares of our common stock which for
purchase accounting purposes were assigned a value of $5.00, and assumed
liabilities of $2.5 million for total consideration of $8.7 million. Upon the
completion of equity or debt financing with net proceeds in excess of $25.0
million, $3.5 million of the notes payable would become due.
On March 17, 1999, we executed an agreement pursuant to which various
affiliates of the Sandler/21st Century Group agreed to purchase 800,000 shares
of Convertible Preferred A Stock and warrants to purchase 1,000,000 shares of
our common stock. We sold 640,000 shares of Convertible Preferred A Stock and
warrants to purchase 800,000 shares of our common stock on March 17, 1999 for
total consideration of $16.0 million. The balance of the shares and warrants
are required to be purchased for $4.0 million no later than March 31, 1999.
Each share of Convertible Preferred A Stock is currently convertible into five
shares of our common stock. The Convertible Preferred A Stock will
automatically convert into common stock upon a public offering which provides
gross proceeds to us in excess of $50.0 million. At the public offering, each
share of Convertible Preferred A Stock will convert into a minimum of 5 and a
maximum of 7.14 shares of common stock, depending on the price of common stock
in the public offering. Each warrant entitles the holder to purchase one share
of our common stock at an exercise price of $10.00 per share for a period of
five years. The proceeds from the first closing, net of related offering
costs, were approximately $15.3 million. One of our directors, Michael
Marocco, is a principal of several of the entities in the Sandler/21st Century
Group.
43
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Our executive officers and directors as of March 16, 1999 are set forth
below. Our directors have staggered terms, with three classes of directors
serving terms as set forth below or until the director's death, resignation or
removal.
<TABLE>
<CAPTION>
Officer
and/or
Director
Name Age Since Position
---- --- -------- --------
<S> <C> <C> <C>
Chief Executive Officer, Chairman and
John R. Evans(1)(2)(3).. 44 1995 Director
President, Chief Operating Officer and
Keith V. Burge(3)....... 44 1995 Director
Executive Vice President, Secretary and
Philip G. Allen(4)...... 51 1995 Director
Roland E. Casati(4)..... 67 1997 Director
Richard G. Tomlinson,
Ph.D.(1)(5)............ 62 1997 Director
Michael J. Marocco
(2)(4)................. 40 1998 Director
Spencer I. Browne
(1)(2)(5).............. 49 1998 Director
John J. Phibbs.......... 37 1997 Executive Vice President, Chief Financial
Officer and Treasurer
Martin E. Freidel....... 35 1997 Executive Vice President, General Counsel
and Assistant Secretary
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Elected to Class I, with a term expiring on the annual meeting following
the end of the calendar year 2000, and every three years thereafter.
(4) Elected to Class II, with a term expiring on the annual meeting following
the end of the calendar year 1999, and every three years thereafter.
(5) Elected to Class III, with a term expiring on the annual meeting following
the end of the calendar year 1998, and every three years thereafter.
John R. Evans served as the Chief Financial Officer and Executive Vice
President of ICG Communications, Inc. from its inception until December 1995.
Mr. Evans has also held various senior accounting and treasury management
positions with Northern Telecom Canada Ltd., including strategic financial
planning, analysis and budgeting, and held various audit and management
information systems positions during six years with Coopers & Lybrand.
Keith V. Burge was the founder, Chief Executive Officer and Chief Operating
Officer of Fiber Optic Technologies, Inc., a leading national network services
integrator specializing in the design, implementation and support of high-
speed data communication infrastructures, from 1986 to 1995. Fiber Optic
Technologies became a subsidiary of ICG in 1992. Before founding Fiber Optic
Technologies, Mr. Burge was employed by Digital Equipment Corporation for nine
years, where, from 1983 to 1986, he was a senior sales executive.
Philip G. Allen was the Vice President of Investor Relations and Corporate
Communications for ICG. Before joining ICG in 1992, Mr. Allen was President of
Allen & Company Business Communications, a communications company specializing
in business development and the design and production of marketing materials
in the communications field. Mr. Allen was also an advisor to senior
management at what is now Ameritech and U S WEST from 1976 to 1986, where he
worked in various media relations, public policy and executive support areas.
44
<PAGE>
Roland E. Casati has developed in excess of three million square feet of
high-quality office buildings in and around Chicago, Illinois, during the past
35 years. For the last 15 years, Mr. Casati has been a venture capitalist.
Richard G. Tomlinson, Ph.D. is the President of Connecticut Research, Inc.,
a management consulting company founded in 1986 which serves the
telecommunications, electric utility and computer industries. He has published
numerous marketing studies, venture analyses and technical papers, is a
contributing author for several books and holds five patents. Before founding
Connecticut Research, Inc., he was the Vice President for Strategic Planning
of United Technologies Communications Co. Inc., a subsidiary of United
Technologies Building Systems Co. His career at United Technologies
Corporation spanned 20 years, including 16 years at the UTC Research
Laboratory where he was a Senior Principal Scientist.
Michael J. Marocco is the managing director of Sandler Capital Management.
Mr. Marocco joined Sandler in 1989 and is currently responsible for analyzing,
structuring and managing Sandler's private equity investments. Before joining
Sandler, Mr. Marocco held various positions at Morgan Stanley Dean Witter,
including a fixed income research analyst specializing in companies in the
communications industry and vice president in the Communications Industries
group.
Spencer I. Browne is a principal and founder of Strategic Asset Management,
LLC, a consulting company that assists small and medium-sized companies in
obtaining financing. Mr. Browne was a director and president and chief
operating officer of M.D.C. Holdings, Inc. from 1989 to 1996. He was also a
co-founder, director and chief executive officer of Asset Investors
Corporation and Commercial Assets, Inc. which are publicly-owned real estate
investment trusts. Mr. Browne is also a director for Mego Mortgage Corporation
and Annaly Mortgage Management, Inc.
John J. Phibbs previously served as our Vice President of Finance and
Administration from March 1997 to February 1998. Before joining us, Mr. Phibbs
held various financial positions from 1991 through February 1997 with ICG,
including Vice President - Accounting and Vice President - Financial Planning
and Analysis. From 1985 to 1991, Mr. Phibbs was employed in various financial
positions at Lockheed Martin Corporation and McDonnell Douglas Corporation.
Martin E. Freidel previously served as Special Counsel to the law firm of
Miller & Welch, LLC in Denver, Colorado, where he also acted as our Associate
General Counsel. From December 1992 until December 1996, Mr. Freidel held
various positions with ICG and its predecessors, the last having been Vice
President and General Counsel. Before joining ICG, Mr. Freidel served as Vice
President - Regulatory for LDDS Communications, Inc. (now MCI WorldCom)
("LDDS") and Vice President and General Counsel for MidAmerican Technologies,
Inc., MidAmerican Communications, Inc. and Republic Telecom Services, Inc.,
which were purchased by LDDS in 1991.
Director Compensation
Our Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. In addition, non-employee Directors are
compensated $1,000 per day for on-site meetings and $250 for teleconference
meetings. Non-employee Directors also receive options to purchase 5,000 shares
of our common stock per quarter for each quarter that they serve as a
Director.
Audit Committee
We have an Audit Committee that:
.monitors our financial reporting and our internal and external audits;
45
<PAGE>
.reviews and approves material accounting policy changes;
.monitors internal accounting controls;
.recommends the engagement of independent auditors;
.reviews transactions between our company and our officers or Directors;
and
.performs other duties when requested by the Board of Directors.
Messrs. Tomlinson, Browne and Evans are members of the Audit Committee.
Compensation Committee
We also have a Compensation Committee that reviews and approves the
compensation and benefits paid to our executive officers, and administers our
employee stock option plans. Messrs. Marocco, Browne and Evans are members of
the Compensation Committee.
Item 11. Executive Compensation
The following table sets forth in summary form the compensation earned by
our Chief Executive Officer and our four other highest paid executive officers
(the "Named Officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------------------------- Compensation
Other Annual Securities Underlying All Other
Name and Principal Position Year Salary(1) Bonus(2) Compensation(3) Options(4) Compensation(5)
- --------------------------- ---- --------- -------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John R. Evans............ 1996 $ 6,250 -- -- 200,000 --
Chairman and Chief 1997 $150,000 $75,000 $12,781 -- $82,500
Executive Officer 1998 $200,000 -- $14,799 100,000 $10,000
Keith V. Burge........... 1996 $ 5,417 -- -- 200,000 --
President and Chief 1997 $130,000 $65,000 $ 8,625 -- $72,022
Operating Officer 1998 $180,000 -- $ 9,775 100,000 $10,000
Philip G. Allen.......... 1996 $ 4,167 -- -- 200,000 --
Executive Vice President 1997 $100,000 $50,000 $12,172 -- $55,735
and Secretary 1998 $150,000 -- $ 9,000 100,000 $10,000
John J. Phibbs........... 1996 -- -- -- -- --
Executive Vice
President, 1997 $ 95,833(6) $32,383 $ 5,000 300,000 $29,134
Chief Financial Officer 1998 $137,500(6) -- $ 6,250 -- $ 8,523
and Treasurer
Martin E. Freidel........ 1996 -- -- -- -- --
Executive Vice
President, 1997 $ 36,939(7) $19,569 $ 2,199 300,000 $21,445
General Counsel and 1998 $139,583(7) -- $ 6,000 -- $ 9,444
Asst. Secretary
</TABLE>
- --------
(1) During 1996, we were in our initial formation stage and the executive
officers did not receive compensation for their services until December
16, 1996.
(2) Includes the 50% of the individual's bonus under his employment agreement
which was paid in cash, plus, in the case of Mr. Phibbs, a signing bonus
of $8,425. Each of the individuals received the remaining 50% of his bonus
in shares of our common stock, valued at fair market value. The total cash
payments made are listed in this column. The total value of cash and
deferred bonus payments made to our Named Officers was as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Mr. Evans....... $150,000
Mr. Burge....... $130,000
Mr. Allen....... $100,000
Mr. Phibbs...... $ 47,917
Mr. Freidel..... $ 39,139
</TABLE>
46
<PAGE>
Bonuses for 1998 have not yet been awarded.
(3) Includes automobile allowance and other fringe benefit payments.
(4) Amounts listed are options granted. 20% of the options to purchase shares
vest on each anniversary of the date of grant.
(5) Includes contributions to our 401(k) Plan and 50% of the bonus payments
made under the individual's employment agreement which were deferred and
paid in shares of our common stock which is held under our deferred
compensation plan. These shares are held in a "rabbi trust" for a period
we and the employee specify, which cannot be less than one year. The
number of shares held for the benefit of the Named Officers are as
follows: Mr. Evans, 23,076; Mr. Burge, 20,000; Mr. Allen, 15,384; Mr.
Phibbs, 7,371; and Mr. Freidel, 6,021.
(6) Mr. Phibbs' employment commenced on March 3, 1997. His base salary was
$130,000 per year and increased to $175,000 on November 1, 1998.
(7) Mr. Freidel's employment commenced on September 15, 1997. His base salary
was $125,000 per year and increased to $175,000 on September 15, 1998.
Option Grants Table
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation
Number of Securities Percent of Total for Option Term (2)
Underlying Options Options Granted Exercise Price Expiration ---------------------
Name Year Granted(1) to Employees Per Share Date 5% 10%
- ---- ---- -------------------- ---------------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Evans........... 1996 200,000 11.0 $1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 100,000 3.0 $5.50 4/13/2008 $ 264,000 $ 747,000
Keith V. Burge.......... 1996 200,000 11.0 $1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 100,000 3.0 $5.50 4/13/2008 $ 264,000 $ 747,000
Philip G. Allen......... 1996 200,000 11.0 $1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 100,000 3.0 $5.50 4/13/2008 $ 264,000 $ 747,000
John J. Phibbs.......... 1996 -- -- -- -- -- --
1997 300,000 7.9 $1.00 3/3/2007 $ 189,000 $ 478,000
1998 -- -- -- -- -- --
Martin E. Freidel....... 1996 -- -- -- -- -- --
1997 300,000 7.9 $2.50 9/15/2007 $ 472,000 $ 1,195,000
1998 -- -- -- -- -- --
</TABLE>
- --------
(1) 20% of the option to purchase shares vest on each anniversary of the date
of grant.
(2) Potential realizable value is based on an assumption that the price per
share of our common stock appreciates annually at the rate shown
(compounded annually) from the date of grant until the end of the option
term. Potential realizable value is shown net of the exercise price. These
rates of appreciation are provided in accordance with the Securities and
Exchange Commission regulations and do not represent our estimate or
projection of the future common stock price.
47
<PAGE>
Aggregated Option Fiscal Year-End Values
<TABLE>
<CAPTION>
Number of Securities Including Value of Unexercised In-The-Money
Unexercised Options At Fiscal Year-End Options At Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- -------------------------------------- ---------------------------------
<S> <C> <C>
John R. Evans........... 80,000/220,000 $312,000/$468,000
Keith V. Burge.......... 80,000/220,000 $312,000/$468,000
Philip G. Allen......... 80,000/220,000 $312,000/$468,000
John J. Phibbs.......... 60,000/240,000 $240,000/$960,000
Martin E. Freidel....... 60,000/240,000 $150,000/$600,000
</TABLE>
- --------
(1) Assumes a fair market value of our common stock as of December 31, 1998,
of $5.00 per share based on recent sales of convertible securities.
Employment Agreements
We have employment agreements with each of the Named Officers.
Each of Messrs. Evans', Burge's and Allen's employment agreement was
originally executed effective December 15, 1996 and provides for an initial
term of five years. Mr. Evans receives a base salary of $200,000, Mr. Burge
receives a base salary of $180,000, and Mr. Allen receives a base salary of
$150,000. They also receive a car allowance, benefit package and an incentive
bonus of up to 100% of their respective base salaries for Messrs. Evans and
Burge, and up to 50% of his base salary for Mr. Allen. The incentive bonus is
determined by our Compensation Committee. If we terminate the employment
agreement without cause, or if the employee terminates as a result of a change
in control, the employee is entitled to continue to receive his salary and
accrued bonus for a period of 24 months, as well as the immediate vesting of
all options granted to the employee. In addition, each of Messrs. Evans, Burge
and Allen is subject to covenants not to compete with our business or
interfere with our business and employee relationships.
Mr. Phibbs' employment agreement is effective as of March 3, 1997 and
provides for a term of four years. Mr. Phibbs receives an annual base salary
of $175,000. In addition, Mr. Phibbs receives a car allowance, benefit package
and an incentive bonus of up to 75% of his base salary. The incentive bonus is
determined by our Compensation Committee. If we terminate the employment
agreement without cause Mr. Phibbs is entitled to continue to receive his
salary for a period of 12 months. In the event of a change in control, he is
entitled to continue to receive his salary for a period of 24 months. In
either case, he will be entitled to the immediate vesting of all options
granted to Mr. Phibbs.
Mr. Freidel's employment agreement is effective as of September 15, 1997 and
provides for an initial term of five years. Mr. Freidel receives an annual
base salary of $175,000. In addition, Mr. Freidel receives a car allowance,
benefit package and an incentive bonus of up to 75% of his base salary. The
incentive bonus is determined by our Compensation Committee. If we terminate
the employment agreement without cause, or if Mr. Freidel terminates his
employment as a result of a change in control, Mr. Freidel is entitled to
continue to receive his salary and accrued bonus for a period of 24 months as
well as the immediate vesting of all options granted to Mr. Freidel.
Stock Option Plans
We have adopted stock option plans for our employees and Directors. The
following table provides summary information about our stock option plans:
48
<PAGE>
<TABLE>
<CAPTION>
Shares Authorized Options Outstanding Options Exercisable
----------------- ------------------- -------------------
<S> <C> <C> <C>
1996 Plan............ 2,700,000 2,188,000 807,000
1997 Plan............ 1,200,000 934,000 186,800
1998 Plan............ 3,500,000 3,364,200 282,500
1999 Plan............ 1,500,000 360,000 0
</TABLE>
The stock option plans include the following terms:
. all employee options vest 20% each year over five years from the date of
grant
. the exercise prices of options granted must be at least equal to the
fair market value of our common stock on the date of grant
. options have a maximum term of ten years
. if an employee owns more than 10% of our outstanding common stock, then
the exercise price of the option must be at least 110% of the fair
market value of a share of our common stock on the date of grant, and
the maximum term of the option is five years
. the aggregate fair market value of the common stock, determined at the
time the option is granted, for which incentive stock options become
exercisable by an employee during any calendar year is limited to
$100,000
Our stock option plans are administered by our Compensation Committee. They
determine additional conditions of the options granted, including the exercise
price and the number of shares to grant. Options cannot be transferred and
they can only be exercised by the person who received the grant. Outstanding
options have exercise prices from $1.00 to $6.00.
401(k) Plan
We also provide our employees with a 401(k) plan. Eligible employees may
voluntarily elect to have up to 15% of their salaries (subject to the maximum
amount allowed under Federal law) deducted from their earnings and contributed
to the 401(k) plan. Contributions are invested in several alternatives
selected by the employee. At the end of each quarter, we determine whether or
not to match our employees' contributions. The maximum amount of our matching
contribution would be 6% of an employee's contribution. If we decide to match
our employees' contributions, we contribute shares of our common stock into
the 401(k) plan. The value of our common stock is determined by an independent
valuation at the end of each quarter. Shares of common stock that we
contribute into the 401(k) plan are fully vested when they are issued. As of
December 31, 1998 we had issued a total of 137,994 shares of stock into the
401(k) Plan.
Incentive Compensation Plan
We have also adopted an Incentive Compensation Plan for most of our
employees. Eligible employees may receive a payment based in part upon their
individual performance during the preceding fiscal year as measured against
predetermined objectives and in part upon our performance during the same
period. For director-level employees and above, 50% of the employee's
incentive compensation must be taken in the form of common stock. The stock
portion can be deferred pursuant to our Deferred Compensation Plan.
Deferred Compensation Plan
Our Deferred Compensation Plan allows management employees the option to
defer the common stock portion of their compensation to be paid at a future
date. This plan requires us to issue shares of common stock into a trust
account which will then be distributed to the employee at a specified date in
the future, which can not be less than 1 year from the deferral date. As of
December 31, 1998, 154,344 shares of common stock are being held in the trust
account.
49
<PAGE>
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Principal Shareholders
The following table summarizes certain information regarding the beneficial
ownership of our stock as of March 17, 1999, by (i) each of our directors and
officers, (ii) each person who we know beneficially owns more than 5% of our
common stock and (iii) all of our officers and directors as a group.
<TABLE>
<CAPTION>
Shares of
Common Stock Total Shares Percent
Beneficially Other Beneficially Beneficially
Name and Address Owned Options Warrants Shares(1) Owned Owned(2)
- ---------------- ------------ ------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John R. Evans(3)(4)(5).. 6,300,000 100,000 49,536 29,279 6,823,585 24.31%
400 Inverness Drive
South,
Suite 400
Englewood, CO 80112
Keith V. Burge(3)(5).... 6,300,000 100,000 49,536 25,690 6,823,585 24.31%
400 Inverness Drive
South,
Suite 400
Englewood, CO 80112
Philip G. Allen(3)(5)... 6,300,000 100,000 49,536 20,008 6,823,585 24.31%
400 Inverness Drive
South,
Suite 400
Englewood, CO 80112
Roland E. Casati........ 750,000 45,000 466,800 -- 1,261,800 4.44%
Dr. Richard G.
Tomlinson.............. 40,000 35,000 21,620 -- 96,620 *
Michael J. Marocco(6)... 1,200,000 5,000 673,500 -- 1,878,500 6.57%
Spencer I. Browne(7).... 135,000 5,000 45,000 -- 185,000 *
John J. Phibbs.......... -- 120,000 -- 11,278 131,278 *
Martin E. Freidel(8).... 43,600 60,000 21,800 7,923 133,323 *
First Continental Group,
L.C. .................. 2,005,000 -- -- -- 2,005,000 7.18%
5731 Greendale Rd, Box
429
Johnston, Iowa 50131
All Officers and
Directors as a group (9
persons)............... 8,468,600 570,000 1,377,328 94,178 10,510,106 35.17%
</TABLE>
- --------
* Less than 1%
(1) Includes shares in our 401(k) plan and our Deferred Compensation Plan
trust account.
(2) Based on 27,920,704 shares of common stock issued and outstanding as of
March 16,1999. Percentage ownership is calculated by dividing (i) the sum
of the number of shares owned by the stockholder plus the number of shares
the stockholder would receive after exercising options and warrants
exercisable within sixty (60) days of the date of this prospectus (shares
issued after exercising options and warrants are called "conversion
shares"), by (ii) the total number of common shares of stock outstanding
plus the stockholder's conversion shares.
(3) Messrs. Evans, Burge and Allen and their wives have agreed that the shares
of common stock that they beneficially own will be voted together pursuant
to a voting agreement. The voting agreement states that the majority vote
of the parties will dictate how all of the shares beneficially owned by
the parties are voted. As a result each party to the voting agreement is
deemed to beneficially own all the shares beneficially owned by the other
parties. If such attribution of beneficial ownership were not deemed to
occur, the total beneficial ownership of each individual would be
2,148,815 shares owned by Mr. Evans, 2,415,226 shares owned by Mr. Burge,
and 2,259,544 shares owned by Mr. Allen.
(4) Includes 205,000 shares held in trusts for the benefit of Mr. Evans'
children as Mr. Evans has voting rights over those shares.
(5) Includes 500,000 shares held by the holder's wife.
(6) Includes 813,640 shares owned by 21st Century Communications Partners,
L.P., 109,520 shares owned by 21st Century Communications T-E Partners,
L.P. and 276,840 shares owned by 21st Century Communications Foreign
Partners, L.P. and warrants to purchase shares held by Sandler Capital
Partners IV, L.P.; Sandler Capital Partners IV FTE, L.P. and MJM
Associates, L.P. as Mr. Marocco has voting power over those shares.
(7) As Mr. Browne is a principal of Strategic Asset Management, LLC, this
includes 85,000 shares and warrants to purchase 70,000 shares owned by
that firm.
(8) Includes 40,000 shares and warrants to purchase 20,000 shares owned by
Freidel Development International, LLC, as Mr. Freidel has voting power
over these shares.
50
<PAGE>
Item 13. Certain Relationships And Related Transactions
In August, 1998 our operating subsidiary, Convergent Communications
Services, Inc., entered into a Strategic Alliance Agreement with Strategic
Healthcare Solutions, LLC. The agreement is a two year agreement and provides
for the payment of a monthly fee and commissions to SHS for new customers in
the healthcare industry that are introduced to us by Strategic Healthcare
Solutions and that become Enterprise Network Services customers. Under the
agreement, we issued a warrant to Strategic Healthcare Solutions which
entitles it to receive up to a maximum of 262,500 shares of our common stock
at an exercise price of $6.00. The warrant includes performance objectives
which are reviewed semi-annually. If Strategic Healthcare Solutions does not
meet those performance objectives, all or a portion of the shares available
for exercise is reduced. As of February 28, 1999, 65,625 shares had been
canceled. The warrant is not exercisable until August 1, 2000 and expires
August 1, 2003. Spencer I. Browne is a principal of Strategic Asset
Management, Strategic Asset Management has an ownership interest in Strategic
Healthcare Solutions.
51
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Convergent
Communications, Inc. are included in Item 8 of this Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the period from January 1, 1996 to
December 16, 1996 (predecessor), the period from inception (March 1, 1996) to
December 31, 1996, and the years ended December 31, 1997 and 1998
Consolidated Statements of Shareholders' Equity for the period from January
1, 1996 to December 16, 1996 (predecessor), the period from inception (March
1, 1996) to December 31, 1996, and the years ended December 31, 1997 and 1998
Consolidated Statements of Cash Flows for the period from January 1, 1996 to
December 16, 1996 (predecessor), the period from inception (March 1, 1996) to
December 31, 1996 and the years ended December 31, 1997 and 1998
Notes to Consolidated Financial Statements
(a)(2) The following financial statement schedules of Convergent
Communications for the three years ended December 31, 1998 are included in
this Report on Form 10-K, as required by Item 14(d):
. Report of Independent Accountants on Financial Statement Schedule
. Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because the information is not
required or is included in the consolidated financial statements.
(a)(3) List of Exhibits (including management contracts or compensatory
plans or arrangements required to be filed)
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1+ Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
3.2+ Bylaws of the Company
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
4.1+ Indenture, dated as of April 2, 1998, by and among the Company and
Norwest Bank Colorado, N.A.
4.2+ Warrant Agreement, dated as of April 2, 1998
4.3+ Warrant Registration Rights Agreement, dated as of April 2, 1998
4.4+ Collateral Account Control Agreement, dated as of April 2, 1998
4.5+ Custody and Security Agreement, dated as of April 2, 1998
4.6 Investor Rights Agreement, dated as of March 17, 1999
4.7 Warrant Agreement, dated as of March 17, 1999
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.1+ Master Lease Agreement, dated November 11, 1997, between Comdisco,
Inc. and the Company
10.2+ Master Lease Agreement, dated November 17, 1997, between Convergent
Capital Corporation and the Company
10.3+ Program Agreement, dated November 19, 1997, among Comdisco, Inc.,
Convergent Communications Services, Inc. and the Company
10.4+ Stock Purchase Agreement, dated October 31, 1996, between SONeTech
and the Company
10.5+ Stock Purchase Agreement dated March 1, 1997, among Integrated
Communication Networks, Inc., Communications Services of Iowa, Inc.,
John Shlepphorst and the Company
10.6+ Agreement and Plan of Merger, dated August 29, 1997, among
Convergent Communications Services, Inc., A.T.T.Ex Corporation and
the Company
10.7+ Agreement and Plan of Merger, dated September 1, 1997, among
Convergent Communications Services, Inc., Vital Integration
Solutions and the Company
10.8+ Asset Purchase Agreement, dated October 1, 1997, between Big Planet,
Inc. and Convergent Communications Services, Inc.
10.9+ Asset Purchase Agreement, dated December 3, 1997, between Sigmacom
Corporation and Convergent Communications Services, Inc.
10.10+ Asset Purchase Agreement, dated February 1, 1998, between Peak Comm,
Inc. d/b/a Telephone Communications Company and Convergent
Communications Services, Inc.
10.11+ Agreement and Plan of Merger, dated March 13, 1998, among Convergent
Communications Services, Inc., Communication Services of Colorado,
Inc., Donna Sipes and the Company
10.12+ Asset Purchase Agreement, dated March 27, 1998, between Network
Computing Solutions, LLC and Convergent Communications Services,
Inc.
10.13+ Employment Agreement, dated December 15, 1996, between Keith V.
Burge and the Company, as amended April 13, 1998
10.14+ Employment Agreement, dated December 15, 1996, between John R. Evans
and the Company, as amended April 13, 1998
10.15+ Employment Agreement, dated December 15, 1996, between Philip G.
Allen and the Company, as amended April 13, 1998
10.16+ Employment Agreement, dated August 7, 1997, between Martin E.
Freidel and the Company.
10.17+ Asset Purchase Agreement, dated May 15, 1990, among Convergent
Communications Services, Inc., H, H & H Communications Technologies,
Inc.
10.18+ Telephone Company Acquisition Agreement between Convergent
Communications, Inc., First Continental Group, L.C., and ICN, LLC
dated July 1996
10.19+ Asset Purchase Agreement, dated June 16, 1998 (as amended) by and
between Convergent Communications Services, Inc. and Tie
Communications, Inc., Debtor-in-Possession
10.20+ Asset Purchase Agreement, dated June 30, 1998 by and between
Convergent Communications, Inc. and CMB Holdings, Inc.
10.21 Asset Purchase Agreement, dated February 1, 1999, by and between
Convergent Communications, Services, Inc. and Kansas Communications,
Inc.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.22+ Employment Agreement, dated March 3, 1997, between John J. Phibbs
and the Company, as amended on April 13, 1998.
10.23 Securities Purchase Agreement, dated as of March 17, 1999, by and
between Convergent Communications, Inc., and the purchasers
signatory thereto.
10.24 First Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Martin E. Freidel, dated September 15,
1998.
10.25 Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and John J. Phibbs, dated February 1, 1999.
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
+Previously filed and incorporated by reference to Registration Statement 333-
53953.
(b) Reports on Form 8-K
Inapplicable
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The registrant has not sent to security holders any annual report covering
the registrant's last fiscal year or any proxy material relating to a meeting
of security holders. Copies of such annual report and proxy will be furnished
to the Commission when it is sent to security holders.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 17, 1999.
Convergent Communications, Inc.
By: /s/ John R. Evans__________
John R. Evans
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
Signature Title Date
/s/ John R. Evans Chairman, Chief March 17, 1999
- ------------------------------------- Executive Officer and
John R. Evans Director (Principal
Executive Officer)
/s/ John J. Phibbs Chief Financial March 17, 1999
- ------------------------------------- Officer, Executive
John J. Phibbs Vice President and
Treasurer (Principal
Financial and
Principal Accounting
Officer)
/s/ Keith V. Burge* President, Chief March 17, 1999
- ------------------------------------- Operating Officer
Keith V. Burge and Director
/s/ Philip G. Allen* Executive Vice March 17, 1999
- ------------------------------------- President, Secretary
Philip G. Allen and Director
Director March 17, 1999
- -------------------------------------
Roland E. Casati
/s/ Richard G. Tomlinson* Director March 17, 1999
- -------------------------------------
Richard G. Tomlinson
/s/ Michael J. Marocco* Director March 17, 1999
- -------------------------------------
Michael J. Marocco
Director March 17, 1999
- -------------------------------------
Spencer I. Browne
By: /s/ Martin E. Freide_______l
Martin E. Freidel
Attorney-in-fact
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Convergent Communications, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 5, 1999, except for Note 16, as to which the date is March
17, 1999, appearing in Item 8 of this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in the index in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
March 5, 1999
56
<PAGE>
SCHEDULE II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Charged
at to Costs Balance at
Beginning and Deductions/ End of
of Period Expenses Writeoffs Other Period
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible trade
receivables:
Period ended December
31, 1996.............. $ -- $ -- $ -- $ -- $ --
---------- ----------- --------- ---------- -----------
Year ended December 31,
1997.................. $ -- $ 21,389 $ -- $ -- $ 21,389
---------- ----------- --------- ---------- -----------
Year ended December 31,
1998.................. $ 21,389 $ 401,451 $(204,919) $1,690,890(A) $ 1,908,811
---------- ----------- --------- ---------- -----------
Allowance for obsolete
or excess inventory:
Period ended December
31, 1996.............. $ -- $ -- $ -- $ -- $ --
---------- ----------- --------- ---------- -----------
Year ended December 31,
1997.................. $ -- $ -- $ -- $ -- $ --
---------- ----------- --------- ---------- -----------
Year ended December 31,
1998.................. $ -- $ 67,896 $ -- $ -- $ 67,896
---------- ----------- --------- ---------- -----------
Valuation allowance for
deferred tax assets:
Period ended December
31, 1996.............. $ -- $ -- $ -- $ -- $ --
---------- ----------- --------- ---------- -----------
Year ended December 31,
1997.................. $ -- $ 3,581,998(B) $ -- $ -- $ 3,581,998
---------- ----------- --------- ---------- -----------
Year ended December 31,
1998.................. $3,581,998 $19,114,379(B) $ -- $ -- $22,696,377
---------- ----------- --------- ---------- -----------
</TABLE>
- --------
(A) Represents amount from acquisition of certain assets of Tie Communications,
Inc.
(B) Represents a full valuation against the net deferred tax assets.
57
<PAGE>
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO
THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CONVERGENT COMMUNICATIONS, INC.
Pursuant to the Provisions of
Section 7-106-102 of the Business Corporation Act
of the State of Colorado
CONVERGENT COMMUNICATIONS, INC., a corporation organized and existing
under the laws of the State of Colorado, hereby certifies that, pursuant to
authority contained in its Amended and Restated Articles of Incorporation and in
accordance with Sections 7-106-102 and 7-108-206 of the Business Corporation Act
of the State of Colorado, the Preferred Stock Committee of the Board of
Directors of the Corporation on March 16, 1999, duly adopted the following
resolution without shareholder action, such shareholder action not being
required:
RESOLVED, that pursuant to authority expressly granted by the Amended
and Restated Articles of Incorporation of Convergent Communications, Inc., a
Colorado corporation (the "Corporation") and the Board of Directors of the
Corporation at its meeting held on March 15, 1999, the Preferred Stock Committee
of the Board of Directors of the Corporation hereby creates and authorizes the
issuance of a series of the preferred stock, no par value, of the Corporation,
to consist of eight hundred thousand shares, and hereby fixes the designation,
dividend rights, voting powers, rights on liquidation or dissolution and other
preferences and relative, participating, optional or other rights, and the
qualifications, limitations or restrictions of the shares of such series (in
addition to any thereof set forth in the Corporation's Amended and Restated
Articles of Incorporation that are applicable to the Corporation's preferred
stock of all series) as follows:
Section 1. Designation; Original Issuance; Status of Reacquired or Converted
-----------------------------------------------------------------
Shares.
- ------
1.1 The designation of the series of the preferred stock, no par
value, of the Corporation authorized hereby is "Series A Senior Convertible
Preferred Stock" (the "Series A Preferred Stock"). The dividend rights, voting
powers, rights on liquidation or dissolution and other preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions of the shares of such series are as set forth in these Articles.
1.2 Shares of the Series A Preferred Stock shall be originally issued
pursuant to the Purchase Agreement (as defined in Section 2 below) and,
---------
thereafter, no additional shares of
<PAGE>
Series A Stock shall be issued by the Corporation other than with the prior
written consent of the Majority Holders (as defined in Section 2 below).
---------
1.3 All shares of Series A Preferred Stock received by the
Corporation upon conversion or redeemed, retired, purchased or otherwise
acquired by the Corporation or any of its Subsidiaries shall be retired and
shall be restored to the status of authorized, undesignated and unissued shares
of preferred stock of the Corporation and, subject to the restrictions contained
in these Articles, may be reissued as part of another series of the preferred
stock of the Corporation, but such shares shall not be reissued as Series A
Preferred Stock.
Section 2. Certain Definitions.
-------------------
The terms defined in this Section 2 shall have the meanings herein
---------
specified:
"Adjustment Date" has the meaning set forth in Section 10.3(d).
---------------
"Additional Shares of Common Stock" means any shares of Common Stock
issued or deemed to be issued by the Corporation after the Closing Time (other
than shares issued upon conversion of any Series A Share or exercise of any
Warrant).
"Adjustment Commencement Date" means the first to occur of (i) the
date of any Sale of the Company or (ii) the fifth anniversary of the Closing
Date.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act. The term "affiliated" (whether or not
capitalized) shall have a correlative meaning. For purposes hereof, neither the
Corporation nor any Subsidiary shall be deemed to be an Affiliate of any
Purchaser and no Purchaser nor any Affiliate of any Purchaser shall be deemed to
be an Affiliate of the Corporation.
"Bankruptcy Code" means Title 11 of the United States Code.
"Beneficial Owner" means a beneficial owner within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act, as interpreted by the Commission,
provided that a Person shall be deemed to have beneficial ownership of all
securities that such Person has a right to acquire without regard to the 60 day
limitation in subdivision (d)(i) of such Rule 13d-3.The terms (whether or not
capitalized) "beneficially own" and "owned beneficially" shall have correlative
meanings.
"Board" means the Board of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in either New York, New York, or the city and
state in which the principal
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executive offices of the Corporation within the United States are located are
authorized or obligated by law or executive order to close.
"capital stock" when used with respect to any corporation means
(unless the context otherwise indicates) any and all shares of capital stock
(however designated) of such corporation, including each class and series of
common stock and preferred stock of such corporation, any class or series, any
and all stock appreciation rights and any and all equivalents of any of the
foregoing, and including any security or interest convertible into or warrant,
option or other right (absolute or contingent) to subscribe for, purchase or
otherwise acquire any of the foregoing, in each case whether or not evidenced by
any certificate, instrument or other document and whether voting or nonvoting.
"Change of Control" has the meaning set forth in Section 101 of the
Indenture. The definition of such term, together with the definitions of all
capitalized terms used therein that are also defined in the Indenture, are
hereby incorporated herein by reference.
"Closing Date" means the date of the closing of the consummation of
the first issuance of Series A Shares to one or more of the Purchasers pursuant
to the Purchase Agreement.
"Closing Time" means 10:00 A.M., New York City time, on the Closing
Date.
"Commission" means the Securities and Exchange Commission or any
successor federal agency administering the Securities Act.
"Common Stock" means the Common Stock, no par value, of the
Corporation as constituted on the Closing Date, and any capital stock into which
such Common Stock may thereafter be changed, and (except where the context
otherwise requires) shall also include (i) capital stock of the Corporation of
each and every other class or series (regardless of how denominated) which is
also not preferred as to dividends or assets on liquidation over any other class
or series of stock of the Corporation and which is not subject to redemption and
(ii) shares of common stock of any successor or acquiring corporation (as
defined in Section 10.16) received by or distributed to the holders of Common
-------------
Stock of the Corporation in the circumstances contemplated by such Section.
"Company Parties" means the Corporation and its Subsidiaries.
"Compensation Committee" has the meaning set forth in Section 7.6(a).
--------------
"Conversion Price" means, as of any time and with respect to any
Series A Share, the initial price of Five Dollars, as such initial price shall
have from time to time been cumulatively adjusted pursuant to Section 10 through
----------
such time.
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<PAGE>
"Conversion Rate" means, as of any time and with respect to any Series
A Share, the kind, number and amount of securities and other property that would
be issuable upon conversion of such Series A Share if converted on and as of
such time, determined in accordance with Section 9 and Section 10 after giving
--------- ----------
cumulative effect to all adjustments pursuant to Section 10 through such time.
----------
"Conversion Securities" means, with respect to any Series A Share at
any time, each class and series of Conversion Stock, each class, series and
issue of any other securities, and any Rights with respect to any of such
Conversion Stock or other securities, any shares, number or other amount of
which at such time are deliverable upon conversion of any Series A Share.
"Conversion Stock" means, with respect to any Series A Share at any
time, the Common Stock, each other class or series of capital stock and any
Rights with respect to any of the foregoing any shares, number or other amount
of which at such time is deliverable upon conversion of any Series A Share.
"Convertible Securities" means evidences of indebtedness, shares of
stock or other securities or obligations (except the Series A Preferred Stock
and the Warrants) that are convertible into or exchangeable, with or without
payment of additional consideration in cash or property, for any Common Stock,
either immediately or upon the occurrence of a specified date or a specified
event or the satisfaction or happening of any other condition or contingency.
"Current Market Price" means, in respect of any share of Common Stock
as of any time,
(i) if the Common Stock shall not then be Publicly Traded, the Fair Market
Value per share of Common Stock as at such date as determined by the
Board in good faith (subject to Section 10.8(e), if applicable), or
---------------
(ii) if the Common Stock is then Publicly Traded, the average of the
reported last sales prices for the ten consecutive Trading Days
commencing twenty Trading Days before the date in question.
The reported last sales price for each Trading Day shall be
(i) the reported last sales price, regular way, as reported on the New
York Stock Exchange Composite Tape, or
(ii) if not listed or admitted to trading on the New York Stock Exchange,
on the National Market tier of The Nasdaq Stock Market, or
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(iii) if the Common Stock is not listed or admitted to trading on the
National Market tier of the Nasdaq Stock Market at such time, in the
principal consolidated or composite transaction reporting system on
the principal national securities exchange on which such security is
listed or admitted to trading, or
(iv) if such security is not quoted on such National Market tier, the
average of the highest bid and lowest asked prices on such day as
reported by The Nasdaq Stock Market.
As used herein, the term "Trading Day" means a day on which the New York Stock
Exchange, each national securities exchange on which the Common Stock is listed
and The Nasdaq Stock Market are open for business, provided that if no sales of
--------
the Common Stock take place on such day on the relevant exchange or stock market
determined under the immediately preceding sentence, such day shall not be a
Trading Day. The Common Stock shall be considered to be "Publicly Traded" as of
any date if on such date (i) the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act and (ii) the Common Stock is listed for trading on
a national securities exchange registered under the Exchange Act or traded in
the over-the-counter market and quoted on The Nasdaq Stock Market.
"Dividend Rate" means the rate of twelve and one-half percent (12.5%)
per annum; provided, that if any Series A Shares remain outstanding after the
--------
Adjustment Commencement Date, then the Dividend Rate shall be increased on each
and every successive Quarterly Adjustment Date by one and one-half percent
(1.5%), up to a maximum rate of twenty percent (20%) per annum.
"Election Form" has the meaning set forth in Section 3.7(a)(i).
-----------------
"Employee Option" means any option to purchase Common Stock for cash,
which is granted by or with the approval of the Board to any director, officer,
employee or consultant of the Corporation or any subsidiary of the Corporation
pursuant to (i) the Corporation's stock option plans disclosed in a schedule to
the Purchase Agreement and as in effect on the Closing Date or (ii) any other
option plan adopted by the Corporation after the Closing Date with (A) if
adopted before a Qualifying IPO, the prior approval of the Majority Holders or
(B) if adopted after a Qualifying IPO, with the approval of the Corporation's
common stockholders or the Majority Holders (collectively, the "Stock Option
Plans").
"Entity" means any corporation, limited liability company, general or
limited partnership, joint venture, association, joint stock company, trust,
other unincorporated business or organization or other Person which is not
either a natural person or a governmental authority or agency.
An "equity interest" in or of any Entity includes any capital stock or
other equity security issued by such Entity, any partnership (general or
limited) or joint venture interest in such
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<PAGE>
Entity, any other equity, ownership, participating or beneficial interest in
such Entity, any stock appreciation or other equity appreciation right with
respect to such Entity, and any equivalent of any of the foregoing, regardless
of how denominated and whether voting or non-voting, and any security or
interest convertible into or warrant, option or other right (absolute or
contingent) to subscribe for, purchase or otherwise acquire, any of the
foregoing, in each case whether or not evidenced by any certificate, instrument
or other document and whether voting or nonvoting.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Rights" means all Rights (including stock options issued
pursuant to the Corporation's Stock Option Plans) and Convertible Securities,
not including any Series A Shares or Warrants, which were outstanding at the
Closing Time and disclosed on a schedule to the Purchase Agreement.
"Fair Market Value" means, in respect of any security, asset or other
property, the price at which a willing seller would sell and a willing buyer
would buy such security, asset or other property having full knowledge of the
facts, in an arm's-length auction transaction without time constraints, and
without being under any compulsion to buy or sell. The Fair Market Value of a
share of Common Stock as of any time shall be determined as of the last day of
the most recent calendar month which ended prior to such time, shall be
determined without giving effect to any discount for a minority interest, to any
lack of liquidity of the Common Stock or to the fact that the Corporation may
have no class of equity security registered under the Exchange Act. The Fair
Market Value of the Corporation shall be determined on a going concern basis,
and on the basis that the management and other key employees of the Corporation
and its subsidiaries will continue to be employed indefinitely and without
treating as liabilities the amount, if any, payable or which may be payable by
the Corporation pursuant to the indemnification provisions of the Purchase
Agreement.
"Holder" means (whether or not capitalized) a Person in whose name any
Series A Share is registered on the books of the Corporation maintained for such
purpose.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Indenture" means the Indenture, dated as of April 2, 1998, between
the Corporation and Norwest Bank Colorado, N.A., a national banking association,
as Trustee, as in effect at the Closing Time, regardless of any subsequent
amendment, modification, termination or expiration thereof.
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<PAGE>
"Insolvency Law" means the Bankruptcy Code and any other law, foreign,
federal or state, relating to bankruptcy, receivership, reorganization,
insolvency, adjustment, compromise or extension of debt or other relief of a
debtor from creditors.
"Investor Rights Agreement" means the Investor Rights Agreement, dated
as of the Closing Date, among the Corporation and the Purchasers, as it may be
further amended from time to time in accordance with its terms.
"Issue Date" means, with respect to any Series A Share, the date of
original issuance of such Series A Share. The date of original issuance of the
Series A Shares issued upon the First Closing (as defined in the Purchase
Agreement) shall be the First Closing Date (as defined in the Purchase
Agreement) and the date of original issuance of the Series A Shares issued upon
the Second Closing (as defined in the Purchase Agreement) shall be the Second
Closing Date (as defined in the Purchase Agreement).
"Junior Stock" means (i) each class or series of Common Stock, (ii)
any other class or series of capital stock of the Corporation hereafter created,
other than (A) any class or series of Parity Stock (except to the extent
provided under clause (iii) of this sentence) and (B) any class or series of
Senior Stock (except to the extent provided under clause (iii) of this
sentence), and (iii) any class or series of Parity Stock or Senior Stock to the
extent that it ranks junior to the Series A Preferred Stock as to dividend
rights, rights of redemption or rights on liquidation, as the case may be. For
purposes of clause (iii) above, a class or series of Parity Stock or Senior
Stock shall rank junior to the Series A Preferred Stock as to dividend rights,
rights of redemption or rights on liquidation if the holders of shares of Series
A Preferred Stock shall be entitled to dividend payments, payments on redemption
or payments of amounts distributable upon dissolution, liquidation or winding up
of the Corporation, as the case may be, in preference or priority to the holders
of shares of such class or series.
"Liquidation Price" means, with respect to any share of Series A
Preferred Stock as of any date of determination, the amount equal to the Stated
Value of such share plus the aggregate amount of all accrued and unpaid
dividends on such share (whether or not earned or declared and whether or not
there are unrestricted funds of the Corporation legally available for the
payment of dividends), if any, as of such date of determination.
"Majority Holders" means, as of any time, the holder or holders of
record of at least a majority of the Series A Shares then outstanding.
"Notes" means the Corporation's 13% Series B Senior Notes due 2008
issued under the Indenture.
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<PAGE>
"Outstanding Common Shares" means, as of any time, all issued and
outstanding shares of Common Stock as of such date, except shares then owned or
held by or for the account of the Corporation or any subsidiary thereof.
Outstanding Common Shares shall not include any shares issuable upon exercise,
conversion or exchange of any Rights or Convertible Securities or issuable in
payment of any dividend or other distribution which has been declared but not
actually paid, nor any other shares which have not actually been issued.
"Parity Stock" means each class or series of capital stock of the
Corporation, if any, hereafter created with the approval of the Majority Holders
and ranking on a parity basis with the Series A Preferred Stock as to any of
dividends, rights of redemption or rights on liquidation. Capital stock of any
class or series shall rank on a parity as to dividends, rights of redemption or
rights on liquidation with shares of Series A Preferred Stock, whether or not
the dividend rates, dividend payment dates, redemption or liquidation prices per
share or sinking fund provisions, if any, are different from those of the Series
A Preferred Stock if the holders of such stock shall be entitled to the receipt
of dividends, amounts distributable upon dissolution, liquidation or winding up
of the Corporation or redemption payments, as the case may be, in proportion to
their respective dividend rates, liquidation prices or redemption prices,
respectively, without preference or priority, one over the other, as between the
holders of such stock and the holders of shares of the Series A Preferred Stock.
No class or series of capital stock that ranks junior to the Series A Preferred
Stock as to rights on liquidation shall rank or be deemed to rank on a parity
basis with the Series A Preferred Stock as to dividend rights or rights of
redemption, unless the instrument creating or evidencing such class or series of
capital stock otherwise expressly provides.
"Permitted Holders" has the meaning set forth in Section 101 of the
Indenture. The definition of such term, together with the definitions of all
capitalized terms used therein that are also defined in the Indenture, are
hereby incorporated herein by reference.
"Person" means any individual, corporation, limited liability company,
general or limited partnership, joint venture, association, joint stock company,
trust, unincorporated business or organization, government or agency or
political subdivision thereof, or other entity, whether acting in an individual,
fiduciary or other capacity.
"Preferred Interest" as applied to the equity interests of any Person
means equity interests of any class or classes (however designated) which are
preferred as to the payments of dividends or distributions, as to rights of
redemption or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over equity interests of any other
class of such Person.
"Purchase Agreement" means the Securities Purchase Agreement, dated as
of the Closing Date, between the Corporation and the Purchasers, as the same
may be amended from time
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<PAGE>
to time in accordance with its or their respective terms and with the prior
written consent of the Majority Holders.
"Purchasers" means each of the SCP Partnerships and each other Person,
if any, who purchases shares of Series A Preferred Stock pursuant to the
Purchase Agreement, either at the First Closing (as defined in the Purchase
Agreement) or at the Second Closing (as defined in the Purchase Agreement).
"Quarterly Adjustment Date" means each and any January 1, April 1,
July 1 and October 1 of each and any year.
"Qualifying IPO"means the consummation of a single public offering of
the Corporation's Common Stock registered under the Securities Act generating
gross proceeds to the Corporation of at least $50 million.
"Redeemable Stock" has the meaning set forth in Section 10.2(b).
---------------
"Redemption Agent" has the meaning set forth in Section 6.5.
-----------
"Redemption Date" as to any share of Series A Preferred Stock shall
mean:
(i) in the case of a redemption pursuant to Section 6.1, the
-----------
Scheduled Redemption Date;
(ii) in the case of a redemption pursuant to Section 6.2 or
-----------
Section 6.3, the date determined pursuant to such Section; or
- -----------
(iii) in the case of a redemption pursuant to Section 6.4, the
-----------
date after the fifth anniversary of the Closing Date specified in the notice of
redemption given in accordance with Section 6.6;
-----------
provided that, except as expressly provided in section 10.19, for purposes of
- -------- -------------
all provisions of these Articles, including any provision under which any Series
A Share is stated to cease to be outstanding or convertible on or as of the
Redemption Date or any date determined by reference to the Redemption Date, in
none of the foregoing cases shall such date be a Redemption Date unless (A) the
applicable Redemption Price is actually indefeasibly paid in full on such date
or (B) such date is a Business Day and the consideration sufficient for the
payment thereof, and for no other purpose, has been indefeasibly deposited in a
trust fund with the Redemption Agent, with irrevocable instructions and
authority to the Redemption Agent to pay the Redemption Price, all in accordance
with Section 6.7, and if the Redemption Price is not so indefeasibly paid in
-----------
full or the consideration sufficient therefor is not so indefeasibly deposited,
then the Redemption Date will be the date on
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<PAGE>
which such Redemption Price indefeasibly and is fully paid or the first Business
Day on which the consideration sufficient for the payment thereof, and for no
other purpose, has been so indefeasibly deposited, except that this proviso is
not intended to eliminate, qualify, modify or limit the rights of the holders of
the Series A Preferred Stock under any provision of these Articles, or any other
rights or remedies which such holders may have at law, in equity or by contract
in the event of the failure of the Corporation to redeem shares of Series A
Preferred Stock as and when required by these Articles.
"Redemption Price" means, as to any share of Series A Preferred Stock
that is to be redeemed on any redemption date pursuant to Section 6.1, Section
----------- -------
6.2, Section 6.3 or Section 6.4, the Redemption Price of such share determined
- --- ----------- -----------
pursuant to such Section.
"Reference Price" means, as of any time, the higher of (x) the
Conversion Price then in effect or (y) the Current Market Price per share of the
Common Stock determined as of such time.
A "Reorganization Event" shall be deemed to have occurred upon the
happening of any of the following:
(i) the appointment of a receiver or trustee to administer all or a
substantial portion of the Corporation or any material Subsidiary's assets which
shall remain in effect for 60 days;
(ii) the filing by the Corporation or any material Subsidiary of a
voluntary petition for relief under any Insolvency Law or of a pleading in any
court of record admitting in writing its inability to pay its debts as they
become due;
(iii) the making by the Corporation or any material Subsidiary of a
general assignment for the benefit of creditors;
(iv) the filing by the Corporation or any material Subsidiary of an
answer admitting the material allegations of, or its consenting to or defaulting
in answering, a petition for relief filed against it in any proceeding under any
Insolvency Law; or
(v) the entry of an order, judgment or decree by any court of
competent jurisdiction granting relief against the Corporation or any material
Subsidiary in an involuntary proceeding under any Insolvency Law and the
continuance of any such decree or order for relief unstayed and in effect for a
period of 60 consecutive days.
"Restricted Subsidiary" has the meaning set forth in Section 101 of
the Indenture. The definition of such term, together with the definitions of
all capitalized terms used therein that are also defined in the Indenture, are
hereby incorporated herein by reference.
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"Rights" means any options, warrants or other rights (except
Convertible Securities and the Series A Preferred Stock), however denominated,
to subscribe for, purchase or otherwise acquire any Common Stock or Convertible
Securities, with or without payment of additional consideration in cash or
property, either immediately or upon the occurrence of a specified date or a
specified event or the satisfaction or happening of any other condition or
contingency.
"Sale of the Company" means any of the following:
(i) any Change of Control; or
(ii) any "person" (within the meaning of that term as used in the
rules under Section 13(d) and 14(d) of the Exchange Act, as interpreted by the
Commission), other than any SCP Partnership or any Affiliate of any SCP
Partnership or any group of persons acting in concert which includes any SCP
Partnership or any Affiliate of any SCP Partnership and other than the Permitted
Holders, at any time becomes the Beneficial Owner, directly or indirectly and
whether as a result of issuances, redemptions or repurchases by the Corporation
of Common Stock or transfers of Common Stock by stockholders of the Corporation,
of Common Stock representing 50% or more of the combined voting power with
respect to the election of directors of the Corporation represented by all then
outstanding Common Stock of the Corporation or, prior to a Qualifying IPO,
representing more voting power with respect to the election of directors of the
Corporation than the combined voting power of the Common Stock Beneficially
Owned by the Permitted Holders; or
(iii) the Corporation consolidates with, or merges with or
into, another Person, sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets directly or indirectly to any
Person, or any Person consolidates with, or merges with or into, the
Corporation, in any such event pursuant to a transaction in which the
outstanding Common Stock of the Corporation is converted into or exchanged for
cash, securities, equity interests or other property and immediately after such
transaction the Persons who were the Beneficial Owners of the outstanding Common
Stock of the Corporation immediately prior to such transaction are not the
beneficial owners, directly or indirectly, of more than 50% of the combined
voting power represented by all then outstanding common stock of the surviving
or transferee Person; or
(iv) the Corporation, in one or more transactions, sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person or Persons; or
(v) the Corporation or any of its Subsidiaries purchase, lease or
otherwise acquire assets of any Person or Persons, in one or a series of related
transactions, for consideration consisting in whole or in part of Common Stock,
Convertible Securities or Rights and the number of shares of Common Stock issued
by the Corporation (including all shares issuable or purchasable upon exercise
of all such Convertible Securities and Rights) in such transaction is equal to
50% or
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more of the number of fully diluted shares of Common Stock outstanding
immediately prior to such transaction (or the first of such series of
transactions); or
(vi) any Reorganization Event.
"Scheduled Redemption Date" means the later of (i) the fifth
anniversary of the Closing Date and (ii) the day after the final maturity date
of the Notes; provided that in no event shall the Scheduled Redemption Date be
--------
on any date that would cause the Series A Preferred to be "Disqualified Stock"
(as defined in the Indenture) so long as any Notes are outstanding.
"SCP Partnerships" means Sandler Capital Partners IV, L.P., a Delaware
limited partnership, and Sandler Capital FTE Partners, L.P., a Delaware limited
partnership, or their respective successors.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Senior Stock" means each class or series of capital stock of the
Corporation, if any, hereafter created with the approval of the Majority Holders
and ranking prior to the Series A Preferred Stock as to dividends, rights of
redemption or rights on liquidation, as the case may be. Capital stock of any
class or series shall rank prior to the Series A Preferred Stock as to
dividends, upon redemption or upon liquidation if the holders of such class or
series shall be entitled to the receipt of dividends, payments on redemption or
payments of amounts distributable upon the dissolution, liquidation or winding
up of the Corporation, as the case may be, in preference or priority to the
holders of shares of Series A Preferred Stock. No class or series of capital
stock that ranks junior to or on parity with the Series A Preferred Stock as to
rights on liquidation shall rank or be deemed to rank as senior to the Series A
Preferred Stock as to dividend rights or rights of redemption, unless the
instrument creating or evidencing such class or series of capital stock
otherwise expressly provides.
"Series A Articles of Amendment" means the Articles of Amendment to
the Amended and Restated Articles of Incorporation of the Corporation setting
forth the resolution of the Board creating and authorizing the issuance of the
Series A Preferred Stock and filed with the Colorado Secretary of State pursuant
to Section 7-106-102 of the Colorado Business Corporation Act or any successor
provisions of the Corporation's Articles of Incorporation, as the same may have
been amended prior to or concurrently with the Closing Time and thereafter may
be amended.
"Series A Director" has the meaning set forth in Section 7.1.
-----------
"Series A Preferred Stock" has the meaning set forth in Section 1.1.
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"Series A Share" means any issued and outstanding share of Series A
Preferred Stock. In no event shall shares of Series A Preferred Stock owned or
held by or for the account of the Corporation or any subsidiary thereof be
deemed to be issued and outstanding for any purpose.
"Stated Value" means, with respect to each share of Series A Preferred
Stock, the amount of Twenty-Five Dollars.
"Stock Option Plans" has the meaning given to such term within the
definition of Employee Option, as set forth above.
"Subsidiary" means, as of any time, each Entity as to which any of the
following statements is true as of such time:
(iv) such Entity is an Affiliate of the Corporation which is
controlled by the Corporation, or
(v) the Corporation owns or controls, directly or indirectly through
one or more intermediaries, 50% or more of the outstanding equity
interests in such Entity having ordinary voting power to elect a
majority of the members of the Board or joint venture, partnership or
other management committee, trustees, managers or other Persons
ordinarily having the power, authority or responsibility for managing
or directing the management of such Entity, or
(vi) the Corporation, directly or indirectly through one or more
intermediaries, is entitled under ordinary circumstances to 50% or
more of the profits or losses of such Entity or to receive upon
dissolution and liquidation of such Entity 50% or more of the assets
available for distribution to the holders of equity interests in such
Entity, or
(vi) such Entity is a partnership (general or limited), joint venture
or other unincorporated Entity and the Corporation or another
Subsidiary is a general partner or joint venturer thereof or has
liability for the debts and obligations thereof over and above its
investment therein.
"Warrant Agreement" means the Warrant Agreement, dated the Closing
Date, between the Corporation and the Initial Purchasers (as defined in the
Purchase Agreement), as it may be amended from time to time in accordance with
its terms.
"Warrants" means the Warrants to purchase shares of Common Stock
issued and sold by the Corporation to, and purchased by, the several Purchasers
pursuant to the Purchase Agreement and the Warrant Agreement.
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"Wholly Owned Subsidiary" means an Entity all of the equity interests
of which at the time are owned beneficially and of record by the Corporation,
one or more Wholly Owned Subsidiaries of the Corporation or the Corporation and
one or more Wholly Owned Subsidiaries of the Corporation.
Section 3. Rank; Certain Restrictions; Fractional Shares; Certain Notices to
-----------------------------------------------------------------
be Given; Actions to Facilitate Redemption.
------------------------------------------
3.1 Rank. The Series A Preferred Stock shall, with respect to
----
dividend rights, rights on liquidation, winding up and dissolution and rights
upon redemption, rank prior to (i) the Common Stock and (ii) any other class or
series of capital stock of the Corporation, whether now existing or hereafter
created, except (in the case of this clause (ii) only) any class or series of
Parity Stock or Senior Stock hereafter created and issued with the prior
approval of the Majority Holders, to the extent otherwise provided for by the
terms of such other class or series of Parity Stock or Senior Stock set forth in
the instrument creating and authorizing such Parity Stock or Senior Stock,
provided that such terms shall have been furnished in writing to and approved by
the Majority Holders.
3.2 Certain Restrictions on Payments in Respect of Capital Stock.
------------------------------------------------------------
Except if and to the extent expressly authorized by Section 3.4 or Section 3.5
----------- -----------
or with the prior approval of the Majority Holders so long as any Series A
Preferred Stock is outstanding, the Corporation shall not, and shall cause each
of the Subsidiaries not to:
(i) declare or pay dividends on, or declare or make any other
distribution, whether in cash, property, securities or any other form of
consideration, to the holders of or otherwise with respect to, the Common Stock
or any other class or series of capital stock of the Corporation now existing or
hereafter created other than the Series A Preferred Stock;
(ii) redeem, purchase or otherwise acquire for cash, property,
securities or any other form of consideration any outstanding shares of Common
Stock or any other class or series of capital stock of the Corporation now
existing or hereafter created other than the Series A Preferred Stock;
(iii) declare or pay dividends on, or make any other
distribution to the holders of or otherwise with respect to any Parity Stock,
whether in cash, property, securities or any other form of consideration, except
dividends declared and paid ratably on the Series A Preferred Stock and each
class or series of Parity Stock as to which dividends are payable or in arrears
so that the amount of dividends declared and paid per share of the Series A
Preferred Stock and per share of each class or series of such Parity Stock are
in proportion to the respective total amounts of unpaid dividends accrued with
respect to the Series A Preferred Stock and all such classes and series of
Parity Stock;
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<PAGE>
(iv) redeem, purchase or otherwise acquire for cash, property,
securities or any other form of consideration any Series A Shares otherwise than
in accordance with the terms of these Articles, but conversion of any Series A
Shares in accordance with the terms of these Articles shall not be deemed to be
a redemption, purchase or other acquisition subject to this clause; or
(v) set aside, pursuant to a sinking fund or otherwise, any cash,
property, securities or other form of consideration for any of the foregoing
purposes.
3.3 Pro Rata Redemptions and Purchases. If any date or event shall
----------------------------------
occur that requires the Corporation to redeem any Series A Shares and the
Corporation has insufficient legally available funds to redeem all Series A
Shares required to be redeemed, then: (i) the Corporation shall give written
notice to such effect to the holders of Series A Shares as soon as practicable
(and in any event not later than ten Business Days) prior to the applicable
redemption date; and (ii) subject to the third sentence of this subsection, (A)
the funds legally available for such purpose shall be applied to redeem the
Series A Shares then required to be redeemed ratably in proportion to the
respective full amounts to which the holders of the Series A Shares would be
entitled if the Corporation had sufficient legally available funds to redeem all
Series A Shares then required to be redeemed and (B) as and when the Corporation
has additional legally available funds, it shall apply such funds to redeem the
balance of the Series A Shares so required to be redeemed proportionately as
provided above in this sentence. In the event of any such partial redemption,
the Series A Shares to be redeemed shall be selected on a pro rata basis from
--- ----
among all holders of the Series A Shares. At any time after a notice from the
Corporation is given pursuant to the first sentence of this subsection and
before the applicable redemption date, the Majority Holders may notify the
Corporation in writing that such Majority Holders object to partial redemptions
as provided in the first sentence of this subsection. If such a written
objection is given, the Corporation shall not make any such redemption of any
Series A Shares unless or until it is otherwise instructed in writing by the
Majority Holders. Nothing contained in this Section 3.3 is intended to
-----------
eliminate, qualify, modify or limit the rights of the holders of any Series A
Shares under any provision of these Articles, including Section 3.8, at law, in
-----------
equity, by contract or otherwise in the event of the failure of the Corporation
to redeem any Series A Shares as and at the times that would be required but for
the provisions of this Section 3.3.
-----------
3.4 Restriction on Dividends, Redemptions, Etc. by Subsidiaries. So
-----------------------------------------------------------
long as any shares of Series A Preferred Stock shall be outstanding, without the
prior approval of the Majority Holders, the Corporation will not permit any
Subsidiary to declare or pay any dividend on or declare or make any other
distribution to any holder or holders of or otherwise with respect to any equity
interest in such Subsidiary (whether in cash, property, securities or any other
form of consideration) nor redeem, purchase or otherwise acquire for cash,
property or any other form of consideration any equity interest in such
Subsidiary. Neither this Section 3.4 nor Section 3.2 hereof shall (i) restrict
----------- -----------
investments by any Restricted Subsidiary in the Corporation or another
Restricted Subsidiary or (ii) restrict the payment by any Restricted Subsidiary
of dividends and other distributions solely in
-15-
<PAGE>
respect of, and redemptions, purchases and other acquisitions solely of, equity
interests in a Restricted Subsidiary owned by the Corporation or any other
Restricted Subsidiary or (iii) so long as any Notes are outstanding, impose upon
any Restricted Subsidiary any restriction prohibited by Section 1016 of the
Indenture. The Corporation will not, without the prior approval of the Majority
Holders, permit any of the Subsidiaries to issue any Preferred Interest other
than issuances by a Restricted Subsidiary to the Corporation or another
Restricted Subsidiary.
3.5 Certain Exceptions.
------------------
(a) Senior and Parity Stock Created with Consent of Majority Holders.
----------------------------------------------------------------
If, after the Closing Date, the Corporation, with the prior approval of the
Majority Holders, creates and issues any class or series of Parity Stock or
Senior Stock, the restrictions contained in Section 3.2 shall be subject to such
-----------
exceptions, if any, expressly provided for by the terms of such Parity Stock or
Senior Stock set forth in the instrument creating and authorizing such Parity
Stock or Senior Stock, provided that such terms shall have been furnished in
writing to and approved by the Majority Holders.
(b) Certain Payments on Junior Stock. Provided that the Corporation
--------------------------------
is in compliance with all of its obligations under these Articles, (i) the
Corporation may pay cash in lieu of fractional shares of Common Stock pursuant
to the Warrants or the terms of Existing Rights as in effect on the Closing
Date, (ii) the Corporation may repurchase shares of capital stock in connection
with cashless exercises of options, warrants and other convertible securities
(provided that such repurchase does not result in any actual payment of cash or
property to the holders of such options, warrants or other convertible
securities (other than issuance of the Junior Stock deliverable by virtue of
such exercise); and (iii) the Corporation may repurchase or otherwise acquire
for value shares of Common Stock of the Corporation or any options or rights to
acquire Common Stock of the Corporation owned by any director, officer or
employee of the Corporation or its Subsidiaries pursuant to any management
equity subscription agreement or similar agreement, or otherwise upon the death,
disability, retirement or termination of employment or departure from the Board,
provided, that the aggregate price paid for all such repurchased, redeemed,
- --------
acquired or retired Common Stock of the Corporation or options shall not exceed
in the aggregate $500,000 in any calendar year.
3.6 Fractional Shares. Fractional shares of Series A Preferred Stock
-----------------
may be issued, either upon original issuance pursuant to the Purchase Agreement
or otherwise as permitted by Section 1.2, or from time to time thereafter upon
-----------
transfers, exchanges or partial conversions or redemptions of outstanding shares
(or fractional shares) thereof or certificates therefor. Each fractional share
of Series A Preferred Stock, if any, outstanding shall be entitled to ratably
proportionate rights, powers, privileges, benefits and preferences, and be
subject to the same qualifications, limitations and restrictions, as a whole
share of the Series A Preferred Stock, including conversion rights.
-16-
<PAGE>
3.7 Certain Notices and Other Obligations Relating to Change of
-----------------------------------------------------------
Control.
- -------
(a) Notices.
-------
(i) If the Corporation agrees or the Board passes a resolution
authorizing the Corporation to voluntarily consummate or take, or assist any one
or more of the holders of its Common Stock in consummating or taking, any
transaction or action which would, if consummated, result in a Sale of the
Company, or if the Corporation receives formal written notice that one or more
of the holders of its Common Stock have agreed to engage in any such transaction
which would, if consummated, result in a Sale of the Company, then it shall send
to each holder of Series A Preferred Stock, at least 30 days prior to the
scheduled or anticipated closing of such transaction or the taking of such
action (or, in the case where the Corporation receives formal written notice of
such transaction, immediately upon receiving such formal written notice if such
notice is received less than 30 days prior to the scheduled or anticipated
closing of such transaction), a written notice which will summarize the material
terms of such transaction or action, and if any of such terms change in any
material respect prior to such closing, the Corporation shall promptly notify
the holders of the Series A Preferred Stock in writing.
(ii) If any Sale of the Company occurs, the Corporation shall give
the holders of the Series A Preferred Stock written notice thereof promptly, and
in any event not later than the fifth Business Day after the Corporation has
knowledge of such occurrence, and such notice shall summarize the material facts
relating to such event or transaction.
(iii) Each notice given by the Corporation pursuant to Section
-------
3.7(a)(ii) shall be accompanied by an appropriate form (an "Election Form") by
- ----------
which the holders of the Series A Preferred Stock may elect whether or not to
require the Corporation to redeem their shares of the Series A Preferred Stock
in accordance with the terms of Section 6.2 (if applicable).
-----------
(b) Redemption Election. If Section 6.2 applies, then, at any time
------------------- -----------
within a period of 30 days after Election Forms are mailed, the Corporation
shall have received completed Election Forms from the Majority Holders electing
to require the Corporation to redeem the Series A Shares held by them, the
Corporation shall upon the consummation of such transaction redeem from all
holders of Series A Preferred Stock, in accordance with Section 6.2 and the
-----------
other applicable provisions of these Articles, all outstanding shares of Series
A Preferred Stock; provided, however, that the Corporation shall not, at any
-------- -------
time that no Notes are outstanding, voluntarily consummate, or assist any of the
holders of its Common Stock in consummating, any transaction which would result
in a Sale of the Company unless (i) prior to the date such transaction is
consummated, the procedures specified in this Section 3.7 shall have been
-----------
followed and the period of 30 days referred to in this sentence shall have
expired; (ii) if the Corporation would be required to redeem all shares of
Series A Preferred Stock by virtue of such Sale of the Company, the Corporation
shall have deposited with a Redemption Agent funds sufficient to redeem on the
applicable redemption date
-17-
<PAGE>
all Series A Shares required to be redeemed at the applicable Redemption Price;
and (iii) the Corporation shall have given written notice of its compliance with
clause (ii) of this sentence to each holder of Series A Preferred Stock.
(c) Successive Events. The provisions of this Section 3.7 shall
----------------- -----------
apply successively to each Sale of the Company which may occur.
3.8 Actions to Facilitate Required Redemptions.
------------------------------------------
(a) Company Obligations. If, at any time that any redemption of any
-------------------
shares of Series A Preferred Stock is, or with the passage of time after any
notice will be, required by any provision of these Articles, the Corporation is
in material violation or breach of the terms of any material indebtedness of the
Corporation or a default or event of default with respect to or under any
material indebtedness of the Corporation exists and has not been waived or
cured, if the Corporation is insolvent under applicable law, or if the
Corporation's capital is impaired under the law of the jurisdiction of
incorporation, or if any such violation, breach, default, event of default,
insolvency or impairment of capital or any material violation of law would
result from such redemption, then the Corporation shall (i) promptly give
written notice to such effect to the holders of the Series A Preferred Stock,
(ii) subject to the terms of the Indenture, take all reasonable lawful actions
to cure or avoid such violation, breach, default or event of default, to restore
or preserve its solvency or to cure or avoid such impairment of capital, in each
case as necessary to enable the Corporation to make such redemption to the
fullest extent possible.
(b) Other Rights of Holders. Nothing contained in this Section 3.8 is
----------------------- -----------
intended to eliminate, qualify, modify or limit the rights of the holders of the
Series A Preferred Stock under any provision of these Articles, or any other
rights or remedies which such holders may have at law, in equity or by contract
in the event of the failure of the Corporation to redeem shares of Series A
Preferred Stock as and when required by these Articles.
Section 4. Dividends.
---------
4.1 Fixed Rate Dividends.
--------------------
(a) Dividend Rate; Compounding of Dividends. The holders of the
---------------------------------------
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board, out of funds legally available therefor, cumulative cash
dividends, in preference and priority to dividends on any Junior Stock, that
shall accrue on the Stated Value of each share of the Series A Preferred Stock
at the Dividend Rate from time to time in effect, from and including the Issue
Date of such share to and including the date on which such share ceases to be
outstanding in accordance with the terms of these Articles.
-18-
<PAGE>
(b) Compounding of Fixed Rate Dividends. Dividends provided for in
-----------------------------------
Section 4.1 (and dividends on accrued dividends provided for below in this
- -----------
Section 4.1(b)) shall be fully cumulative and shall accrue on a daily basis,
based on a 365- or 366-day, as the case may be, whether or not such dividends
have been earned or declared and whether or not there are any unrestricted funds
of the Corporation legally available for the payment of dividends. On January 1
of each year, all dividends that have accrued on each share of Series A
Preferred Stock during the immediately preceding calendar year (or, in the case
of calendar 1999, the portion of such year elapsing after the Issue Date of such
share) pursuant to Section 4.1(a) shall, to the extent not declared and paid
--------------
during such preceding year for any reason (whether or not such unpaid dividends
have been earned or declared or there are any unrestricted funds of the
Corporation legally available for the payment of dividends), themselves begin to
accrue dividends, in preference and priority to dividends on any Junior Stock,
at a rate per annum equal to the Dividend Rate from time to time in effect,
compounded annually on January 1 of each subsequent year, until such dividends,
together with all dividends (whether or not earned) that have accrued thereon to
the date of such payment have been declared and paid in full and in cash or such
share ceases to be outstanding in accordance with the terms of these Articles.
(c) Payment and Record Dates. The dividend payment date for any
------------------------
dividends accrued pursuant to Section 4.1(a) or Section 4.1(b) that are declared
-------------- --------------
by the Board shall be payable on a Business Day selected by the Board as the
dividend payment date, and the record date for any such dividend shall be the
fifteenth day of the month immediately preceding such dividend payment date or
if such day is not a Business Day, then on the next preceding Business Day.
Notice of the applicable record date and related dividend payment date shall be
given, not more than 45 days nor less than 10 days prior to such record date, to
the holders of record of the Series A Preferred Stock at their respective
addresses as the same appear on the books of the Corporation or are supplied by
them in writing to the Corporation for the purpose of such notice.
4.2 Participating Dividend Rights.
-----------------------------
(a) Right to Participating Dividends. Subject to the prior
--------------------------------
preferences and other rights of any Senior Stock ranking prior to the Series A
Preferred Stock with respect to dividends and the provisions of Section 3 and
---------
Section 4.2(b), if the Corporation shall at any time or from time to time
- --------------
declare or pay any dividend or declare or make any distribution, whether payable
in cash or in assets, securities (whether issued by the Corporation or another
Person) or any other form of property or consideration other than cash, on the
Common Stock of any class or series into which the Series A Preferred Stock is
then convertible, the holders of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board and from assets of the
Corporation legally available therefor, a dividend or distribution per Series A
Share in like kind and equal to the amount of such cash or such assets,
securities or any other form of property or consideration (as the case may be)
declared, paid or made with respect to a number of shares of such class or
series of Common Stock equal to the number of shares of such class or series
into which a share of Series A Preferred Stock
-19-
<PAGE>
may be converted (or, if not then convertible because of the provisions of
Section 9.1 defining when the Series A Shares first become convertible, could be
- -----------
converted but for those provisions) as of the date such dividend on the Series A
Preferred Stock is paid. If, in connection with any such dividend or
distribution declared or paid or made on any such class or series of Common
Stock, the holders of such class or series are given any election with respect
to the form of consideration to be received, the same right of election shall be
given to the holders of the Series A Preferred Stock with respect to the
corresponding dividend or distribution on the Series A Preferred Stock. The
Board shall declare a dividend or distribution on the Series A Preferred Stock
as contemplated by this Section 4.2(a) immediately prior to the time it declares
--------------
a dividend or distribution on the Common Stock.
(b) Coordination With Conversion Right. To the extent that Section 10
---------------------------------- ----------
provides for an adjustment to the Conversion Rate by reason of any dividend or
distribution on any class or series of Common Stock referred to in Section
-------
4.2(a), the Majority Holders shall have the right to elect either (i) to require
- ------
the corresponding dividend or distribution on the Series A Preferred Stock
contemplated by Section 4.2(a) declared and paid or made as provided herein, in
--------------
which case such adjustment to the Conversion Price shall not be made to such
extent or (ii) to require such adjustment to the Conversion Rate to be made, in
which case such corresponding dividend or distribution on the Series A Preferred
Stock shall not be declared or paid or made to such extent. The election of the
Majority Holders shall bind all holders of Series A Shares. In declaring,
making and paying dividends and distributions on the Common Stock as to which
such right of election exists, the Corporation shall provide the holders of the
Series A Shares with reasonable advance notice and forms of election, and shall
otherwise act in good faith, so that such holders may effectively exercise all
rights of election provided for in this Section on a timely basis.
(c) Record and Payment Dates. The Board may fix a record date for
------------------------
the determination of holders of Series A Preferred Stock entitled to receive a
dividend or distribution pursuant to Section 4.2(a), which date shall be the
--------------
same as the record date for the corresponding dividend or distribution on the
Common Stock. The payment date for any such dividend or distribution shall be
on or before the payment date for the corresponding dividend or distribution on
the Common Stock.
(d) Dividends Are Preferred and Fully Cumulative. Dividends on the
--------------------------------------------
Series A Preferred Stock provided for in Section 4.2(a) shall be payable prior
--------------
and in preference to any dividends or distributions to the holders of any Junior
Stock, and shall be fully cumulative from and after the date declared.
4.3 No Offset; Accrued Dividends. None of the accrual, declaration
----------------------------
or payment of dividends provided for in Section 4.1 shall reduce or otherwise
-----------
affect the amount, or the accrual or payment, of dividends to which the holders
of the Series A Preferred Stock shall from time to time be or become entitled
under Section 4.2. Similarly, none of the accrual, declaration or payment of
-----------
dividends provided for in Section 4.2 shall reduce or otherwise affect the
-----------
amount, or the accrual or
-20-
<PAGE>
payment, of dividends to which the holders of the Series A Preferred Stock shall
from time to time be or become entitled under Section 4.1. The amount of
-----------
dividends "accrued and unpaid" with respect to any share of Series A Preferred
Stock as of any date shall include (i) all dividends and dividends on dividends
provided for in Section 4.1 (whether or not declared) that have accrued on such
-----------
share as provided in such Section to and including such date of determination
that have not been paid as of such date and (ii) all dividends on such share
provided for in Section 4.2 that have been declared but not been paid as of such
-----------
date.
4.4 Pro Rata Declaration and Payment of Dividends. All dividends
----------------------------------------------
paid with respect to shares of the Series A Preferred Stock pursuant to this
Section 4 shall be declared and paid pro rata to all the holders of the shares
- --------- --- ----
of Series A Preferred Stock outstanding as of the applicable record date or, if
no such record date is fixed, on the date of payment.
Section 5. Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
5.1 Payment of Preference Amount.
----------------------------
(a) Liquidation Preference. Subject to the prior preferences and
----------------------
other rights of any Senior Stock ranking prior to the Series A Preferred Stock
with respect to rights upon liquidation, dissolution or winding up of the
Corporation, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of shares of the
Series A Preferred Stock shall be entitled to receive from the assets of the
Corporation available for distribution to stockholders after payment of all
other debts and obligations of the Corporation, before any payment or
distribution on any Junior Stock is declared, made or provided for or any cash,
property or other consideration shall be set aside for such purpose, (i) cash in
an amount per share of Series A Preferred Stock equal to the Liquidation Price
of such share determined as of the Determination Time (as defined below in this
Section), plus (unless the outstanding Series A Shares shall have ceased to be
convertible in accordance with Section 10.19) (ii) with respect to each class or
-------------
series of Common Stock or other Conversion Stock into which a share of Series A
Preferred Stock may be converted as of the Determination Time, the same amounts
(and in the same relative proportions) of cash, property and other consideration
to be distributed with respect to a number of shares of such class or series of
Common Stock or other Conversion Stock, as the case may be, equal to the number
of shares of such class or series into which a share of Series A Preferred Stock
may be converted as of the Determination Time. The "Determination Time" shall
be immediately prior to the record date for such distribution to the holders of
such class or series of Common Stock or, if no such record date is fixed,
immediately prior to any other time as of which the holders of such class or
series of Common Stock entitled to receive such distribution is determined.In
connection with any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, after payment in full to the holders of the
Series A Preferred Stock and the holders of all other classes or series of
Parity Stock, if any, which rank on a parity basis with the Series A Preferred
Stock with respect to distributions upon such liquidation, dissolution or
winding up of the respective
-21-
<PAGE>
preferential amounts to which they are entitled, the Corporation shall
distribute its remaining assets and properties available for distribution to any
stockholders of the Corporation to the holders of its shares of Common Stock and
each other class or series of Junior Stock.
(b) Elections. If, in connection with any distribution with respect
---------
to any class or series of Common Stock referred to in clause (ii) of the first
sentence of Section 5.1, the holders of such class or series are given any
-----------
election with respect to the form of consideration to be received, the same
right of election shall be given to the holders of the Series A Preferred Stock
with respect to the corresponding distribution to the holders of the Series A
Preferred Stock. The Corporation shall provide the holders of the Series A
Shares with reasonable advance notice and forms of election, and shall otherwise
act in good faith, so that such holders may effectively exercise all such rights
of election on a timely basis.
5.2 Pro Rata Distributions to Parity Stock Holders. If, upon
----------------------------------------------
distribution of the Corporation's assets in liquidation, dissolution or winding
up, the assets of the Corporation available for distribution to its stockholders
shall be insufficient to permit payment in full to the holders of the Series A
Preferred Stock and the holders of all other classes or series of Parity Stock,
if any, which rank on a parity basis with the Series A Preferred Stock with
respect to distributions upon such liquidation, dissolution or winding up of the
respective full preferential amounts to which they are entitled, then the entire
assets of the Corporation available for distribution to stockholders (after full
distribution on Senior Stock, if any) shall be distributed ratably to such
holders in proportion to the respective full preferential amounts to which the
shares of Series A Preferred Stock and all such other classes and series of
Parity Stock would otherwise be entitled.
5.3 Record Date and Notice. Unless the Majority Holders otherwise
----------------------
agree in writing, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary:
(i) Any distribution to the holders of capital stock of the
Corporation of any class or series of assets of the Corporation available for
distribution to its stockholders will be made to the holders of record of such
class or series as of a record date that is not less than 10 days nor more than
30 days prior to the date such distribution is proposed to be made (each, a
"Distribution Date"). Each Distribution Date for any distribution to the holders
of the Series A Shares shall not in any event be later than the date of any
related or contemporaneous distribution to the holders of any Parity Stock or
Junior Stock.
(ii The Corporation shall give to each holder of Series A Preferred
Stock at least 20 days' prior written notice of the record date to be fixed for
any payment or distribution to any of the holders of any capital stock of the
Corporation of any class or series. In addition to any other information
required by these Articles, any contract or applicable law, such notice shall
describe in reasonable detail each payment or distribution proposed to be made,
identify all classes and series
-22-
<PAGE>
of capital stock that will participate in such payment or distribution and the
relative participations of the holders of each such class or series and state
the record date and Distribution Date for such payment or distribution. Such
notice shall be accompanied by a statement, in reasonable detail, showing the
amount, kind and value of all assets of the Corporation available for payment or
distribution to its stockholders. After any such notice is given, the
Corporation shall promptly furnish to each holder of Series A Preferred Stock
any information that such holder may reasonably request relating to the
liquidation, dissolution or winding up of the Corporation and its assets and
liabilities, including any information reasonably requested and in the
possession of the Corporation in order to assist such holder in determining
whether to exercise any right to convert any or all of such holder's shares of
Series A Preferred Stock pursuant to Section 9.
---------
(iii) The Series A Shares shall continue to be convertible into Common
Stock in accordance with the terms of these Articles unless and until such
holders have received payment of the full preferential amounts to which they are
entitled pursuant to Section 5.1.
-----------
Section 6. Redemption.
----------
6.1 Mandatory Redemption. On the Scheduled Redemption Date, the
--------------------
Corporation shall redeem all shares of Series A Preferred Stock then outstanding
at a Redemption Price per share equal to the Liquidation Price of such share
determined as of such date.
6.2 Redemption Upon Sale of the Company That Occurs When No Notes Are
-----------------------------------------------------------------
Outstanding.
- -----------
(a) Redemption Right When Notes Are Not Outstanding. The provisions of
-----------------------------------------------
this Section 6.2 shall be suspended, and shall not have any force or effect so
-----------
long as any Notes continue to be outstanding, but shall automatically become
effective and enforceable in accordance with their terms to any Sale of the
Company that occurs at any time after the first time as of which no Notes are
outstanding.
(b) Redemption at Option of Holders. In the event of the occurrence of
-------------------------------
a Sale of the Company while this Section 6.2 is applicable, the Majority Holders
-----------
shall have the right to require the Corporation to redeem all of the outstanding
shares of the Series A Preferred Stock at a Redemption Price per share equal to
the greater of (i) the Liquidation Price of such share determined as of the
applicable Redemption Date or (ii) the amount, per share, which would be payable
to the holders of the Series A Shares if such Sale of the Company were treated
as a liquidation, dissolution or winding up of the Corporation effective as of
the date of such Sale of the Company entitling the holders of the Series A
Preferred Stock to receive, in cash and promptly after the date of the closing,
consummation or occurrence of such transaction or event, the respective amounts
specified in Section 5.1 that they would receive if the Corporation were being
-----------
liquidated and dissolved on such date and all assets of the Corporation were
sold for Fair Market Value on such date and all proceeds
-23-
<PAGE>
thereof remaining after discharge of the debts and liabilities of the
Corporation in accordance with applicable law were distributed to the
Corporation's stockholders as contemplated by Section 5. Such right may be
---------
exercised by one or more Election Forms or any other written notices to such
effect which, collectively, have been signed by the Majority Holders and given
to the Corporation at any time after the date of occurrence of such Sale of the
Company and prior to the expiration of the period of 30 days after Election
Forms are delivered to the holders of the Series A Preferred Stock pursuant to
Section 3.7. If such right is so exercised, the Redemption Date shall be a
- -----------
Business Day selected by the Majority Holders that is not sooner than the tenth
day after and not later than the twentieth day after the Election Forms or other
written notices referred to in the second sentence of this Section are submitted
to the Corporation.
6.3 Redemption Upon Change of Control That Occurs When Notes Are
------------------------------------------------------------
Outstanding.
- -----------
(a) Redemption Right When Notes Are Outstanding. The provisions of
-------------------------------------------
this Section 6.3 shall be apply to any Change of Control that occurs while any
-----------
Notes are outstanding, but shall not apply to any Change of Control (or other
Sale of the Company) that occurs after the first time as of which no Notes are
outstanding.
(b) Redemption Right. Upon the occurrence of a Change of Control to
----------------
which this Section 6.3 is applicable, the Corporation shall redeem, on the
-----------
Redemption Date determined pursuant to this Section 6.3, ninety percent of all
-----------
Series A Shares outstanding on the date of the occurrence of such Change of
Control (calculated without giving effect to Section 10.19) at the Redemption
-------------
Price per share equal to 101% of the Stated Value thereof, plus all accrued and
unpaid dividends (whether or not earned or declared), if any, as of the
Redemption Date. The Corporation shall give written notice of such redemption
to each holder of Series A Shares by telegram, telex, facsimile transmission or
first-class mail, postage prepaid. Such notice shall be given to the holders of
the Series A Shares not less than twenty-five days nor more than forty-five days
before the Redemption Date and in no event later than the date the related
notice required by Section 1014(a) of the Indenture is given to holders of
Notes. The Series A Shares to be redeemed shall be selected as provided in
Section 3.3.
- -----------
(c) Additional Procedures. The Corporation's notice given pursuant to
---------------------
Section 6.3(b) shall, in addition to containing or being accompanied by any
- --------------
other information required by these Articles or applicable law, state the
following: (i) the Redemption Price and the Redemption Date, which shall be a
Business Day no earlier than twenty-five days nor later than forty-five days
from the date such notice is mailed, or such later date as is necessary to
comply with any applicable securities laws or regulations, but in no event later
than the first Business Day after the "Change of Control Payment Date"
established pursuant to Section 1014(b) of the Indenture; (ii) that all Series A
Shares to be redeemed will continue to accrue dividends, continue to be
convertible (except as expressly provided in Section 10.19) and continue to be
-------------
outstanding for all purposes until the
-24-
<PAGE>
Redemption Price thereof is paid as provided herein; (iii) that, unless the
Corporation defaults in the payment of the Redemption Price, any Series A Shares
redeemed as provided herein shall cease to accrue dividends after the Redemption
Date; (iv) that, in order to receive payment of the Redemption Price therefor,
holders of Series A Shares to be redeemed shall be required to surrender the
stock certificates evidencing such Series A Shares to the Redemption Agent at
the address specified in the notice prior to the close of business on the fifth
Business Day preceding the Redemption Date; (v) that the Majority Holders shall
be entitled to elect to waive and revoke the redemption of Series A Shares
pursuant to this Section 6.3 if the Corporation or the Redemption Agent
-----------
receives, not later than the close of business on the second Business Day
preceding the Redemption Date, a telegram, telex, facsimile transmission or
letter specifically to that effect, and that such election shall bind all
holders of Series A Shares; and (vi) the circumstances and relevant facts
regarding such Change of Control.
(d) Deposit With Redemption Agent; Redemption. Unless the Majority
-----------------------------------------
Holders make the election referred to in clause (v) of Section 6.3(b), on the
---------------
Redemption Date the Corporation shall, subject to Section 6.3(e), deposit with
--------------
the Redemption Agent money, in immediately available funds, sufficient to pay
the Redemption Price of all Series A Shares to be redeemed. The Redemption
Agent will promptly mail or deliver to the holders of the Series A Shares to be
redeemed payment in an amount equal to the aggregate Redemption Price for such
Series A Shares and the Corporation shall promptly issue, execute and mail or
deliver to each holder who delivered to the Corporation or the Redemption Agent
any stock certificate evidencing more Series A Shares than are redeemed a
replacement stock certificate evidencing the Series A Shares not redeemed. If
any of the Series A Shares evidenced by any stock certificate are not redeemed
for any reason when required, the Corporation shall cause the Redemption Agent
to promptly mail or deliver such certificate to the holder of such Series A
Shares.
(e) Sections 1009 and 1014 of Indenture. Subject, in all events to
-----------------------------------
the proviso of the definition of "Redemption Date" in Section 2 hereof, (i) if
------- ---------
any Notes are outstanding at the Redemption Date for a redemption required by
Section 6.3(b) and any Notes are required to be repurchased pursuant to Section
- --------------
1014 of the Indenture, the Corporation shall not be required to redeem any
Series A Shares pursuant to this Section 6.3 prior to the time of the
-----------
Corporation's repurchase of all such Notes so required to be repurchased and the
Redemption Date otherwise determined pursuant to this sentence shall be deferred
until the date such repurchase is completed and (ii) the redemption of any
Series A Shares pursuant to this Section 6.3 shall, at all times while any Notes
-----------
are outstanding, be subject to the Corporation's compliance with Section 1009 of
the Indenture. If, by reason of the restrictions contained in Section 1009 of
the Indenture, the Corporation is unable, without default under the Indenture,
to pay, on the Redemption Date established pursuant to this Section 6.3 the
-----------
full Redemption Price for ninety percent of all Series A Shares outstanding on
the date of the occurrence of such Change of Control (calculated without giving
effect to Section 10.19) pursuant to such Redemption Date, then
-------------
-25-
<PAGE>
(i) the Corporation shall promptly give, by telegram, telex or
facsimile transmission, a written notice to that effect to each
holder of Series A Shares, with such notice also stating (A) the
relevant facts establishing that such payment would result in a
violation of the Indenture, and (B) the maximum amount of funds
available to the Corporation for such redemption of Series A
Shares under Section 1009 of the Indenture and maximum number of
Series A Shares that the Corporation could redeem using those
funds and the percentage of all outstanding Series A Shares
represented by such number of Series A Shares that could be so
redeemed; and
(ii) the Majority Holders may elect, by written notice given to the
Corporation by telegram, telex or facsimile transmission within
ten Business Days after the notice for the Corporation is given,
to either
(A) require the Corporation to promptly apply to the redemption
(in accordance with the provisions of this Section 6.3) of
-----------
the Series A Shares required to be redeemed the maximum
amount of funds available to the Corporation under Section
1009 of the Indenture, and thereafter (x) promptly apply all
funds that thereafter become available for use for such
purpose by the Corporation without violation of the
Indenture to redeem Series A Shares and (y) if any Series A
Shares continue to be outstanding on the first date as of
which no Notes are outstanding, promptly redeem all such
Series A Shares as hereinafter provided in this Section, or
(B) waive the requirement that the Corporation redeem any Series
A Shares pursuant to this Section 6.3 until the first day
-----------
after the final maturity of the Notes.
If the Majority Holders make the election under subclause (ii)(B) of the
immediately preceding sentence, then the Corporation shall, on the first day
after the final maturity date of the Notes, promptly redeem all Series A Shares
then outstanding in accordance with this Section 6.3 and the other applicable
-----------
provisions of this Section 6 as though it were assumed that such day were the
---------
date of the occurrence of a Change of Control, with such redemption to be made
on the Redemption Date and at the Redemption Price determined pursuant to this
Section 6.3 based on such assumption (but ignoring any qualifications or
- -----------
limitations that are attributable to the Notes and the Indenture). If the
Majority Holders make the election under subclause (ii)(A) of the second
preceding sentence, then each redemption required by subclause (ii)(A)(x) or
(ii)(A)(y) of such sentence shall be made in accordance with the following:
-26-
<PAGE>
(i) the Redemption Price per share for all Series A Shares to be
redeemed shall be equal to 101% of the Stated Value thereof plus
all accrued and unpaid dividends (whether or not earned or
declared), if any, as of the date the Redemption Price is
actually paid to the holders of the Series A Shares redeemed;
(ii) the Redemption Date shall be a Business Day no earlier than
twenty-five days nor later than forty-five days from the date
that funds for such redemption became available under Section
1009 of the Indenture or, in the case of subclause (ii)(A)(y),
the first date as of which no Notes shall be outstanding;
(iii)the Corporation shall give written notice of such redemption to
each holder of Series A Shares by telegram, telex, facsimile
transmission or first-class mail, postage prepaid, with such
notice to be given to the holders of the Series A Shares not less
than twenty-five days nor more than forty-five days before the
applicable Redemption Date, and
(iv) Sections 6.7, 3.3 and 3.8 shall apply.
------------ --- ---
(f) Selection of Shares to be Redeemed; Shares Remain Outstanding
-------------------------------------------------------------
Until Paid For. Section 3.3 hereof shall govern the selection of the Series A
- -------------- -----------
Shares to be redeemed in the case of any partial redemption pursuant to this
Section. Notwithstanding any other provision of these Articles (except section
-------
10.19), no Series A Share required to be redeemed or delivered for redemption
- -----
pursuant to this Section 6.3 shall cease to be, or shall be deemed to cease to
-----------
be, outstanding for any purpose unless or until the applicable Redemption Price
therefor is actually paid in cash to the holder thereof or deposited with the
Redemption Agent as provided in Section 6.7.
-----------
6.4 At Corporation's Option. At any time after the fifth
-----------------------
anniversary of the Closing Date, all but not less than all of the Series A
Shares then outstanding may be redeemed at the option of the Corporation at the
per share redemption price equal to the Liquidation Price of such share
determined as of the Redemption Date; provided, however, that if an event has
-------- -------
occurred that may require redemption under either Section 6.2 or Section 6.3 and
----------- -----------
such redemption requirement shall not have been waived by the Majority Holders,
then the redemption under this Section 6.4 shall be at the Redemption Price
-----------
determined under Section 6.2 or Section 6.3, as applicable. Unless otherwise
----------- -----------
approved by the Majority Holders, the Corporation shall not exercise its right
of redemption pursuant to this Section 6.4 unless such redemption does not and
-----------
shall not result in impairment of the Corporation's capital, otherwise result in
a violation of applicable law or result in a material breach, violation, default
or event of default under any agreement or instrument to which the Corporation
is a party or by or to which it or its assets are bound or subject and unless
the Corporation is not then insolvent and would not be rendered insolvent as a
result of such redemption.
-27-
<PAGE>
6.5 Form and Source of Redemption Payments. The Redemption Price for
--------------------------------------
all shares redeemed pursuant to Section 6.1, Section 6.2, Section 6.3 or Section
----------- ----------- ----------- -------
6.4 shall be paid in cash from unrestricted funds legally available for such
- ---
purpose.
6.6 Notice of Redemption. Notice of any redemption by the
--------------------
Corporation pursuant to Section 6.1, Section 6.2, Section 6.3 or Section 6.4
----------- ----------- ----------- -----------
shall be given to the holders of record of the shares of Series A Preferred
Stock to be redeemed, at their respective addresses as the same appear upon the
books of the Corporation or are supplied by them in writing to the Corporation
for the purpose of such notice. Such notice shall be given not more than 45
days nor less than 10 days prior to the applicable redemption date. In addition
to any information required by law or by the applicable rules of any national
stock exchange or national interdealer quotation system, such notice shall set
forth the Redemption Price, the redemption date, the number of shares to be
redeemed and the place at which the shares called for redemption will, upon
presentation and surrender of the stock certificates evidencing such shares, be
redeemed, and shall state the name and address of the Redemption Agent appointed
in accordance with Section 6.7. In the case of a redemption pursuant to Section
----------- -------
6.3, that Section shall govern notices to be given to holders of Series A
- ---
Shares. If, in the case of a redemption pursuant to Section 6.3, there is a
-----------
conflict between the provisions of Section 6.3 and this Section 6.6, the
----------- -----------
provisions of Section 6.3 shall govern to the extent of the conflict.
-----------
6.7 Deposit of Redemption Price. If any shares of Series A Preferred
---------------------------
Stock are to be redeemed pursuant to Section 6.1, Section 6.2, Section 6.3 or
----------- ----------- -----------
Section 6.4, then on or before the applicable redemption date the Corporation
- -----------
shall deposit, in an irrevocable trust fund for the sole purpose of redeeming
the shares of Series A Preferred Stock to be redeemed on such redemption date,
with any bank or trust company organized under the laws of the United States of
America or any state thereof having capital, undivided profits and surplus
aggregating at least $250,000,000 or having capital, undivided profits and
surplus aggregating at least $250,000,000 on a consolidated basis with such
bank's or trust company's parent, provided, however, that, in such case, such
-------- -------
parent has guaranteed all of the existing and future obligations of such bank or
trust company (a "Redemption Agent"), immediately available unrestricted funds
legally available for such purpose sufficient to redeem all outstanding Series A
Shares for the applicable Redemption Price on such redemption date, with
irrevocable instructions and authority to the Redemption Agent, on behalf and at
the expense of the Corporation, to pay, commencing on such redemption date or
prior thereto, the Redemption Price of the Series A Shares to their respective
holders upon the surrender of their share certificates and, from and after the
later of the date of such deposit and such redemption date, such shares shall be
deemed to be no longer outstanding and the holders thereof shall cease to be
stockholders with respect to such shares and shall have no rights with respect
thereto, except the right to receive payment, as provided in these Articles, of
the Redemption Price of such shares, calculated through such redemption date,
upon surrender of the certificates therefor. Until such date, the Series A
Shares shall, subject to Section 10.19, continue to be convertible into Common
-------------
Stock in accordance with Section 9 and shall continue to be issued and
---------
outstanding for all other purposes. Any funds so deposited with the Redemption
Agent by the Corporation and unclaimed for six
-28-
<PAGE>
months from the redemption date shall (unless an applicable escheat or abandoned
property law designates another Person) be paid to the Corporation, after which
repayment the holders of such shares of Series A Preferred Stock shall look to
the Corporation for the payment of the Redemption Price therefor, without
interest. If, in the case of a redemption pursuant to Section 6.3, there is a
-----------
conflict between the provisions of Section 6.3 and this Section 6.7, the
----------- -----------
provisions of Section 6.3 shall govern to the extent of the conflict.
-----------
7. Board Representation.
--------------------
7.1 Right to Elect Director. The holders of the Series A Preferred
-----------------------
Stock shall be entitled to vote as a separate class for the election of one
director of the Corporation, provided that such right shall terminate upon any
--------
redemption of any Series A Shares completed in accordance with Section 6.1,
-----------
Section 6.2, Section 6.3 or Section 6.4. The director whom, at any time and
- ----------- ----------- -----------
from time to time, the holders of the Series A Preferred Stock elect or are
entitled to elect voting as a separate class is sometimes herein referred to as
the "Series A Director". Subject to earlier death, resignation or removal
pursuant to Section 7.3, each Series A Director elected or appointed at any time
-----------
as provided herein shall serve until the next annual meeting of the
Corporation's stockholders and his or her successor shall have been elected as
provided herein. At their option and in their sole discretion and for any one
or more periods of any length of time, the Majority Holders at any time and from
time to time may choose not to exercise their right to elect a Series A Director
or to fill any vacancy existing in the office of the Series A Director, without
prejudice to any subsequent exercise of such right. In such event, or if the
right of the holders of the Series A Shares to elect a director shall terminate
upon a redemption of Series A Shares as provided in the first sentence of this
Section, the Majority Holders may (in their sole discretion) choose to have a
representative appointed by them attend any one or more meetings of the Board as
an observer, and not as a director, and such representative shall be entitled to
receive the same notices of meetings of and proposed actions by the Board as
directors generally, but shall not be entitled to any voting or consent rights
of a director.
7.2 Manner of Election. Subject to the last sentence of this Section
------------------ -------
7.2, the Series A Director shall be elected (and if such directors previously
- ---
has been elected and any vacancy shall exist, such vacancy shall be filled)
either (i) by written consent of the Majority Holders given in accordance with
Section 8.1; or (ii) by the vote of the Majority Holders voting as a separate
- -----------
class and in accordance with Section 8.2, at (A) annual meetings of the
-----------
shareholders of this Corporation, or (B) a special meeting of the holders of
Series A Preferred Stock for the purpose of electing such directors (or filling
any such vacancy), to be called by the Secretary of this Corporation upon the
written request of the holders of record of 5% or more of the number of shares
of Series A Preferred Stock then outstanding; provided, however, that if the
-------- -------
Secretary of this Corporation shall fail to call any such special meeting within
10 days after any such request, such meeting may be called by any holder or
holders of 5% or more of the number of shares of Series A Preferred Stock then
outstanding. Notwithstanding the foregoing, the Secretary shall not be entitled
to call any such
-29-
<PAGE>
special meeting in the case of any such request received by this Corporation
less than 45 days before the date fixed for any annual meeting of shareholders,
and if in such case such special meeting is not called, the holders of Series A
Preferred Stock shall be entitled to vote (as a class) at such annual meeting to
elect the Series A Director (or to fill any such vacancy).
7.3 Removal. Any Series A Director may at any time and from time to
-------
time be removed, with or without cause, by and only by the Majority Holders.
Any vacancy in the office of Series A Director resulting from death, resignation
or removal or existing for any other reason whatsoever may be filled only by the
Majority Holders. Any director elected to fill a vacancy shall serve the same
remaining term as that of his or her predecessor and until his or her successor
has been elected.
7.4 Certain Procedural Matters. So long as the holders of the Series
--------------------------
A Preferred Stock shall have the right to elect a Series A Director:
(i) any one or more members of the Board or any committee thereof may
participate in meetings of the Board by conference telephone;
(ii) each member of the Board or any committee thereof shall be given
not less than five Business Days' prior written notice of each meeting of the
Board or such committee (or two days' prior written notice in case of meetings
to consider emergency matters), specifying the time and place of such meeting
and the matters to be discussed thereat, unless such member signs (either before
or after such meeting) a written waiver of his right to be given such notice, or
attends such meeting without protesting (prior thereto or at the commencement
thereof) the failure to be given such notice;
(iii) each member of the Board or any committee thereof shall be
given not less than five Business Days' prior written notice of any action
proposed to be taken by the Board or such committee without a meeting (or two
days' prior written notice in case of proposed actions involving emergency
matters), unless such member signs (either before or after such action is taken)
a written waiver of his right to be given such notice, or gives his written
consent to such action without protesting the failure to be given such notice;
(iv) no executive committee of the Board, and no other committee of
the Board which is authorized to exercise any powers of the Board, shall be
created except (i) as provided in Section 7.6 or (ii) otherwise with the
-----------
concurrence of the Series A Director or, if there is no Series A Director, by
the Majority Holders; and at any meeting of the Board or any committee thereof,
a quorum for the purpose of taking any action shall require the presence in
person or participation by conference telephone or similar communications
equipment of a number of directors equal to at least a majority of the entire
Board or the entire committee.
-30-
<PAGE>
7.5 Indemnification. The Corporation shall (i) to the fullest extent
---------------
permitted by applicable law, indemnify each director and former Series A
Director who is made a party or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such Person is or
was a director of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such Person in connection with such action,
suit or proceeding and (ii) pay in advance, or advance to each such director and
former director for payment of, expenses incurred in defending any such action,
suit or proceeding to the maximum extent permitted by applicable law. The
rights conferred on any Person by this Section 7.5 shall not be exclusive of any
-----------
other rights which such Person may have or acquire under any statute, under the
Corporation's Certificate of Incorporation, under the Corporation's By-laws,
under any agreement, vote of stockholders or disinterested directors or
otherwise.
7.6 Compensation Committee.
----------------------
(a) Compensation Committee. Unless the Majority Holders otherwise
----------------------
agree, prior to a Qualifying IPO, the Board shall have a compensation committee
(the "Compensation Committee"), which shall have three members one of whom shall
be the Series A Director, and at least one other of whom shall be an independent
director (as defined below in this Section). The Compensation Committee will
have the authority and responsibility for establishing and administering the
stock, incentive and other employee benefit plans of the Corporation,
establishing and changing the compensation of executive officers, approving or
amending existing and proposed employment agreements between the Corporation and
its executive officers and performing any and all other such functions
customarily performed by compensation committees of public companies. Without
limiting the generality of the foregoing, the Compensation Committee will have
the authority and responsibility, in administering any stock, incentive or other
employee benefit plans, including any such plans in effect on the Closing Date,
to determine the persons to whom awards or benefits may be made, to determine
the terms and conditions (which need not be identical) of each award made or
benefit conferred (including the timing and type of award or benefit, the
exercise or purchase price for any award of stock or stock options, and terms
related to vesting, exercisability, forfeiture and termination), and to
interpret the provisions of each such plan.
(b) Qualifications of Independent Directors. For purposes hereof, an
---------------------------------------
"independent director" is an individual who (unless otherwise approved by the
Series A Director or, if there is no Series A Director, by the Majority Holders)
(i) has either a significant financial investment in the Corporation or a
significant strategic position or expertise relative to the business of the
Corporation and (ii) is not (A) an officer or employee of the Corporation or any
of its Subsidiaries, (B) a director, employee, partner, manager or other member
of management of any of Affiliate of the Corporation (except a director of a
Subsidiary of the Corporation), (C) a relative of any Person described in
-31-
<PAGE>
subclause (ii)(A) or (ii)(B) or (C) a trustee of any trust or estate in which
any Person described in subclause (ii)(A), (ii)(B) or (ii)(C) is a beneficiary
has a substantial beneficial interest.
8. Actions by Holders Generally; Consistent Charter and By-law
-----------------------------------------------------------
Provisions.
8.1 Actions by Written Consent or at Meetings. With respect to
-----------------------------------------
action by the holders of the Series A Preferred Stock upon any matter on which
such holders are entitled to vote as a separate series or class, such action may
be taken either at a meeting of such holders or without a stockholder meeting by
the written consent of holders of shares of Series A Preferred Stock having
voting power to cast not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares of
Series A Preferred Stock entitled to vote were present and voted. Notice shall
be given in accordance with the applicable provisions of the Colorado Business
Corporation Act of the taking of corporate action without a meeting by less than
unanimous written consent to those holders of Series A Preferred Stock whose
shares were not represented on the written consent.
8.2 Meetings. At any meeting having as a purpose either the election
--------
of a Series A Director or any action upon any other matter on which the holders
of the Series A Preferred Stock are entitled to vote as a separate series or
class, the presence, in person or by proxy, of the holders of record of at least
a majority of the Series A Shares then outstanding shall be required and be
sufficient to constitute a quorum of such series or class for any such purpose,
and the affirmative vote of the holders of a majority of the shares of Series A
Preferred Stock then outstanding and entitled to vote at such meeting shall be
the act of the Series A Preferred Stock. At any such meeting or adjournment
thereof, (i) the absence of a quorum of such holders of Series A Preferred Stock
shall not prevent the election of the directors to be elected by the holders of
shares other than the Series A Preferred Stock or the taking of any other action
which they are entitled to take, and the absence of a quorum of holders of
shares other than the Series A Preferred Stock shall not prevent the election of
any director to be elected by the holders of the Series A Preferred Stock or the
taking of any other action which they are entitled to take and (ii) in the
absence of such quorum, either of holders of the Series A Preferred Stock or of
shares other than the Series A Preferred Stock (or both), a majority of the
holders, present in person or by proxy, of the series, class or classes of stock
which lack a quorum shall have power to adjourn the meeting for the election of
directors which they are entitled to elect or the taking of any other action
which they are entitled to take, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
8.3 Consistent By-laws and Charter. The Articles of Incorporation
------------------------------
and the By-laws of the Corporation shall at all times contain provisions
consistent with the provisions, purposes and intent of Sections 3 through 11,
inclusive, and the other provisions of these Articles.
-32-
<PAGE>
9. Conversion Right Generally.
--------------------------
9.1 Conversion Right. Unless previously redeemed in accordance with
----------------
Section 6, each share of Series A Preferred Stock may be converted at the option
- ---------
of the holder thereof, in whole or in part, at any time and from time to time on
and after earliest of (i) the consummation of the Corporation's initial public
offering of Common Stock registered under the Securities Act, (ii) 180 days
after the Closing Date or (iii) immediately before the occurrence of any Sale of
the Company or any liquidation, dissolution or winding up of the Corporation,
into the number of fully paid and nonassessable shares of Common Stock equal to
the Conversion Rate in effect at the time of conversion and in the manner and on
the terms and conditions hereinafter provided in this Section 9 and Section 10.
--------- ----------
The initial Conversion Rate is five shares of Common Stock for each Series A
Share converted. The Conversion Rate, the Conversion Price and the kind, number
and amount of securities and other property deliverable upon conversion of any
Series A Share shall be subject to adjustment from time to time as set forth in
Section 10. In case cash, property or securities other than Common Stock shall
- ----------
be payable, deliverable or issuable upon conversion, then all references to
Common Stock in this Section 9 and in Section 10 shall be deemed to apply, so
--------- ----------
for as appropriate and as nearly as may be, to such cash, property or other
securities.
9.2 Mechanics of Conversion.
-----------------------
(a) Conversion Notice. In order to convert any Series A Share, the
-----------------
holder thereof shall deliver to the Corporation at its principal executive
offices within the United States or at another office or agency designated by
the Corporation pursuant to Section 10.14, of the certificate(s) evidencing the
-------------
Series A Share(s) to be converted, which certificate(s), if the Corporation
shall so request, shall be duly endorsed to the Corporation or in blank or
accompanied by proper instruments of transfer to the Corporation or in blank
(such endorsements or instruments of transfer to be in form reasonably
satisfactory to the Corporation), and shall give written notice to the
Corporation at said office that such holder elects to convert all or a part of
the Series A Share(s) represented by said certificate(s) in accordance with the
terms of this Section 9, and shall state in writing therein the name or names
---------
and denomination or denominations in which such Holder wishes certificate(s) for
Common Stock to be issued.
(b) Subscription. Subject to Section 9.2(d), every such notice of
------------ --------------
election to convert shall constitute a contract between the holder of such
Series A Share(s) and the Corporation, whereby the holder of such Series A
Share(s) shall be deemed to subscribe for the amount of Common Stock which such
holder shall be entitled to receive upon conversion of the number of shares of
Series A Preferred Stock to be converted, and, in satisfaction of such
subscription, to deliver the shares of Series A Preferred Stock to be converted,
and whereby the Corporation shall be deemed to agree that the surrender of the
shares of Series A Preferred Stock to be converted shall constitute full payment
of such subscription for such Common Stock to be issued upon such conversion.
-33-
<PAGE>
(c) Issuance of Conversion Securities. The Corporation will as soon
---------------------------------
as practicable after such deposit of a certificate or certificates for Series A
Preferred Stock to be converted, accompanied by the written notice above
prescribed, issue and deliver at such offices of the Corporation or at such
other office or agency to the Person for whose account such Series A Preferred
Stock was so surrendered, or to his nominee(s) or, subject to compliance with
applicable law, transferee(s), a certificate or certificates for the number of
whole shares of Common Stock to which such holder shall be entitled. Subject to
Section 9.2(d), such conversion shall be deemed to have been made as of the date
- --------------
of such surrender of the Series A Preferred Stock to be converted, and the
Person or Persons entitled to receive the Common Stock issuable upon conversion
of such Series A Preferred Stock shall be treated for all purposes as the record
holder or holders of such Common Stock on such date. Simultaneously with the
delivery of such certificate(s) for such Common Stock, the Corporation also
shall duly deliver to such holder all cash, other securities and other property,
if any, to which he is entitled by virtue of the conversion of such Series A
Preferred Stock. If fewer than all of the Series A Shares evidenced by any stock
certificate delivered to the Corporation in connection with a conversion are to
be converted, the Corporation shall also deliver to such holder, at the time of
delivery of the certificate(s) representing such Common Stock, a new stock
certificate, dated as of the Issue Date, evidencing the number of Series A
Shares remaining unconverted and otherwise identical to the stock certificate
for Series A Shares so delivered by such holder.
(d) Conversions Associated With Public Offerings. Notwithstanding the
--------------------------------------------
foregoing, if any notice of conversion given by any Holder states that such
conversion is in connection with an offering of securities registered or to be
registered pursuant to the Securities Act, then such conversion may, at the
option of such Holder, be conditioned upon and deferred until the closing of the
sale of such securities pursuant to such offering or another date designated by
such Holder, in which event the Series A Share(s) covered by such notice shall
not be deemed to have been converted until immediately prior to the closing of
such sale or such other date (as the case may be) and the Corporation shall,
unless otherwise instructed by such Holder, deliver the stock certificate(s) and
any cash, securities or other property to which such Holder shall be entitled at
such time or times as such Holder shall reasonably request.
(e) Payment of Accrued Dividends. Upon the conversion of any Series
----------------------------
A Share, the Corporation shall pay to the Holder of such Series A Share an
amount of cash equal to all dividends, whether or not declared, on such Series A
Share which have accrued but not been paid as of the date of the surrender of
such Series A Share for conversion. Such payment shall be made in cash or, at
the election of such Holder, the issuance of certificates representing such
number of shares of Common Stock as have an aggregate Current Market Price as of
the date of issuance equal to the amount of such unpaid dividends. Upon the
making of such payment to such Holder, no further dividends shall accrue on such
Series A Share.
9.3 Expenses and Taxes. The Corporation shall pay all expenses in
------------------
connection with, and all stamp, transfer and other similar taxes and other
governmental charges that may be
-34-
<PAGE>
imposed with respect to, the issue or delivery of the shares of Common Stock and
cash, property or other securities which any Holder is entitled to receive upon
conversion of any Series A Share(s). The Corporation shall not be required,
however, to pay any stamp, stock transfer or other similar tax or other
governmental charge required to be paid solely by virtue of any transfer
involved in the issue of shares of Common Stock in any name other than that of
the Holder of the Series A Share(s) converted at the order of such Holder, and
if any such transfer is involved, the Corporation shall not be required to issue
or deliver the shares of Common Stock as to which such tax or charge is
applicable until such tax or other charge shall have been paid or it has been
established to the Corporation's reasonable satisfaction that no such tax or
other charge is due.
9.4 Fractional Shares of Common Stock. If the number of shares of
---------------------------------
Common Stock issuable on the conversion of Series A Share(s) is not a whole
number, the Corporation shall not be required to issue any fraction of a share
of Common Stock and such number of shares issuable shall be rounded up to the
next highest whole number. If a certificate or certificates evidencing more
than one Series A Share shall be surrendered for conversion at one time by the
same Holder, the number of full shares which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate number of Series A
Shares so surrendered for conversion. Notwithstanding the provisions of this
Section 9.4, in computing adjustments to the Conversion Rate pursuant to Section
- ----------- -------
10, fractional shares of Common Stock shall be taken into account as provided in
- --
Section 10.8(c) and any outstanding Series A Share may at any time represent the
- ---------------
right to receive upon conversion less than one share of Common Stock or some
other number of shares of Common Stock which is not a whole number.
9.5 Covenant to Reserve Shares for Issuance on Conversion. The
-----------------------------------------------------
Corporation shall at all times reserve and keep available out of the authorized
but unissued shares of Common Stock, solely for the purpose of issue upon
conversion of Series A Shares, the full number of shares of Common Stock
issuable if all outstanding Series A Shares were to be converted in full. All
shares of Common Stock which shall be issuable upon conversion of any Series A
Share shall be newly issued, duly authorized, validly issued, fully paid and
nonassessable and without any personal liability attaching to the ownership
thereof, and the issuance thereof shall not give rise or otherwise be subject to
preemptive or similar purchase rights on the part of any Person or Persons, and
the Corporation shall take any corporate and other actions that may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and nonassessable all shares of Common Stock and
all shares of the Corporation's capital stock of any other class or series
issuable upon conversion of the Series A Preferred Stock. The Corporation
hereby authorizes and directs its current and future transfer agents, if any,
for the Common Stock and for any shares of the Corporation's capital stock of
any other class or series issuable upon the conversion of the Series A Preferred
Stock at all times to reserve such number of authorized shares as shall be
requisite for such purpose. The Corporation shall supply such transfer agents
with duly executed stock certificates for such purposes.
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<PAGE>
9.6 Compliance with Governmental Requirements; Listing of Shares.
------------------------------------------------------------
(a) General. If issuance of any Conversion Securities issuable upon
-------
conversion of any Series A Share(s) require, under any applicable federal,
state, local or foreign law, rule or regulation or any applicable requirement of
any national securities exchange or inter-dealer quotation system, any
registration, qualification, listing or approval before such shares may be
issued upon conversion, the Corporation shall in good faith, as promptly as
practicable and at its expense, diligently endeavor to cause such shares to be
duly registered, qualified, approved or listed, as the case may be, and the
conversion of such Series A Share(s) shall be suspended for the period during
which such registration, qualification, approval or listing is being diligently
pursued or sought by the Corporation.
(b) Listing. Without limiting the generality of the foregoing, if any
-------
shares of Common Stock or other capital stock or securities required to be
reserved for issuance upon conversion of Series A Shares require registration or
qualification with any governmental authority under any federal or state law
before such shares may be so issued, the Corporation will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered. During all periods during which shares of Common Stock or any
other capital stock or securities of the same class, series or issue as are
issuable upon conversion of any Series A Share are listed, qualified or
otherwise eligible for trading or quotation on any national securities exchange
or The Nasdaq Stock Market, the National Association of Securities Dealers, Inc.
Automated Quotation System or any similar quotation system, the Corporation
shall cause all shares of Common Stock, and all such other capital stock and
securities, issuable upon conversion of such Series A Share to be listed,
qualified or eligible for trading or quotation thereon upon issuance thereof.
(c) HSR Act, Etc. If any Holder's intended conversion of any Series
------------
A Shares would or might be subject to the HSR Act, the Corporation shall
promptly comply with any applicable requirements under the HSR Act relating to
filing and furnishing of information to the Federal Trade Commission and the
Antitrust Division of the Department of Justice and shall cooperate, and cause
all Persons which are part of the same "person" (as defined for purposes of the
HSR Act) as the Corporation to cooperate and assist in such filing and
compliance. If any Holder is advised by its legal counsel that its intended
conversion of any Series A Share(s) would or might be subject to any other law,
rule or regulation which requires any filing with or review or approval by any
governmental authority or agency, the Corporation shall promptly comply with any
requirements of such law, rule or regulation applicable to it and shall
cooperate with such Holder in such Holder's efforts to comply with the
requirements of such law, rule or regulation applicable to it on a timely basis.
(d) Expenses. Each of the Corporation and such Holder shall bear and
--------
pay any costs or expenses that it incurs in complying with this Section 9.6,
-----------
except that each shall pay one half of
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<PAGE>
any filing fee payable to the FTC or the Department of Justice pursuant to this
Section 9.6 and the HSR Act.
- -----------
9.7 Mandatory Conversion. Upon a Qualifying IPO, all outstanding
--------------------
shares of Series A Preferred Stock automatically shall be converted in
accordance with this Section 9, with the same effect for purposes of this
---------
Section 9 as if each holder of Series A Shares gave a notice of conversion
- ---------
pursuant to Section 9.2(a) with respect to the conversion of all Series A Shares
--------------
then held by such holder, provided that all adjustments to the Conversion Rate
--------
and the Conversion Price required pursuant to Section 10 by reason of any event,
----------
transaction or action occurring on or before the date of such conversion shall
be made, whether or not the effectiveness of such adjustment is stated by the
provision requiring such adjustment to be after the date of such conversion and
even if the calculation, nature or size of the adjustment is dependent on facts
or events occurring, or not ascertainable until, after such date, including all
adjustments required by Section 10.17, if applicable, and the Corporation shall,
-------------
to the extent necessary, comply with Section 10.8(d).
---------------
10. Conversion Rate Adjustments.
---------------------------
10.1 Adjustment Generally. The Conversion Rate shall be subject to
--------------------
adjustment from time to time as hereinafter set forth. Upon each adjustment to
the Conversion Rate, the Conversion Price shall also be adjusted, effective as
of the same time as the adjustment to the Conversion Rate, by multiplying the
Conversion Price in effect immediately prior to the effective time of such
adjustment to the Conversion Rate by a fraction the numerator of which is the
number of shares of Common Stock issuable upon conversion of one share of Series
A Preferred Stock immediately prior to such adjustment, and the denominator of
which is the number of shares of Common Stock issuable upon conversion of one
share of Series A Preferred Stock immediately following such adjustment to the
Conversion Rate. If , however, the adjustment of the Conversion Rate does not
result in any increase in the number of shares of Common Stock issuable upon
conversion of a share of Series A Preferred Stock, then the Conversion Price
shall instead be adjusted to equal the product of
(i) the Conversion Price determined as of immediately prior to
the effective time of the related adjustment to the Conversion Rate,
multiplied by
(ii) a fraction the denominator of which shall be the Current
Market Price per share of the Outstanding Common Shares determined as of
the first Business Day prior to the date of the public announcement of the
event requiring such adjustment or, if no such public announcement is made,
the date of the action of the Corporation or the Board authorizing such
event and the numerator of which shall be the Current Market Price per
share of the Outstanding Common Shares determined as of (A) if the Common
Stock is then Publicly Traded, the 21st day after the effective date of
such event or (B) if the Common
-37-
<PAGE>
Stock is not then Publicly Traded, as of the end of the calendar month in
which such event occurs or becomes effective.
If, after the event giving rise to such adjustment but prior to the calculation
of any such adjustment of the Conversion Price, any Holder converts any Series A
Share and if such Holder would have received any additional Conversion
Securities, cash or other securities, property or consideration if he had
converted such Series A Share after such calculation, the Corporation shall
deliver to him, promptly after such calculation, all such additional Conversion
Securities, cash or other securities, property or consideration.
Notwithstanding the foregoing or any other provision of this Agreement, no
adjustment of the Conversion Rate, other than a readjustment pursuant to Section
-------
10.7(a), shall be made that would result in the Conversion Rate being reduced
- -------
below the Conversion Rate in effect immediately before such adjustment, and no
adjustment of the Conversion Price, other than a readjustment attributable
solely to a readjustment of the Conversion Rate pursuant to Section 10.7(a),
---------------
shall be made that would result in the Conversion Price being increased above
the Conversion Price in effect immediately before such adjustment Adjustments
of the Conversion Rate and the Conversion Price shall be cumulative and shall be
made successively on each and every occasion that any event requiring any such
adjustment shall occur. The form of the stock certificate(s) evidencing the
Series A Shares need not be changed because of any adjustment made pursuant
hereto.
10.2 Stock Dividends, Subdivisions, Combinations and
-----------------------------------------------
Recapitalizations.
(a) Adjustment. If the Corporation shall at any time (i) declare or
----------
pay a dividend or declare, pay or make any other distribution on the Common
Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock into a greater number of shares, (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, (iv) declare or pay a dividend or
declare, pay or make a distribution on the outstanding shares of Common Stock in
capital stock other than Common Stock or (v) issue any shares of capital stock
of the Corporation by way of reclassification of the Common Stock, then in each
and every such event the Conversion Rate determined as of immediately prior to
the applicable time referred to in clause (x) or (y) below in this sentence
shall be adjusted so that the Holder of any Series A Share thereafter
surrendered for conversion shall be entitled to receive the aggregate number of
shares of Common Stock (or other capital stock of the Corporation) which such
Holder would have owned and would have been entitled to receive by virtue of the
happening of any of the events described above had such Series A Share been
converted (x) in the case of a dividend or distribution, immediately prior to
the record date for the determination of the stockholders entitled to receive
such dividend or distribution (or, if no such record date is fixed, immediately
prior to any other time as of which the holders of Common Stock entitled to
participate in such distribution was determined) or (y) in the case of a
subdivision, combination or reclassification, on the effective date of such
subdivision, combination or reclassification. If, after any such adjustment, a
holder of a Series A Share upon conversion may receive shares of two or more
classes of capital stock of the Company, the Board shall determine,
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<PAGE>
in good faith, the allocation of the adjusted Conversion Price between the
classes of capital stock. After such allocation, the conversion privilege and
the Conversion Price of each class of capital stock shall thereafter be subject
to adjustment on terms comparable to those applicable to Common Stock in this
Section 10. An adjustment made pursuant to this Section 10.2 shall become
- ---------- ------------
effective immediately after such record date (or other applicable date referred
to in clause (x) of the immediately preceding sentence) in the case of a
dividend or distribution, subject to Section 10.8(d), and shall become effective
---------------
immediately after the effective date in the case of a subdivision, combination
or reclassification.
(b) Exclusion of Distributions of Redeemable Stock. Notwithstanding
----------------------------------------------
Section 10.2(a), if an event listed in clause (iv) or (v) of the first sentence
- ---------------
of Section 10.2(a) would result in the shares of Series A Preferred Stock being
---------------
convertible into shares or units of more than one class or series of capital
stock of the Corporation and any such class or series of capital stock provides
by its terms a right in favor of the Corporation to call, redeem, exchange or
otherwise acquire all of the outstanding shares or units of such class or series
(such class or series of capital stock being herein referred to as "Redeemable
Stock"), then in lieu of the adjustment to the Conversion Rate pursuant to
Section 10.2(a), the adjustment to the Conversion Rate contemplated by Section
- --------------- -------
10.3 shall be made with the same effect as if the dividend or distribution of
- ----
such Redeemable Stock or the issuance of the additional class or series of such
Redeemable Stock by reclassification had been a distribution of assets of the
Corporation.
10.3 Certain Other Distributions.
---------------------------
(a) Adjustment Formula. Subject to Section 10.3(b) and Section
------------------ --------------- -------
10.3(c), if the Corporation shall at any time declare or make any distribution,
- -------
by dividend or otherwise, to all holders of outstanding shares of Common Stock
of any cash or other assets or property of any nature whatsoever, any debt
securities or other evidences of its indebtedness, any capital stock, any other
securities of any nature whatsoever or any warrants, options or other Rights to
subscribe for, purchase or otherwise acquire any assets, property, capital
stock, debt or other securities or evidences of indebtedness (excluding
dividends, distributions or issuances covered by Section 10.2, Rights covered by
------------
Section 10.5 and Convertible Securities covered by Section 10.6), or shall take
- ------------ ------------
a record of such holders for the purpose of entitling them to receive such a
distribution, then the Conversion Rate shall be adjusted to equal the product of
(i) the Conversion Rate determined as of immediately prior to
the applicable Adjustment Date determined pursuant to Section 10.3(d)
---------------
multiplied by
(ii) a fraction the numerator of which shall be the Current
Market Price per share of the Outstanding Common Shares immediately before
such Adjustment Date and the denominator of which shall be the excess of
(x) such Current Market Price per share of the Outstanding Common Shares as
of the Adjustment Date over (y) the amount allocable to one
-39-
<PAGE>
share of the Outstanding Common Shares as of such Adjustment Date of the
sum of (A) any such cash so distributable and (B) the Fair Market Value (as
determined as of such date in good faith by the Board) of any and all such
evidences of indebtedness, shares of capital stock, debt securities, other
securities, property, assets or Rights so distributable.
(b) When Adjustment Is Not to be Made. No adjustment pursuant to the
---------------------------------
provisions of Section 10.3(a) shall be made if such adjustment would result in a
---------------
Conversion Rate that is lower than the Conversion Rate in effect prior to such
adjustment. In the event that, with respect to any such distribution, the
Current Market Price referred to in clause (ii)(x) of Section 10.3(a) is less
---------------
than the amount referred to in clause (ii)(y) of Section 10.3(a), then the
---------------
adjustment provided for in Section 10.3(a) shall not be made. In lieu thereof,
---------------
but subject to Section 10.3(c), the Conversion Rate determined as of immediately
---------------
prior to the effective date for such adjustment specified in the last sentence
of this Section 10.3 shall be adjusted so that the Holder of any Series A Share
------------
thereafter surrendered for conversion shall be entitled to receive the kind and
number or amount of shares of Common Stock (or other capital stock of the
Corporation), other Conversion Securities and other property or assets which
such Holder would have received had such Series A Share been converted
immediately prior to
(i) the record date for the determination of the stockholders entitled to
receive such distribution, or
(ii) if no such record date is fixed, as of any other time as of which the
holders of Common Stock entitled to participate in such distribution
was determined,
plus the kind and amount of cash, other assets or property, debt securities,
other evidences of indebtedness, other securities or Rights which such Holder
would have been entitled to receive by virtue of being the record holder, as of
such record date or other time, of such kind and number or amount of shares of
Common Stock or other Conversion Securities. For such purpose, it shall be
assumed that such holder of Common Stock or other Conversion Securities failed
to exercise rights of election, if any, as to the kind or amount of shares or
stock, other securities or property receivable in such distribution, provided
--------
that if the kind or amount of shares of stock, other securities or property
receivable in such distribution is not the same for each non-electing share,
then the kind and amount of shares of stock, other securities or property
receivable upon consummation of such transaction for each non-electing share
shall be deemed to be the kind and amount so receivable per share by a plurality
of the non-electing shares.
(c) Special Rule for Distributions of Redeemable Stock. If by virtue
--------------------------------------------------
of the applicability of Sections 10.2(b) and 10.3(b) in any one or more events,
-----------------------------
the Conversion Securities issuable upon conversion of any Series A Share consist
of or include any shares of Redeemable Stock and if the Corporation redeems all
or any part of the outstanding shares of such Redeemable Stock prior to the date
on which such Series A Share is converted, then upon conversion of such
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<PAGE>
Series A Share the Holder thereof shall be entitled to receive, in lieu of such
shares of Redeemable Stock or, in the event of such a partial redemption, a pro
---
rata portion of such shares, the kind and amount of cash or other assets,
- ----
securities or other property or consideration paid by the Corporation with
respect to its redemption of an equal number of shares of such Redeemable Stock.
If the consideration so paid upon the Corporation's redemption of any such
Redeemable Stock consists of or includes any other class or series of Redeemable
Stock which is also redeemed before conversion of any Series A Share, then the
provisions of the first sentence of this Section 10.3(c) (and of this sentence)
---------------
shall apply to successively to the shares of such other class or series of
Redeemable Stock.
(d) Adjustment Date. The "Adjustment Date" for any distribution in
---------------
respect of which an adjustment is required by this Section 10.3 shall be either
------------
(i) the date of taking of a record of holders of Common Stock for the purpose
of entitling them to receive such distribution or, if no record is taken, at the
date as of which the holders of Common Stock entitled to participate in such
distribution were determined or (ii) the date of such distribution, whichever
date yields the largest increase in the Conversion Rate in applying the formula
contained in the first sentence of this Section 10.3.
------------
(e) Adjustment Effective Date. An adjustment made pursuant to this
-------------------------
Section 10.3 shall become effective, subject to Section 10.8(d), immediately
- ------------ ---------------
after such record date or, if no such record date is fixed, immediately after
the time as of which holders of Common Stock entitled to participate in such
distribution were determined or, if no such time is fixed, as of the date of
such distribution.
10.4 Issuance of Additional Shares of Common Stock.
---------------------------------------------
(a) Adjustment Formula. Subject to Section 10.4(b), if at any time
------------------ ---------------
the Corporation shall issue, or pursuant to Section 10.5, Section 10.6, Section
------------ ------------ -------
10.7 or Section 10.8 be deemed to issue, any Additional Shares of Common Stock
- ---- ------------
in exchange for consideration in an amount, determined in accordance with
Section 10.8(a) and Section 10.8(e), per Additional Share of Common Stock less
- --------------- ---------------
than the Reference Price as of the applicable time of determination specified in
the last sentence of this Section 10.4(a), then the Conversion Rate shall be
---------------
adjusted to equal the product obtained by multiplying the Conversion Rate in
effect immediately prior to such time of determination by a fraction (i) the
numerator of which shall be the number of Outstanding Common Shares immediately
before such issuance or deemed issuance plus the number of Additional Shares of
Common Stock so issued or deemed to be issued and (ii) the denominator of which
shall be the number of Outstanding Common Shares immediately before such
issuance or deemed issuance plus the number of shares which the aggregate amount
of consideration, if any, received by the Corporation upon such issuance or
deemed issuance of all such Additional Shares of Common Stock would purchase at
the Reference Price determined as of such time. The applicable time of
determination shall be:
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<PAGE>
(i) if the event requiring the adjustment is the taking of a record date
for any dividend or distribution referred to in Section 10.5 or
------------
Section 10.6, as of either the close of business on such record date
------------
or the date such dividend or distribution is paid, whichever produces
the highest Reference Price, or
(ii) in the case of any other issuance or deemed issuance, immediately
prior to the time of such issuance or deemed issuance.
(b) When Adjustment is Not Required. The provisions of Section
------------------------------- -------
10.4(a) shall not apply to any issuance of Additional Shares of Common Stock for
- -------
which an adjustment is made under Section 10.2 or Section 10.3. Subject to
------------ ------------
Section 10.7, no adjustment of the Conversion Rate shall be made under this
- ------------
Section 10.4 upon the issuance of any Additional Shares of Common Stock which
- ------------
are or are deemed to be issued pursuant to (i) the exercise of any Existing
Rights in accordance with the terms thereof in effect of the Closing Date or
(ii) the exercise of any other Rights or the exercise of any conversion or
exchange rights in any other Convertible Securities if, in the case of any such
Rights or Convertible Securities referred to in this clause (ii) any such
adjustment shall previously have been made, or no such adjustment shall have
been required to be made, upon the issuance of such Rights or upon the issuance
of such Convertible Securities (or upon the issuance of any Rights therefor)
pursuant to Section 10.5 or Section 10.6.
------------ ------------
(c) Effective Date. Each adjustment pursuant to this Section 10.4 by
-------------- ------------
reason of any issuance or deemed issuance of any Additional Shares of Common
Stock shall be effective as of the date of such issuance or deemed issuance.
10.5 Issuance of Rights.
------------------
(a) Adjustment. If at any time the Corporation shall take a record of
----------
the holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution of, or shall in any manner (whether directly or
indirectly by assumption in a consolidation or in a merger in which the
Corporation is the surviving corporation or otherwise) issue to any Person or
Persons, any Rights to subscribe for, purchase or otherwise acquire any
Additional Shares of Common Stock or any Convertible Securities, in any case
whether or not such Rights or the right to exchange or convert such Convertible
Securities is immediately exercisable, and the consideration per share for which
Common Stock is issuable upon the exercise of such Rights or upon conversion or
exchange of such Convertible Securities, determined pursuant to Section 10.8(a)
---------------
and Section 10.8(e), shall be less than the Reference Price determined as of the
---------------
applicable time of determination specified in the last sentence of this Section
-------
10.5(a), then the maximum number of shares of Common Stock issuable upon the
- -------
exercise of such Rights or, in the case of Rights for Convertible Securities,
upon the conversion or exchange of such Convertible Securities determined as of
such applicable time shall be deemed to be Additional Shares of Common Stock
issued as of such applicable time for such
-42-
<PAGE>
consideration per share and the Conversion Rate shall be adjusted as provided in
Section 10.4. The applicable time of determination shall be:
- ------------
(i) if the event requiring the adjustment is the taking of a record date
for any dividend or distribution of Rights referred to in this Section
-------
10.5(a), as of either the close of business on such record date or the
-------
date such dividend or distribution is paid, whichever produces the
highest Reference Price, or
(ii) in the case of any other issuance of Rights, immediately prior to the
time of such issuance.
(b) No Further Adjustment on Exercise. Subject to Section 10.7, no
--------------------------------- ------------
further adjustments of the Conversion Rate shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon exercise of
such Rights or upon the actual issuance of such Common Stock upon such
conversion or exchange of such Convertible Securities for which an adjustment
pursuant to this Section 10.5 previously had been made or was not required to be
------------
made. Subject to Section 10.7, no adjustment under this Section 10.5 shall be
------------ ------------
required by reason of the grant of Employee Options that have an exercise price
per share of Common Stock (i) if granted before a Qualifying IPO, at least equal
to five dollars or (ii) if granted after a Qualifying IPO at least equal to the
Current Market Price at the time of grant.
10.6 Issuance of Convertible Securities.
----------------------------------
(a) Adjustment. If at any time the Corporation shall take a record of
----------
the holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution of, or shall in any manner (whether directly or
indirectly by assumption in a consolidation or in a merger in which the
Corporation is the surviving corporation or otherwise) issue to any Person or
Persons, any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the consideration per share
for which Common Stock is issuable upon such conversion or exchange, determined
pursuant to Section 10.8(a) and Section 10.8(e), shall be less than the
--------------- ---------------
Reference Price determined as of the applicable time of determination specified
in the last sentence of this Section 10.6(a), then the maximum number of shares
---------------
of Common Stock issuable upon the conversion or exchange of such Convertible
Securities determined as of such time of determination shall be deemed to be
Additional Shares of Common Stock issued as of such time of determination for
such consideration per share and the Conversion Rate shall be adjusted as
provided in Section 10.4. If the terms of any Convertible Securities provide
------------
for any issuance of additional Convertible Securities (whether in payment of
dividends or interest or otherwise), then each occasion on which any such
additional Convertible Securities are issued shall be deemed a new issuance of
Convertible Securities for which an adjustment pursuant to this Section 10.6
------------
shall be made. The applicable time of determination shall be:
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<PAGE>
(i) if the event requiring the adjustment is the taking of a record date
for any dividend or distribution of Rights referred to in this Section
-------
10.6(a), as of either the close of business on such record date or the
-------
date such dividend or distribution is paid, whichever produces the
highest Reference Price, or
(ii) in the case of any other issuance of Rights, immediately prior to the
time of such issuance.
(b) No Further Adjustment Upon Conversion. Subject to Section 10.7,
------------------------------------- ------------
no further adjustment of the Conversion Rate shall be made under this Section
-------
10.6 upon the issuance of any Convertible Securities which are issued pursuant
- ----
to the exercise of any Rights therefor if any such adjustment shall previously
have been made upon the issuance of such Rights pursuant to Section 10.5.
------------
Subject to Section 10.7, no further adjustments of the Conversion Rate shall be
------------
made upon the actual issuance of such Common Stock upon conversion or exchange
of Convertible Securities for which an adjustment pursuant to this Section 10.6
------------
previously had been made or was not required.
10.7 Superseding Adjustment.
----------------------
(a) Readjustment if Adjustment Previously Made. If, at any time after
------------------------------------------
any adjustment of the Conversion Rate shall have been made pursuant to Section
-------
10.5 or Section 10.6 in respect of any Rights or any Convertible Securities:
- ---- ------------
(i) the consideration paid or payable to the Corporation, or the
number of shares of Common Stock issued or issuable, upon the exercise,
conversion or exchange of the Rights or Convertible Securities in respect of
which such adjustment was made is increased or decreased by virtue of provisions
contained therein for an automatic increase or decrease (as the case may be)
upon the occurrence of a specified date or event, any amendment or modification
of or departure from the terms thereof previously in effect or otherwise (other
than under or by reason of an event resulting in a change pursuant to the
provisions set forth in the documents governing such Rights or Convertible
Securities designed to protect against dilution, which event also results in an
adjustment pursuant to this Section 10), the adjustments to the Conversion Rate
----------
computed upon the original grant, issuance or sale thereof or upon the taking of
a record date with respect thereto (as the case may be), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be readjusted to the Conversion Rate which would then be in effect
had such adjustment originally been made on the basis that such increased or
decreased consideration paid or payable or such increased or decreased number of
shares of Common Stock issued or issuable was the consideration paid or payable
or the number of shares issued or issuable in respect of such Rights or
Convertible Securities which are actually outstanding immediately prior to the
effective time of such increase or decrease (but no such readjustment shall be
made with respect to any Rights or Convertible Securities which for any reason
no longer are outstanding as of such time); or
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<PAGE>
(ii) any Rights or any rights of conversion or exchange under
Convertible Securities in respect of which such adjustment was made shall expire
without having been fully exercised, the adjustments to the Conversion Rate
computed upon the original grant, issuance or sale thereof or upon the taking of
a record date with respect thereto (as the case may be), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(1) in the case of such Rights or Convertible Securities, the only
Addi tional Shares of Common Stock issued were the shares of Common Stock, if
any, actually issued upon the exercise of such Rights or the conversion or
exchange of such Convertible Securities and the consideration received for such
Additional Shares of Common Stock was, in the case of Rights, the consideration
actually received by the Corporation for the grant, issuance or sale of all such
Rights, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or, in the case of Convertible Securities,
the consideration actually received by the Corporation for the issuance or sale
of all such Convertible Securities which were actually converted or exchanged,
plus the additional consideration, if any, actually received by the Corporation
upon such conversion or exchange; and
(2) in the case of any such Rights for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon the exercise
thereof were issued at the time of grant, issuance or sale of such Rights, and
the consideration received by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration actually
received by the Corporation for the grant, issuance or sale of all such Rights,
whether or not exercised, plus the additional consideration, if any, actually
received by the Corporation upon the issuance or sale of the Convertible
Securities with respect to which such Rights were actually exercised.
(b) When Readjustment is Not to be Made. No readjustment pursuant to
-----------------------------------
this Section 10.7 shall have the effect of (i) decreasing the number of shares
------------
of Common Stock or the amounts of other Conversion Securities, cash or other
property into which any Series A Share is convertible below the number of such
shares and the amounts of such other Conversion Securities, cash and property
into which such Series A Share would have been convertible if the original
adjustment had not been made but all subsequent adjustments, if any, required by
this Section 10 had been made or (ii) requiring any surrender, return or
----------
redelivery of any shares of Common Stock, other Conversion Securities, cash or
other property delivered upon any conversion of any Series A Share prior to the
time such readjustment is made, requiring that the converting Holder or any
subsequent holder of any such shares of Common Stock, Conversion Securities or
other property make any payment to the Corporation or otherwise affecting such
shares of Common Stock, other Conversion Securities or other property or the
rights or obligations of the converting Holder or any such subsequent holder
with respect thereto. From and after any adjustment or adjustments provided for
in this Section 10.7, the Conversion Rate shall continue to be subject to
------------
further adjustment as provided in this Section 10.
----------
-45-
<PAGE>
(c) Adjustment When No Adjustment Was Previously Made. If, at any
-------------------------------------------------
time after any grant, sale or other issuance of any Rights or Convertible
Securities for which an adjustment of the Conversion Rate shall not have been
required to be made pursuant to the provisions of Section 10.5 or Section 10.6
------------ ------------
(as the case may be), the consideration paid or payable to the Corporation upon
the exercise of such Rights or Convertible Securities is decreased, or the
number of shares of Common Stock issued or issuable upon the exercise of such
Rights or Convertible Securities is increased, in either case by virtue of
provisions contained therein for an automatic decrease or increase (as the case
may be) upon the occurrence of a specified date or event, any amendment or
modification of or departure from the terms thereof previously in effect or
otherwise (other than under or by reason of an event resulting in a change
pursuant to the provisions set forth in the documents governing such Rights or
Convertible Securities designed to protect against dilution, which event also
results in an adjustment pursuant to this Section 10), then such event shall,
----------
for purposes of Section 10.5 (in the case of such Rights) or Section 10.6 (in
------------ ------------
the case of such Convertible Securities) be deemed to be a new issuance, as of
the date of the effectiveness of such decrease or increase (as the case may be)
of Rights or Convertible Securities having terms reflecting such changes.
(d) Adjustment for Events Affecting Existing Rights. If the number
-----------------------------------------------
of shares of Common Stock issued or issuable upon exercise of any Existing Right
is increased as a direct or indirect result of any amendment or modification of
or departure from the terms thereof previously in effect, then such increased
number of shares of Common Stock issued or issuable upon exercise thereof shall
be deemed to be Additional Shares of Common Stock issued as of the effective
date of such increase for the additional consideration, if any, payable to
acquire such increased number of shares upon exercise of such Existing Right,
and the Conversion Rate shall be adjusted as provided in Section 10.4. If the
------------
consideration payable for shares of Common Stock issued or issuable upon
exercise of any Existing Right is decreased as a direct or indirect result of
any amendment or modification of or departure from the terms thereof previously
in effect, then such event shall be deemed to be the issuance, as of the
effective date of such decrease, of a number of Additional Shares of Common
Stock equal to the excess of (i) the maximum number of shares of Common Stock
issuable upon exercise of such Existing Right over (ii) the number of shares of
Common Stock determined by dividing the total consideration, if any, that would
be payable to the Corporation upon the exercise in full of such Existing Right
after giving effect to such decrease by the amount of consideration per share of
Common Stock issuable upon exercise of such Existing Right that would have been
payable to the Corporation absent such decrease. The provisions of this Section
-------
10.7(d) are in addition to (and not exclusive of) any other rights or remedies
- -------
of such holders in the event that any such amendment, modification or departure
occurs without any required approval of the holders of Series A Shares.
10.8 Other Provisions Applicable to Adjustments. The following
------------------------------------------
provisions shall be applicable to the making of adjustments provided for in this
Section 10:
- ----------
-46-
<PAGE>
(a) Computation of Consideration. Subject to Section 10.8(e) and
---------------------------- ---------------
the last sentence of this Section 10.8(a):
---------------
(i) To the extent that any Additional Shares of Common Stock, any
Convertible Securities or any Rights to subscribe for or purchase any Additional
Shares of Common Stock or any Convertible Securities shall be issued or deemed
to be issued for cash consideration, the consideration received or deemed to be
received by the Corporation therefor shall be the net amount of the cash
received or deemed to be received by the Corporation therefor (in any such case
subtracting any amounts received in respect of accrued interest, accrued
dividends or other similar amounts which the Corporation may be obligated to pay
to the holders thereof in the future and any compensation, discounts or expenses
paid or incurred by the Corporation in connection with the issuance thereof).
(ii) To the extent that such issuance or deemed issuance shall be for
a consideration other than cash, then, except as herein otherwise expressly
provided, the amount of such consideration shall be deemed to be the Fair Market
Value of such consideration at the time of such issuance or deemed issuance as
determined in good faith by the Board.
(iii) In case any Additional Shares of Common Stock, any Convertible
Securities or any Rights to subscribe for, purchase or otherwise acquire
Additional Shares of Common Stock or Convertible Securities shall be issued or
deemed to be issued in connection with any merger, consolidation, share exchange
or similar transaction, the amount of consideration therefor shall be deemed to
be the Fair Market Value, as determined in good faith by the Board, of such
portion of the assets and business of the nonsurviving corporation as the Board
in good faith shall determine to be attributable to such Additional Shares of
Common Stock, Convertible Securities, or Rights, as the case may be.
(iv) In case any Additional Shares of Common Stock, any Convertible
Securities or any Rights to subscribe for, purchase or otherwise acquire
Additional Shares of Common Stock or Convertible Securities are issued or deemed
to be issued in combination with each other or with any other securities or
property in connection with any transaction in which the Corporation receives
cash, securities, property or other consideration, or any combination of the
foregoing, then the amount of consideration therefor shall be deemed to be such
portion of the cash, securities, property and other consideration received by
the Corporation as the Board in good faith shall determine to be attributable to
such Additional Shares of Common Stock, Convertible Securities or Rights, as the
case may be, with any noncash consideration being valued at its Fair Market
Value as determined by the Board in good faith. The consideration for any
Additional Shares of Common Stock issuable or deemed to be issuable pursuant to
any Rights to subscribe for, purchase or otherwise acquire the same shall be the
consideration received or deemed to be received by the Corporation for issuing
such Rights plus the minimum additional consideration, if any, paid or payable
to the Corporation upon the exercise or deemed exercise of such Rights.
-47-
<PAGE>
(v) The consideration for any Additional Shares of Common Stock issued
or issuable pursuant to the terms of any Convertible Securities covered by any
Rights to subscribe for, purchase or otherwise acquire such Convertible
Securities shall be the consideration received or deemed to be received by the
Corporation for issuing such Rights, plus the minimum additional consideration,
if any, paid or payable to the Corporation in respect of the subscription for,
purchase or other acquisition of such Convertible Securities, plus the minimum
additional consideration, if any, paid or payable to the Corporation upon the
exercise or deemed exercise of the right of conversion or exchange in such
Convertible Securities.
(vi) The consideration for any Additional Shares of Common Stock
issuable or deemed to be issuable pursuant to the terms of any Convertible
Securities, other than any covered by any Rights to subscribe for, purchase or
acquire the same, shall be the consideration received or deemed to be received
by the Corporation for issuing such Convertible Securities plus the minimum
additional consideration, if any, paid or payable to the Corporation upon the
exercise of the right of conversion or exchange in such Convertible Securities.
(vii) For all purposes of this Section 10, all Rights or Convertible
----------
Securities issued or deemed to be issued to directors, officers, employees or
consultants of the Corporation or any Subsidiary shall be deemed to be issued
for no consideration except to the extent the Corporation receives in exchange
for the issuance thereof consideration other than services rendered or to be
rendered.
(b) When Adjustments to Be Made. The adjustments required by this
---------------------------
Section 10 shall be made whenever and as often as any specified event requiring
- ----------
an adjustment shall occur, except that any adjustment of the number of shares of
Common Stock into which a Series A Share is convertible that would otherwise be
required may be postponed (except in the case of a subdivision or combination of
shares of the Common Stock) up to, but not beyond the date of conversion if such
adjustment either by itself or with other adjustments not previously made adds
or subtracts less than 1% of the shares of Common Stock into which a Series A
Share is convertible immediately prior to the making of such adjustment. Any
adjustment representing a change of less than such minimum amount (except as
aforesaid) which is postponed shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this Section 10 and not
----------
previously made by virtue of this Section 10.8(b), would result in a minimum
---------------
adjustment or on the date of conversion or, if earlier, upon conversion. For
the purpose of any adjustment, any specified event shall be deemed to have
occurred at the close of business on the date of its occurrence.
(c) Fractional Interests. In computing adjustments under this
--------------------
Section 9, fractional interests in Common Stock shall be taken into account to
- ---------
the nearest 1/100th of a share.
-48-
<PAGE>
(d) Delivery of Due Bills. If, after the taking of any record of the
---------------------
holders of any class or series of capital stock of the Corporation for the
purpose of entitling them to receive a dividend or distribution for or in
connection with any other event which an adjustment pursuant to this Section 10
----------
is required, but prior to the occurrence of the event for which such record is
taken, any Series A Share is converted, the Corporation shall deliver to the
converting Holder a due bill or other appropriate instrument evidencing such
Holder's right to receive the additional shares of Common Stock, other
securities, cash and other property receivable upon conversion by reason of an
adjustment pursuant to this Section 10 that would have been required by reason
----------
of such dividend, distribution or other event if the Series A Shares had
continued to be outstanding immediately after the occurrence of the event
requiring such adjustment.
(e) Certain Determinations. Any determination of the Current Market
----------------------
Price of any share of Common Stock or the Fair Market Value of any other
security, asset, property or consideration which may be required to be made by
the Board pursuant to or in connection with the application of any provision of
these Articles may be disputed in good faith by the Majority Holders and any
such dispute shall be resolved by an independent investment banking firm of
recognized national standing selected by the Majority Holders and reasonably
acceptable to the Corporation (and whose fees and expenses shall be paid by the
Corporation), whose decision with respect to such dispute shall be final and
conclusive and binding on the Corporation and all holders of Series A Shares.
Any determination by the Board pursuant to Section 10.9(b) or Section 10.16 may
--------------- -------------
be disputed in good faith by the Majority Holders, and any such dispute shall be
resolved in accordance with Section 10.15.
-------------
(f) Other Action Affecting Common Stock. In case at any time or from
-----------------------------------
time to time the Corporation shall take any action in respect of its Common
Stock which is not one described in any other provision of Section 10 as
----------
requiring an adjustment, then, unless such action will not have an adverse
effect upon the rights and intended benefits of the holders of Series A Shares,
the number of shares of Common Stock and the kind and amount of other securities
and property into which each Series A Share is convertible shall be increased in
such manner as may be equitable in the circumstances.
10.9 Multiple Classes of Common Stock.
--------------------------------
(a) Election Right. If, at any time while any Series A Shares are
--------------
outstanding, the Corporation's authorized capital stock shall include two or
more classes or series of Common Stock, then each Holder shall have the right,
upon each conversion of any of his Series A Share(s), to elect to receive such
number of shares of each such class or series as such Holder desires, provided
that the total number of shares of all classes and series selected by such
Holder shall not exceed the aggregate number of shares of Common Stock issuable
upon conversion of such Series A Share(s).
-49-
<PAGE>
(b) Adjustment Rights Apply. If, as a result of any adjustment made
-----------------------
pursuant to Section 10, by virtue of the existence of Section 10.9(a), as a
---------- ---------------
result of any event referred to in Section 10.16, or otherwise, the Holder of a
-------------
Series A Share would, upon conversion thereof, become the holder of more than
one class or series of capital stock of the Corporation, then the Conversion
Rate and the Conversion Price shall be subject to adjustment in respect of each
such class and series of capital stock in a manner and on terms as nearly as
equivalent as practicable to all the provisions set forth in this Section 10,
----------
which manner and terms shall be determined by the Board promptly after each such
adjustment, each such action by the Corporation and each other event which has
or might have such result. Promptly after the Board makes any such
determination, the Corporation shall deliver to each Holder a written notice
which shall describe in reasonable detail the manner and terms so determined.
10.10 Notices to Holders.
------------------
(a) Notice of Adjustments. Whenever the Conversion Rate shall be
---------------------
adjusted pursuant to Section 10, the Corporation at its expense shall forthwith
----------
prepare a certificate to be executed by the chief financial officer of the
Corporation setting forth, in reasonable detail, the event requiring the
adjustment, the nature and amount of such adjustment, the method by which such
adjustment was calculated (including a description of the basis on which the
Board made any determination required by any provision of Section 10), the date
----------
as of which such adjustment was or will be effective as provided herein, the
Conversion Rate immediately prior to such event and for and the Conversion Rate
immediately after such adjustment and all other relevant information. The
Corporation shall promptly cause to be delivered to each Holder a signed copy of
such certificate. The Corporation shall, upon the written request at any time
of any Holder, furnish or cause to be furnished to such Holder a like
certificate setting forth the Conversion Rate at the time in effect and showing
how such Conversion Rate was calculated.
(b) Notice of Corporate Action. If at any time
--------------------------
(i) the Corporation shall take a record of the holders of any class,
series or issue of its capital stock or other securities for the purpose of
entitling them to receive a dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any evidences of its indebtedness,
any shares of capital stock of any class or series, any cash or any other
securities or property, or to receive any other right, interest or benefit, or
(ii) there shall be any capital reorganization of the Corporation,
any reclassification or recapitalization of the capital stock of the Corporation
or any consolidation or merger or binding share exchange of the Corporation
with, or any sale, transfer or other disposition of all or substantially all the
property, assets or business of the Corporation to, another Person or any other
event referred to in Section 10.16 or within the definition of the term "Sale of
-------------
the Company" shall occur or be proposed, or
-50-
<PAGE>
(ii there shall be any tender offer or exchange offer for
Conversion Securities of any class, series or issue, or
(iv there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation,
then the Corporation shall (x) give to each Holder at least 20 days' prior
written notice of the date on which a record date shall be fixed for such
dividend, distribution or right or for determining rights to vote in respect of
any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up, (y) promptly
after learning of any such tender or exchange offer, deliver to each Holder
notice thereof, a copy of all written offering material which the Corporation
possesses or reasonably can obtain or if no such materials exist or are
possessed or can reasonably be obtained by the Corporation, a written summary of
all material terms and conditions of and other material facts relating thereto
known to the Corporation and (z) give each Holder at least 20 days' prior
written notice of the scheduled, planned or anticipated date when any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation, winding up or other event shall take
place. Such notice in accordance with clause (x) of the immediately preceding
sentence also shall specify (i) the date on which any such record is to be taken
for the purpose of the event covered by the notice or any related event, and
(ii) the date on which such event or related event is to take place and, if
applicable, the time, if any such time is to be fixed, as of which the holders
of Common Stock shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable as a result of such event or
related event.
(c) Notices To Stockholders. In addition to the foregoing, each
-----------------------
Holder shall be given the same notices of corporate action or proposed corporate
action as any holder of Common Stock.
10.11 No Impairment. The Corporation shall not by or through
-------------
amending its certificate of incorporation, any reorganization, transfer of
assets, consolidation, merger, share exchange, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of these Articles, but will at all times in
good faith carry out and assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights and intended benefits of the holders of the Series A Shares against
impairment. Without limiting the generality of the foregoing, the Corporation
(i) will not directly or indirectly increase the par value of any shares of
Common Stock or other capital stock receivable upon the conversion of any Series
A Share above the Conversion Price immediately prior to such increase in par
value, (ii) will not take any action that results in any adjustment to the
Conversion Rate pursuant to Section 10 if after such adjustment the total number
----------
of shares of Common Stock or shares of any other class or series of Conversion
Stock issuable upon the conversion of all of the outstanding Series A Shares
would exceed the total number of shares of Common Stock or such other Conversion
Stock, respectively, then authorized by the Corporation's
-51-
<PAGE>
Certificate of Incorporation and available and reserved for the purpose of
issuance upon such conversion, (iii) will not enter into any transaction or take
any action which, by reason of any resulting adjustment hereunder, would cause
the Conversion Price to be less than the par value per share of Common Stock and
(iv) will take all such action as may be necessary or appropriate in order that
the Corporation may validly and legally issue shares of each class and series of
Conversion Stock and other Conversion Securities upon the conversion of any
Series A Share which in each case are fully paid, non-assessable and without
personal liability attaching to the ownership thereof and not subject to
preemptive and similar purchase rights. Upon the request of any Holder, at any
time, the Corporation will acknowledge in writing, in form satisfactory to such
Holder, the continuing validity of each certificate for any Series A Share(s)
then held by such Holder and the obligations of the Corporation with respect
thereto and thereunder.
10.12 Taking of Record; Stock Transfer Books. In the case of all
--------------------------------------
dividends or other distributions by the Corporation to the holders of its Common
Stock with respect to which any provision of Section 10 refers to the taking of
----------
a record of such holders, in each such case the Corporation will not declare,
pay or make any such dividend or distribution unless it shall take such a record
and the Corporation shall take each such record as of the close of business on a
Business Day. The Corporation shall not be required to convert any shares of
Series A Preferred Stock, and no surrender of Series A Preferred Stock shall be
effective for that purpose, while the stock transfer books of the Corporation
are closed for any proper purpose; but the surrender of Series A Preferred Stock
for conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books, as if the
conversion had been made on the date such Series A Preferred Stock was
surrendered for conversion. The Corporation will not at any time voluntarily
close its stock transfer books so as to result in preventing or delaying the
conversion or transfer of any Series A Share.
10.13 Each Holder May Enforce Rights. Notwithstanding any of the
------------------------------
provisions hereof, any Holder, without the consent of any other Holder, or any
holder of any Conversion Securities may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Corporation suitable to enforce, or otherwise in respect of, his
rights with respect to his Series A Shares or Conversion Securities.
10.14 Office of the Corporation. As long as any of the Series A
-------------------------
Shares are outstanding, the Corporation shall maintain one or more offices or
agencies where the Series A Shares may be presented for conversion and Series A
Shares and Conversion Securities may be presented for registration of transfer,
division or combination. Series A Shares and Conversion Securities may, in any
event, be presented for such purposes at the principal executive offices of the
Corporation in the United States.
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<PAGE>
10.15 Resolution of Certain Disputes.
------------------------------
(a) Consultation. If there shall arise any dispute between the
------------
Corporation and the Majority Holders concerning the interpretation, application
or operation of the adjustment provisions of Section 10 (other than any such
----------
dispute referred to in the first sentence of Section 10.8(e), which shall be
---------------
resolved as stated therein), the Corporation and the Majority Holders will
promptly attempt to settle such dispute through consultation and negotiation in
good faith and in a spirit of mutual cooperation. If agreement is reached
concerning the resolution of such dispute, then such agreement shall be final,
conclusive and binding on the Corporation and all holders of Series A Shares.
(b) Arbitration. If, on or before the thirtieth day after written
-----------
notice of such dispute is given by the Corporation to the holders of the Series
A Shares or the Majority Holders to the Corporation, such dispute has not been
resolved by the agreement of the Corporation and the Majority Holders, such
dispute shall be settled by an expedited arbitration proceeding conducted in
accordance with the then current Commercial Arbitration rules of the American
Arbitration Society in New York, New York by a single arbitrator who satisfies
the requirements of Section 10.15(e) and who is mutually acceptable to the
----------------
Corporation and the Majority Holders or, in the event such Persons fail to agree
upon such arbitrator within ten Business Days after such written notice of
dispute is given, an arbitrator who satisfies such requirements appointed by the
American Arbitration Association upon application of either the Corporation or
the Majority Holders. Neither the Corporation nor the Majority Holders shall
unreasonably withhold its approval of the selection of an arbitrator satisfying
the requirements of Section 10.15(e).
----------------
(c) Certain Provisions Applicable to Arbitration. The Corporation and
--------------------------------------------
the Majority Holders shall provide such arbitrator with such information as may
be reasonably requested in connection with the arbitration of such dispute and
shall otherwise cooperate with each other and such arbitrator in good faith and
with the goal of resolving such dispute as promptly as reasonably practicable.
The arbitrator shall not have authority to award damages, but shall have only
the authority to determine disputes regarding the matters set forth in the first
sentence of Section 10.15(a). Subject to the immediately preceding sentence and
----------------
to Section 10.15(f), the arbitrator's decision with respect to the dispute
----------------
referred to such arbitration shall be final and binding and may be entered in
any court with jurisdiction, and the Corporation and the holders of the Series A
Shares shall abide by such decision. Each party shall bear its own costs and
expenses, including attorney's fees, incurred in connection with any arbitration
proceeding, except that the Corporation and the holders of the Series A Shares
(as a group) each shall pay one-half of all fees, costs and disbursements of the
arbitrator and of or charged by the American Arbitration Society.
(d) Other Remedies. The provisions of this Section 10.15 shall not in
-------------- -------------
any way limit or otherwise affect (i) the right of any Holder to seek, with
regard to the matter in dispute, specific performance or other injunctive relief
in any court of competent jurisdiction or (ii) the rights or
-53-
<PAGE>
remedies of any Holder with respect to any claim, controversy or dispute not
submitted to and decided by an arbitrator pursuant to this Section 10.15.
-------------
(e) Arbitrators. Each arbitrator appointed pursuant to Section
----------- -------
10.15(a) shall be an attorney who practices law in New York City, who has
- --------
substantial experience in sophisticated corporate and securities transactions
generally and in negotiating and drafting "antidilution" provisions of warrants
and convertible securities in particular and who has not, and who is not a
member or employee of any firm which has, rendered legal services to any of the
parties to the dispute or any of their respective Affiliates within the
preceding two years and who has no interest (other than the receipt of customary
fees for his services as an arbitrator) in the matter in dispute.
(f) Other Rights Unaffected. Nothing contained in this Section 10.15
----------------------- -------------
or any other provision hereof is intended to or shall preclude any holder of any
Series A Share or Conversion Securities from exercising or pursuing or otherwise
limiting or affecting the rights or remedies which such holder may have pursuant
to the Purchase Agreement, at law, in equity or otherwise by reason of any
matter which is the subject of or basis for any dispute referred to in Section
-------
10.15(a) (or any other matter), and the dispute resolution mechanisms provided
- --------
for in this Section 10.15 are intended solely as a means of resolving bona fide
------------- ---- ----
disputes concerning the interpretation, application or operation of the
adjustment provisions of Section 10 (other than any such dispute referred to in
----------
the first sentence of Section 10.8(e), which shall be resolved as stated
---------------
therein) or bona fide disputes which the last sentence of Section 10.8(e)
---- ---- ---------------
provides will be resolved pursuant to this Section 10.15, and not for the
-------------
purpose of determining the rights of holders of Series A Shares or Conversion
Securities or the liabilities or obligations of the Corporation, for the purpose
of resolving or settling any claim by any such holder of any breach or
inaccuracy of any representation or warranty of, or any breach or failure to
perform any covenant, agreement or obligation, of the Corporation contained
herein or in the Purchase Agreement or any other Transaction Document (as
defined in the Purchase Agreement) or any other purpose. Without limiting the
generality of the immediately preceding sentence, no decision of any arbitrator
appointed pursuant to this Section 10.15 shall have or be given any res judicata
------------- --- --------
or similar effect in any action, suit or proceeding in which any claim by any
holder of any Series A Share or Conversion Securities of any breach or
inaccuracy of any representation or warranty of, or any breach or failure to
perform any covenant, agreement or obligation, of the Corporation contained
herein or in the Purchase Agreement or any other agreement or instrument is to
be adjudicated.
10.16 Reclassification, Consolidation, Merger or Sale,
------------------------------------------------
Conveyance or Lease or Assets.
- -----------------------------
(a) Adjustments. Unless, as a result of such event, the Series A
-----------
Shares are redeemed in accordance with Section 6.2 by reason of the election of
-----------
the Majority Holders in accordance with such Section, if any of the following
shall occur while any Series A Shares are outstanding:
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<PAGE>
(i) any consolidation, merger, binding share exchange or
reorganization to which the Corporation is party (other than a
consolidation, merger, share exchange or reorganization in which
the Corporation is the continuing corporation and which does not
result in any reclassification of or change in the outstanding
shares of Conversion Securities of any class or series issuable
upon conversion of the Series A Preferred Stock); or
(ii) any sale, conveyance, transfer or lease to another Entity of the
properties and assets of the Corporation as an entirety or
substantially as an entirety,
then the Corporation or the successor or acquiring Entity, as the case may be,
shall thereupon make appropriate provision, reasonably satisfactory to the
Majority Holders, so that the holders of the Series A Shares then outstanding
shall have the right at any time thereafter, upon conversion of the Series A
Shares, to receive the kind and amount of shares of common stock of such
successor or acquiring Entity, other capital stock or equity interests, other
securities and property receivable or purchasable (as the case may be) upon such
reclassification, change, consolidation, merger, sale, conveyance, transfer or
lease as would be received by a holder of the number of shares of Common Stock,
the number of shares of each other class or series of Conversion Stock and the
kind and amount of all other Conversion Securities issuable upon conversion of
such Series A Shares immediately prior to such consolidation, merger, sale,
conveyance, transfer or lease (after giving effect to all adjustments required
by this Section 10, including any adjustment required by Section 10.18 or
---------- -------------
Section 10.19). If the holders of the Common Stock, any other shares of
- -------------
Conversion Stock or any other Conversion Securities of any class or series have
rights of election as to the kind or amount of capital stock or other equity
interests, other securities or other property receivable upon consummation of
any such transaction, then the same right of election shall be given to the
holders of the Series A Preferred Stock. For purposes of this Section 10.16,
---------------
"common stock of the successor or acquiring Entity" shall include capital stock
(or other equity interests if such Entity is not a corporation) of such Entity
of any class which is not preferred as to dividends or assets on liquidation
over any other class or series of stock of such corporation (or other equity
interests of a non-corporate Entity) and which is not subject to redemption and
shall also include any evidences of indebtedness, shares of capital stock,
equity interests or other securities which are convertible into or exchangeable
for any such capital stock (or other equity interests), either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such capital stock
(or other equity interests).
(b) Express Assumption by Successor or Acquiring Corporation. In case
--------------------------------------------------------
of any such merger, consolidation, share exchange, reorganization, or
disposition of assets, the successor or acquiring corporation shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of these Articles to be performed and observed by the
Corporation and all the obligations and liabilities thereunder or otherwise with
respect thereto, subject to such modifications as may be deemed appropriate (as
determined by resolution of the
-55-
<PAGE>
Board) in order to provide for adjustments of shares of the capital stock, other
securities or other property into which Series A Shares are convertible which
shall be as nearly equivalent as practicable to the adjustments provided for in
Section 10. Promptly after the Board makes any such determination, the
- ----------
Corporation shall deliver to each Holder a written notice which shall describe
in reasonable detail the manner and terms so determined.
(c) Provisions Apply Successively. The foregoing provisions of this
-----------------------------
Section 10.16 shall similarly apply to successive reorganizations, mergers,
- -------------
consolidations or disposition of assets.
10.17. Adjustment Relating to Initial Public Offering.
----------------------------------------------
(a) Applicability; Certain Definitions. The provisions of this
----------------------------------
Section 10.17 shall apply if the Corporation consummates a Qualifying IPO within
- -------------
twenty-one months after the Closing Date. For purposes of this Section:
(i) the term "IPO Effective Time" means the time of the closing of the
consummation of a Qualifying IPO;
(ii) the term "Offering Price" means the price to the public per share
of Common Stock in the Qualifying IPO;
(iii) the term "Nine Month Adjusted Initial Conversion Price" means
the greater of (A) Three Dollars and Fifty Cents or (B) one-half
of the Offering Price for such Qualifying IPO (as appropriately
adjusted for any stock split and reverse stock split of the
Common Stock after the Closing Time and prior to the IPO
Effective Time so that such adjusted Offering Price is the price
per share which, if it had been proportionately adjusted for all
such stock splits and reverse stock splits, would have been equal
to the Offering Price); and
(iv) the term "Twenty-One Month Adjusted Initial Conversion Price"
means the greater of (A) Three Dollars and Fifty Cents or (B)
one-third of the Offering Price for such IPO (as appropriately
adjusted for any stock split and reverse stock split of the
Common Stock after the Closing Time and prior to the IPO
Effective Time so that such adjusted Offering Price is the price
per share which, if it had been proportionately adjusted for all
such stock splits and reverse stock splits, would have been equal
to the Offering Price); and
(b) Completion of Qualifying IPO Within Nine Months. If the Company
-----------------------------------------------
consummates a Qualifying IPO within nine months after the Closing Date and if
one-half of the Offering Price is less than Five Dollars per share (as such
amount shall be appropriately adjusted
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<PAGE>
in the event of any stock split or reverse stock split of the Common Stock after
the Closing Time and prior to the IPO Effective Time), then:
(i) the Conversion Price in effect as of the IPO Effective Time shall
be recomputed, giving effect to all adjustments provided for in
Sections 10.1 through 10.8, inclusive, by reason of all events
------------- ----
(including the consummation of the Qualifying IPO, but not
including the issuance of the shares of Common Stock sold to the
public in the Qualifying IPO) occurring after the Closing Time
and as of or prior to the IPO Effective Time, to be the amount
which would have been, as of the IPO Effective Time, the
Conversion Price of a share of Series A Preferred Stock issued
as of the Closing Time and continuing to be outstanding at all
times thereafter through and including the IPO Effective Time if
the initial Conversion Price as of the Closing Time had
originally been equal to the Nine Month Adjusted Initial
Conversion Price;
(ii) the Conversion Rate in effect as of the IPO Effective Time shall
be recomputed, giving effect to all adjustments provided for in
Sections 10.1 through 10.8, inclusive, by reason of all events
------------- ----
(including the consummation of the Qualifying IPO, but not
including the issuance of the shares of Common Stock sold to the
public in the Qualifying IPO) occurring after the Closing Time
and as of or prior to the IPO Effective Time, to be the number of
whole and fractional shares of Common Stock and the kind and
number or amount of other securities, cash and other property
into which a share of Series A Preferred Stock issued as of the
Closing Time and continuing to be outstanding at all times
thereafter through and including the IPO Effective Time would
have been convertible as of the IPO Effective Time if the initial
Conversion Rate as of the Closing Time had originally been equal
to the number of whole and fractional shares of Common Stock
equal to the absolute number determined by dividing (A) the
Stated Value of one share of Series A Preferred Stock, by (B) the
Nine Month Adjusted Initial Conversion Price;
(iii) the adjustment to the Conversion Price that otherwise would be
required by Section 10.1 by reason of such adjustment of the
------------
Conversion Rate shall not be made; and
(iv) effective as of immediately prior to the IPO Effective Time, the
Conversion Rate and the Conversion Price of each Series A Share
shall be the recomputed Conversion Rate calculated under clause
(ii) of this sentence and the recomputed Conversion Price
calculated under clause (i) of this sentence, respectively.
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<PAGE>
For the sake of certainty, it is intended that the adjustments provided for
herein shall in all events be effective prior to the effectiveness of the
conversion of the Series A Preferred Shares pursuant to Section 9.7.
-----------
(c) Completion of Qualifying IPO After Nine Months But Within Twenty-
----------------------------------------------------------------
One Months. If the Company consummates a Qualifying IPO more than nine months
- ----------
after the Closing Date, but within twenty-one months after the Closing Date and
if one-third of the Offering Price is less than Five Dollars per share (as such
amount shall be appropriately adjusted in the event of any stock split or
reverse stock split of the Common Stock after the Closing Time and prior to the
IPO Effective Time), then:
(i) the Conversion Price in effect as of the IPO Effective Time shall
be recomputed, giving effect to all adjustments provided for in
Sections 10.1 through 10.8, inclusive, by reason of all events
------------- ----
(including the consummation of the Qualifying IPO, but not
including the issuance of the shares of Common Stock sold to the
public in the Qualifying IPO) occurring after the Closing Time
and as of or prior to the IPO Effective Time, to be the amount
which would have been, as of the IPO Effective Time, the
Conversion Price of a share of Series A Preferred Stock issued
as of the Closing Time and continuing to be outstanding at all
times thereafter through and including the IPO Effective Time if
the initial Conversion Price as of the Closing Time had
originally been equal to the Twenty-One Month Adjusted Initial
Conversion Price;
(ii) the Conversion Rate in effect as of the IPO Effective Time shall
be recomputed, giving effect to all adjustments provided for in
Sections 10.1 through 10.8, inclusive, by reason of all events
------------- ----
(including the consummation of the Qualifying IPO, but not
including the issuance of the shares of Common Stock sold to the
public in the Qualifying IPO) occurring after the Closing Time
and as of or prior to the IPO Effective Time, to be the number of
whole and fractional shares of Common Stock and the kind and
number or amount of other securities, cash and other property
into which a share of Series A Preferred Stock issued as of the
Closing Time and continuing to be outstanding at all times
thereafter through and including the IPO Effective Time would
have been convertible as of the IPO Effective Time if the initial
Conversion Rate as of the Closing Time had originally been equal
to the number of whole and fractional shares of Common Stock
equal to the absolute number determined by dividing (A) the
Stated Value of one share of Series A Preferred Stock, by (B) the
Twenty-One Month Adjusted Initial Conversion Price;
(iii) the adjustment to the Conversion Price that otherwise would be
required by Section 10.1 by reason of such adjustment of the
------------
Conversion Rate shall not be made; and
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<PAGE>
(iv) effective as of immediately prior to the IPO Effective Time, the
Conversion Rate and the Conversion Price of each Series A Share
shall be the recomputed Conversion Rate calculated under clause
(ii) of this sentence and the recomputed Conversion Price
calculated under clause (i) of this sentence, respectively.
For the sake of certainty, it is intended that the adjustments provided for
herein shall in all events be effective prior to the effectiveness of the
conversion of the Series A Preferred Shares pursuant to Section 9.7.
-----------
10.18. Adjustment Relating to Certain Other Events.
-------------------------------------------
(a) Applicability; Certain Definitions. The adjustment to the
----------------------------------
Conversion Rate and the Conversion Price provided for in Section 10.18(b) shall
be made if either (i) the closing of the consummation of a Qualifying IPO by the
Corporation does not occur at any time within the period of twenty-one
consecutive months after the Closing Date or (ii) a Special Event occurs at any
time prior to a Qualifying IPO. For purposes of this Section, the term "Special
Event" shall mean either (i) a Sale of Company or (ii) the liquidation,
dissolution or winding up of the Corporation. If such adjustment is required
pursuant to clause (i) of the first sentence of this Section 10.18(a), the term
----------------
"Adjustment Time" shall mean 5:00 P.M., New York City time, on the last day of
the period of twenty-one consecutive months after the Closing Date. If such
adjustment is required pursuant to clause (ii) of the first sentence of this
Section 10.18(a), the term "Adjustment Time" shall mean the time of the
- ----------------
particular Special Event.
(b) Adjustment. If an adjustment shall be required by Section
---------- -------
10.18(a), then:
- --------
(i) the Conversion Price in effect as of the Adjustment Date shall be
recomputed, giving effect to all adjustments provided for in
Section 10.1 through 10.8, inclusive, by reason of all events
------------ ----
occurring after the Closing Time and as of or prior to the
Adjustment Time, to be the amount which would have been, as of
the Adjustment Time, the Conversion Price of a share of Series A
Preferred Stock issued as of the Closing Time and continuing to
be outstanding at all times thereafter through and including the
Adjustment Time if the initial Conversion Price as of the Closing
Time had originally been equal to Three Dollars and Fifty Cents;
(ii) the Conversion Rate in effect as of the Adjustment Time shall be
recomputed, giving effect to all adjustments provided for in
Sections 10.1 through 10.8, inclusive, by reason of all events
------------- ----
occurring after the Closing Time and as of or prior to the
Adjustment Time, to be the number of whole and fractional shares
of Common Stock and the kind and number or amount of other
securities, cash and other property into which a share of Series
A Preferred Stock issued as of the Closing Time and continuing to
be outstanding at all times thereafter through and including the
Adjustment Time would have
-59-
<PAGE>
been convertible as of the Adjustment Time if the initial
Conversion Rate as of the Closing Time had originally been equal
to the number of whole and fractional shares of Common Stock
equal to the absolute number determined by dividing (A) the
Stated Value of one share of Series A Preferred Stock, by (B)
Three Dollars and Fifty Cents;
(iii) the adjustment to the Conversion Price that otherwise would be
required by Section 10.1 by reason of such adjustment of the
------------
Conversion Rate shall not be made; and
(iii) effective as of the Adjustment Time, the Conversion Rate and
the Conversion Price of each Series A Share shall be the
recomputed Conversion Rate calculated under clause (ii) of the
immediately preceding sentence and the recomputed Conversion
Price calculated under clause (i) of this sentence, respectively.
(c) Subsequent Adjustment Events. From and after the effective time
----------------------------
of any adjustment made pursuant to this Section 10.18, the Conversion Rate and
-------------
Conversion Price of each share of Series A Preferred Stock shall continue to be
subject to further adjustment as provided in Section 10.
----------
10.19. Additional Adjustment Relating to Certain Changes of
----------------------------------------------------
Control.
- -------
(a) Applicability. The adjustment provided for in Section 10.19(b)
------------- ----------------
shall be made if a Change of Control occurs prior to a Qualifying IPO and while
any Notes are outstanding. In the event of the occurrence of such a Change of
Control (i) the right to convert the 90% of the outstanding shares of Series A
Preferred Stock subject to redemption under Section 6.3 shall terminate; (ii)
-----------
the Conversion Rate of each of the balance of 10% the outstanding shares of
Series A Preferred Stock shall be adjusted, effective as of the date the notice
by the Corporation to the holders of the Series A Shares pursuant to Section
-------
6.3(b) is given, to be eleven times the number of whole and fractional shares of
- ------
Common Stock and eleven times the kind and number or amount of other securities,
cash and other property into which a share of Series A Preferred Stock was
convertible immediately before such date, giving effect to all adjustments
provided for in Sections 10.2 through 10.8, inclusive, and Section 10.18 by
------------- ---- -------------
reason of all events (including the adjustment under Section 10.18 by reason of
-------------
such Change of Control) after the Closing Time and on, as of or prior to such
date; and (iii) all outstanding shares of Series A Preferred Stock adjusted as
provided in clause (ii) of such sentence shall (after giving effect to such
adjustment) automatically be converted in accordance with Section 9, with the
---------
same effect for purposes of Section 9 as if each holder of such shares gave a
---------
notice of conversion pursuant to Section 9.2(a) with respect to the conversion
--------------
of all such shares then held by such holder, provided that all adjustments to
--------
the Conversion Rate and the Conversion Price required pursuant to Section 10 by
----------
reason of any event, transaction or action occurring on or before the date of
such conversion shall be made, whether or not the effectiveness of such
adjustment is stated by the provision requiring such adjustment to be after the
date of such conversion and even if the calculation, nature or size of the
adjustment is
-60-
<PAGE>
dependent on facts or events occurring, or not ascertainable until, after such
date, including all adjustments required by Section 10.18, and the Corporation
-------------
shall, to the extent necessary, comply with Section 10.8(d). The Series A Shares
------------
to be included within the ninety percent of the Series A Shares subject to
redemption under Section 6.3 and to be included within the ten percent of the
-----------
Series A Shares to have their Conversion Rate adjusted and then automatically
converted as provided in this Section 10.19 shall be selected on a pro rata
------------- --- ----
basis from among all holders of the Series A Shares.
Section 11. Voting Rights. The Series A Shares shall not carry voting rights
-------------
except as provided in these Articles and except for any voting rights to which
the holders thereof may be or become entitled under the Business Corporation Act
of the State of Colorado as in effect from time to time (or any successor
statutory provisions) or other applicable law. The foregoing shall not prevent
the Corporation from granting, by contract or otherwise, to any holder or
holders of any Series A Shares any consent or approval, veto or similar rights
of any nature whatsoever. Without the consent of the holders of at least a
majority of the number of shares of Series A Preferred Stock then outstanding:
(i) the Corporation will not amend, alter or repeal (whether by amendment,
merger, consolidation or otherwise) (A) these Articles, or (B) the Series A
Articles of Amendment;
(ii) the Corporation shall not, and shall cause each Subsidiary not to,
establish, create or acquire any Subsidiary that is not both a Wholly Owned
Subsidiary and a Restricted Subsidiary, or consummate or take, or assist any one
or more of the holders of its Common Stock or other securities in consummating
or taking, any transaction or action which would, if consummated or taken,
result in any Subsidiary (that continues to be a Subsidiary after such
transaction or action) ceasing to be both a Wholly Owned Subsidiary and a
Restricted Subsidiary;
(iii)the Corporation will not amend, alter or repeal (whether by amendment,
merger or consolidation or otherwise) any of the provisions of its Amended
Restated Articles of Incorporation or By-laws, or any resolution of the Board or
any other instrument establishing and designating any capital stock of the
Corporation and determining the relative rights, privileges, powers or
preferences thereof so as to effect any adverse change in the rights,
privileges, powers, preferences, qualifications, limitations or restrictions of
the Series A Preferred Stock or the holders of Series A Shares;
(iv) the Corporation shall not (A) authorize, create, designate or issue
any Senior Stock or Parity Stock, or (B) issue any shares of Series A Preferred
Stock except on the Closing Date pursuant to the Purchase Agreement or (C)
combine, subdivide or recapitalize the Series A Preferred Stock;
(v) the Corporation shall not, and shall cause each Subsidiary not to,
enter into any agreement with any Person which, in the absence of a default
thereunder, would prevent the Corporation from fully performing on a timely
basis any of its obligations with respect to the Series A Preferred Stock;
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<PAGE>
(vi the Corporation shall not, and shall cause each Subsidiary not to,
consolidate with, merge with or into, conclude any binding share exchange with,
sell, lease or otherwise dispose of (in one or more transactions) all or
substantially all of its assets to any Person or enter into a binding share
exchange or similar transaction with any Person other than (A) the merger of a
Restricted Subsidiary into the Corporation, with the Corporation being the
surviving Person, (B) a disposition of assets of a Restricted Subsidiary to the
Corporation or another Restricted Subsidiary or (B) a merger or consolidation
exclusively between Restricted Subsidiaries; or
(vi) the Corporation shall not consummate or take, or assist any one or
more of the holders of its Common Stock or other securities in consummating or
taking, any transaction or action which would, if consummated, result in a
Change of Control or Sale of the Company.
Section 12. Headings. The headings of the various sections and subsections
--------
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
Section 13. Terms Generally. References herein to "these Articles" are to
---------------
the Series A Articles of Amendment as the same may be amended from time to time
in accordance with Section 19. The definitions of terms contained herein shall
----------
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The words "herein", "hereof" and "hereunder" and words of similar import refer
to these Articles in its entirety and not to any part hereof, unless the context
shall otherwise require. All references herein to Sections shall be deemed
references to Sections of these Articles, unless the context shall otherwise
require. Unless the context shall otherwise require, any references to any
agreement or other instrument or to any statute or regulation or any specific
section or other provision thereof are to it as amended and supplemented from
time to time (and, in the case of a statute or regulation or specific section or
other provision thereof, to any successor to such statute, regulation, section
or other provision). Unless otherwise expressly provided herein or unless the
context shall otherwise require, any provision of this Agreement using a defined
term (such as "Subsidiary" or "Wholly Owned Subsidiary") which is based on a
specified relationship between one Person and one or more other Persons shall,
as of any time, refer to such Persons who have the specified relationship as of
that particular time. Any reference in this Agreement to a "day" or number of
"days" (without the explicit qualification of "Business") shall be interpreted
as a reference to a calendar day or number of calendar days. Unless the context
clearly indicates otherwise, "or" shall not be exclusive and means "and/or."
When used with reference to any Right or Convertible Security, the term
"exercise" means to exercise the right to subscribe for, purchase or otherwise
acquire shares of Common Stock represented by such Right or the right to
exchange or convert such Convertible Security for or into shares of Common Stock
represented by such Convertible Security, and variants of such word (including
"exercised" and "exercisable") shall have correlative meanings. Whenever used
with respect to any Additional Share of Common Stock or any other share of
Common Stock, the word "issue" includes any issuance, sale or other method of
transfer or delivery of such share, whether such share is newly issued or is a
treasury share and variants of such word (including "issued", "issuance" or
"issuable") used with respect to any Additional Share of Common Stock or any
other share of Common Stock shall have
-62-
<PAGE>
correlative meanings; therefore, any provision of these Articles which is stated
to be applicable if the Corporation issues or shall issue any share is
applicable both to a newly issued share and to a treasury share sold or
otherwise transferred or delivered. The word "property" shall include assets or
property of any kind, real, personal, tangible or intangible.
Section 14. Actions on Non-Business Days. If any action or notice is to be
----------------------------
taken or given on or by a particular calendar day, and such calendar day is not
a Business Day, then such action or notice shall be deferred until, and may be
taken or given on, the next Business Day.
Section 15. Severability. If any provision of these Articles shall be
------------
illegal, invalid or unenforceable by reason of any rule of law or public policy,
that provision will be enforced to the maximum extent permissible so as to
effect the intent thereof and the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby. In
any such case, if requested by the Majority Holders, the Corporation will
negotiate in good faith to amend these Articles to replace the illegal, invalid
or unenforceable language with legal, valid and enforceable language which as
closely as possible reflects such intent.
Section 16. Waivers. Any provision of these Articles that prohibits, limits
-------
or restricts actions by the Corporation, or imposes obligations on the
Corporation, may be waived in whole or in part, or the application of all or any
part of such provision in any particular circumstance or generally may be
waived, in each case with the consent of the Majority Holders, either in writing
or by vote at a meeting called for such purpose at which the holders of Series A
Preferred Stock shall vote as a separate class, unless such waiver, by its
terms, has an adverse effect upon the shares of Series A Preferred Stock of any
holder that does not affect all shares of Series A Preferred Stock on an equal
per share basis, in which case such waiver shall require the prior approval of
such holder.
Section 17. Defects in Notices. No failure on the part of the Corporation to
------------------
give any notice required by any provision of these Articles, nor any delay or
defect in any such notice which is given or in the giving thereof, shall
adversely affect the rights which the holders of the Series A Preferred Stock
would have if such notice had been duly given on a timely basis, and such
holders shall be entitled to exercise such rights from and at any time after
they acquire actual knowledge of the matters required to be set forth in such
notice.
Section 18. Specific Performance; Injunctive Relief. In addition to any
---------------------------------------
other rights or remedies which may be available at law, in equity or by
contract, any holder from time to time of shares of Series A Preferred Stock
shall be entitled to obtain in any court of competent jurisdiction specific
performance of, or an injunction or other order restraining any act or proposed
act by the Corporation which would result in a violation of, any of the terms or
provisions of these Articles.
Section 19. Amendment. The Series A Articles of Amendment may be amended
---------
from time to time by the Board with the affirmative vote at a meeting duly
called and held or written consent of the Majority Holders; provided, however,
-------- -------
any such amendment which, by its terms, would have an adverse effect upon the
shares of Series A Preferred Stock of any holders that does not affect all
shares of Series A Preferred Stock on an equal per share basis shall also
require the prior approval
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<PAGE>
of such holder. Unless otherwise required by mandatory provisions of applicable
law, no vote or consent of the holders of any other class or series of the
Corporation's stock shall be necessary.
Section 20. Decisions by Holders Generally. Unless otherwise expressly
------------------------------
provided herein, all decisions and determinations required or permitted to be
made hereunder by the holders collectively or as a class (including any decision
as to whether to give any consent or approval) shall be made by the Majority
Holders. To the maximum extent permitted by law, each Person who is or shall
become a holder of any Series A Share waives all fiduciary duties to such
Person, if any, that the Majority Holders, the Majority Holders or any other
holder otherwise would or might have in its or their capacities as such.
Dated: March 17, 1999
CONVERGENT COMMUNICATIONS, INC.
By: /s/ Keith V. Burge
----------------------------------
Name: Keith V. Burge
Title: President
By: /s/ Martin E. Freidel
----------------------------------
Name: Martin E. Freidel
Title: Assistant Secretary
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<PAGE>
EXHIBIT 4.6
INVESTOR RIGHTS AGREEMENT
-------------------------
INVESTOR RIGHTS AGREEMENT, dated March 17, 1999, between Convergent
Communications, Inc., a Colorado corporation (the "Company"), and each of the
entities named on Exhibit A hereto (each an "Initial Investor" and,
---------
collectively, the "Initial Investors").
The Company and the Initial Investors have entered into that certain
Securities Purchase Agreement, dated as of the date hereof, pursuant to which
each of the Initial Investors is purchasing from the Company, simultaneously
with the execution and delivery of this Agreement on the date hereof, certain
securities of the Company that are convertible into or exercisable for shares of
the Company's common stock. The Company has agreed to grant the Investors
certain rights with respect to such securities and the underlying common stock
of the Company.
In consideration of the premises and the covenants and agreement herein
contained, in order to induce the Initial Investors to enter into such
Securities Purchase Agreement and consummate the transactions contemplated
thereby and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows.
ARTICLE I
DEFINITIONS
Section 1.1 As used in this Agreement, the following terms have the
-----------
meanings indicated:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act. The term "affiliated" (whether or not
capitalized) shall have a correlative meaning. For purposes hereof, the Company
shall not be deemed to be an Affiliate of any Initial Investor or any Affiliate
of any Initial Investor.
"Agreement" means this Investor Rights Agreement, as amended from time to
time in accordance with the terms hereof.
"Beneficial Ownership" shall mean the power, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, to
(i) vote, or to direct the voting of, a security, and (ii) dispose, or to direct
the disposition of, such security.
"Beneficially Owns" shall mean having Beneficial Ownership.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in either New York, New York, or the city and state
in which the principal executive offices of the Company within the United States
are located are authorized or obligated by law or executive order to close.
"Commencement Date" means the earlier of (i) 180th day after the effective
date of an IPO and (ii) the second anniversary of the First Closing Date.
<PAGE>
"Commission" means the Securities and Exchange Commission or any other
federal agency then administering the Securities Act.
"Common Stock" means the Common Stock, no par value, per share, of the
Company and any capital stock into which such Common Stock may be reclassified
or otherwise changed, and, unless the context otherwise requires, such term
shall also include all securities of the Company or any other issuer issued to
the holders of shares of Common Stock as a dividend or other distribution on, in
exchange for, in replacement of or upon the exercise of any conversion, purchase
or subscription right associated with any shares of Common Stock.
"Common Stock Rights" shall mean any Rights to subscribe for, purchase or
otherwise acquire any share or shares of Common Stock.
"Company Indemnified Parties" has the meaning set forth in Section 6.2.
-----------
"Convertible Securities" means evidences of indebtedness, shares of capital
stock or other securities or obligations that are convertible into or
exchangeable, with or without payment of additional consideration in cash or
property, for any Common Stock, either immediately or upon the occurrence of a
specified date or a specified event or the satisfaction or happening of any
other condition or contingency.
"Demand Registration" has the meaning set forth in Section 2.1.
-----------
"Disadvantageous Effect" has the meaning set forth in Section 2.7.
-----------
"Exchange Act" means the Securities and Exchange Act of 1934, as amended,
or any successor federal statute, and (unless the context otherwise indicates)
the rules and regulations of the Commission promulgated thereunder, as they each
may, from time to time, be in effect.
"Existing Registration Rights" mean, as of any time of determination,
contractual commitments of the Company that either (i) existed as of February 1,
1999, were disclosed on a schedule to the Purchase Agreement and remain in
effect as of such time, entitling Persons to exercise piggy-back registration
rights if the Company registers any of its securities for itself or for others
or (ii) are granted, on or after the Closing Date (and in consideration of the
release by such Persons of other registration rights, if any, to which they may
be entitled), to Persons who were holders on the First Closing Date of Existing
Registration Rights within the scope of clause (i) of this defintion to
participate by registration of shares of Common Stock held by them in the IPO or
in the first registered offering of Common Stock by the Company which is made
after the IPO and for which a Registration Statement becomes effective within
six months after the IPO.
"First Closing Date" has the meaning given to such term in the Purchase
Agreement.
2
<PAGE>
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indemnified Party" has the meaning set forth in Section 6.3.
-----------
"Indemnifying Party" has the meaning set forth in Section 6.3.
-----------
"Initial Investors" has the meaning set forth in the introductory
paragraph.
"Initiating Investor" has the meaning set forth in Section 2.2.
-----------
"Insiders" means each of the "Permitted Holders," as such term is defined
in Section 101 of the Indenture, dated as of April 2, 1998, between the
Corporation and Norwest Bank Colorado, N.A., a national banking association, as
Trustee, as in effect on the date hereof, regardless of any subsequent
amendment, modification, termination or expiration thereof.
"Investors" means
(i) the Initial Investors,
(ii) each Second Purchaser,
(iii) each other Person, other than the Company or an Affiliate of
the Company, who at any time acquires any Registrable Shares
directly or indirectly from any Initial Investor or Second
Purchaser in a transaction or chain of transactions not
involving a public offering within the meaning of and
registered under the Securities Act, and who
(A) so acquires at least 15% of the original number of
Registrable Shares or
(B) is a constituent stockholder, partner or member (including
limited partners and retired partners or members) of an
Investor to whom Registrable Shares are distributed as part
of a distribution by such Investor to its constituent
stockholders, partners or members generally, or is a
liquidating trust established in connection with the
dissolution or winding up of any Investor;
(C) and who was assigned by the Investor from whom such
Registrable Shares were acquired the registration rights of
an Investor hereunder with respect to such Registrable
Shares, and
3
<PAGE>
(iv) any Investor's successors, Affiliates and, in the case of any
Investor who is a natural person, such individual's spouse,
ancestors, lineal descendants, siblings, executors,
administrators and heirs of who acquire Registrable Shares by
gift, will or intestate succession,
in each of the foregoing cases, if such Person (if not an Initial Investor)
agrees in writing to be bound by this Agreement as an Investor and for so long
as such Person continues to hold any Registrable Shares.
"IPO" means the consummation of an initial public offering of the Company's
stock registered under the Securities Act.
"Losses" has the meaning set forth in Section 6.1.
-----------
"Majority Investors" means any one or more Investors who hold a total
number of Registrable Shares equal to at least a majority of the aggregate
number of Registrable Shares then held by all Investors.
"Majority Selling Investors" means, with respect to any Demand Registration
or Piggyback Registration, any one or more Selling Investors who hold a total
number of Registrable Shares equal to at least a majority of the aggregate
number of Registrable Shares which are held by all Selling Investors and which
are or are to be included in such Demand Registration or Piggyback Registration.
"New Securities" means, subject to Section 7.4, any newly issued shares of
capital stock of the Company, including Common Stock and any class or series of
preferred stock, whether authorized or not, and Rights to acquire shares of
Common Stock or preferred stock.
"New Securities Purchaser" has the meaning set forth in the definition of
"Preissuance Notice" set forth below in this Section 1.1.
-----------
"Notes" means the Corporation's 13% Series B Senior Notes due 2008 issued
under the Indenture, dated as of April 2, 1998, between the Corporation and
Norwest Bank Colorado, N.A., a national banking association, as Trustee.
"Number of Common Shares Outstanding" has the meaning set forth in Section
-------
7.1.
- ---
"Pari Passu Registration Rightsholder" means:
(i) as used in Section 2.6 or Section 2.10 with respect to any Demand
----------- ------------
Registration requested by the Investors, a Person (A) who has, at
the time of such request, the right, under a then-effective
written contract entered into with the Company prior to the First
Closing Date and disclosed on a schedule
4
<PAGE>
to the Purchase Agreement, to require shares of Common Stock then
owned by such Person to be included in such Demand Registration
and (B) who exercises that right with respect to all or some of
those shares in accordance with the terms of such contract, if
--
and to the extent a breach of such contract by the Company would
-----------------
result from the reduction, in the circumstances contemplated by
Section 2.6, of the number of such shares requested to be
-----------
included by such Person in such Demand Registration before any
reduction in the number of Registrable Shares sought to be
included in such Demand Registration by the Investors; or
(ii) as used in Section 3.2(b) with respect to any Piggyback
--------------
Registration in which any Investors have requested inclusion of
Registrable Shares in accordance with Section 3.1, a Person (A)
-----------
who has, at the time of such request, the right, under a then-
effective written contract entered into with the Company prior to
the First Closing Date and disclosed on a schedule to the
Purchase Agreement or granted after the First Closing Date
without violation of Section 8.3, to require shares of Common
-----------
Stock then owned by such Person to be included in such Piggyback
Registration and (B) who exercises that right with respect to all
or some of those shares in accordance with the terms of such
contract, if and to the extent a breach of such contract by the
--------------------
Company would result from the reduction, in the circumstances
contemplated by Section 3.2(b), of the number of such shares
--------------
requested to be included by such Person in such Piggyback
Registration before any reduction in the number of Registrable
Shares sought to be included in such Piggyback Registration by
the Investors.
"Person" means any individual, corporation, limited liability company,
general or limited partnership, joint venture, association, joint stock company,
trust, unincorporated business or organization, government or agency or
political subdivision thereof, or other entity, whether acting in an individual,
fiduciary or other capacity.
"Piggyback Registration" has the meaning set forth in Section 3.1.
-----------
"Preissuance Notice" shall be a written notice given to the Investors
pursuant to Section 7.1 no later than ten days prior to the date the Company
-----------
plans to issue New Securities. Each Preissuance Notice shall (i) specify the
kind and amount of New Securities proposed to be issued, (ii) if such New
Securities consist of or include Common Stock Rights, briefly describe the terms
of such Common Stock Rights, (iii) identify each Person to whom such New
Securities are proposed to be issued (each a "New Securities Purchaser"), if
then known by the Company, (iv) state the method or manner of issuance, (v)
state the kind(s) and amount(s) of consideration for which such New Securities
are proposed to be issued and the determination of the Company's Board of
Directors of the fair market value of any such consideration other than cash
and (vi) describe the other material terms and conditions of the proposed
issuance of New Securities.
5
<PAGE>
"Proposed Purchaser" shall have the meaning assigned to it in Section
-------
9.6(b).
- ------
"Proposed Sale" shall have meaning assigned to it in Section 9.6(a).
--------------
"Proposed Sale Notice" shall have the meaning assigned to it in Section
-------
9.6(b).
- ------
"Purchase Agreement" means the Securities Purchase Agreement, dated as of
the date hereof, between the Corporation and the Initial Investors, as the same
may be amended from time to time in accordance with its terms.
"Qualified Affiliate" means, with respect to any transfer of Common Stock
by any Insider, any Immediate Family Member of such Insider or a trust described
in Section 664 of the Internal Revenue Code of 1986, as amended, of which the
income beneficiaries consist exclusively of one or more of such Insider and the
Immediate Family Members of such Insider, provided that such transfer is made
without consideration and the transferee, by written instrument reasonably
satisfactory to the Majority Investors, agrees to be bound by Section 9.6 of
-----------
this Agreement as an "Insider" hereunder. An "Immediate Family Member" of any
natural person any other natural person means such person's spouse, ancestors,
lineal descendants, siblings, executors, administrators and heirs of who acquire
Common Stock by gift, will or intestate succession.
"Qualifying IPO" means the consummation of a single public offering of the
Company's stock registered under the Securities Act generating gross proceeds to
the Company of at least $50 million.
"Qualifying Rights" means, as of any time, shares of the Series A Preferred
Stock and the Warrants, and also includes all other Common Stock Rights which,
by their terms, are exercisable for shares of Common Stock only upon the
payment, conversion, surrender, exchange or delivery by the holder of additional
consideration in cash or property in an amount or having a fair market value per
share of Common Stock which, as of such time, is equal to or less than the fair
market value per share of the Common Stock determined as of such time.
"Registrable Shares" means (i) any and all shares of Common Stock issued
or issuable upon conversion of any Series A Share or upon exercise, conversion
or exchange of any Warrant, (ii) any and all shares of Common Stock, and any
shares of Common Stock issued or issuable upon the exercise of any Rights or
other securities, acquired by or issuable to the Investors pursuant to Article
VII of this Agreement, (iii) any and all other shares of Common Stock held on
the date of this Agreement by any Investor or any of its Affiliates and (iv) any
other shares of Common Stock issued in respect of any such shares (because of
stock splits, stock dividends, reclassifications, recapitalizations, or similar
events); provided, however, that shares of Common Stock which are Registrable
-------- -------
Shares shall cease to be Registrable Shares (x) upon any sale pursuant to a
Registration Statement or Rule 144 under the Securities Act, (y) upon any sale
in any manner to a Person which is not entitled to the rights provided by this
Agreement or (z) with respect to the Registrable Shares held by any specific
Investor, when all such Registrable Shares held by such Investor either (1) may
6
<PAGE>
be sold by such Investor under Rule 144 under the Securities Act without
limitation as to manner of sale and without any limitation as to volume or (2)
are equal to or less than the number that may be sold by such Investor under
Rule 144(e) within any three-month period. For purposes of this Agreement, any
Person shall be deemed to hold, as of any time, (A) all issued and outstanding
shares of Common Stock, Registrable Shares or other securities then held or
deemed to be held by such Person, (B) all additional shares of Common Stock,
Registrable Shares or other securities which would then be held by such Person
if it were assumed that all shares of Series A Preferred Stock and Warrants, if
any, then held or deemed to be held by such Person had been duly and effectively
exercised in full at and effective as of such time, (C) all additional shares of
Common Stock, Registrable Shares or other securities which would then be held by
such Person if it were assumed that all Rights, if any, then held or deemed to
be held by such Person had been duly and effectively exercised in full at and
effective as of such time and (D) all additional shares of Common Stock,
Registrable Shares or other securities, if any, which such Person then has a
right to purchase pursuant to the preemptive rights granted pursuant to this
Agreement by virtue of any prior exercise of such preemptive rights, assuming,
in the case of each of clauses (B) and (C), that all adjustments to the kind,
number and amount of shares of capital stock or other securities issuable upon
exercise, exchange or conversion of any of the shares of Series A Preferred
Stock, Warrants or other Rights referred to in such clause required by reason of
any event or transaction occurring at or prior to such time had been duly and
effectively made as and when required by the terms thereof.
"Registration Expenses" shall mean, with respect to any Demand Registration
or Piggyback Registration all (i) registration, qualification and filing fees,
(ii) fees and expenses of compliance with securities or blue sky laws (including
the reasonable fees and disbursements of counsel for any underwriters, dealers
or placement agents in connection therewith), (iii) printing expenses (or
comparable duplication expenses) and escrow fees, (iv) internal expenses of the
Company (including all salaries and expenses of officers and employees
performing legal or accounting duties), (v) fees and disbursements of counsel
for the Company, (vi) fees and expenses for independent certified public
accountants retained by the Company (including all fees and expenses associated
with special audits or the delivery by independent certified public accountants
of a "cold comfort" letter or letters), (vii) fees and expenses of any special
experts retained by the Company in connection with such registration, (viii)
fees and expenses of listing the Registrable Shares on a securities exchange or
otherwise in connection with subdivision (r) of Section 4.1, (ix) the reasonable
-----------
fees and expenses of a single firm of legal counsel for the Investors
participating in such Demand Registration or Piggyback Registration up to
$75,000 in connection with a Demand Registration and $25,000 in connection with
a Piggyback Registration and (x) all other reasonable fees, costs, expenses and
disbursements incurred in connection with or incident to the Company's
compliance with Article IV. Registration Expenses do not include underwriting
commissions or discounts payable in respect to Registrable Shares of an Investor
included in a Demand Registration or Piggyback Registration.
"Registration Statement" means a registration statement of the Company
under the Securities Act on any form for which the Company then qualifies and
which permits the sale thereunder of the number of Registrable Shares (and any
other securities of the Company) to be included therein in accordance with this
Agreement by the Selling Investors and, in the case of the Registrable Shares,
7
<PAGE>
according to the method(s) of distribution determined in accordance with this
Agreement and in the case of any other securities covered thereby, according to
the plan(s) of distribution described therein, including all exhibits and
schedules to, all financial statements included in or otherwise filed with, and
all documents incorporated by reference in any such registration statement, in
each case as amended or supplemented as of any reference date.
"Rights" means any options, warrants, convertible or exchangeable
securities or other rights, however denominated, to subscribe for, purchase or
otherwise acquire any equity interest or other security of any class or series,
with or without payment of additional consideration in cash or property, either
immediately or upon the occurrence of a specified date or a specified event or
the satisfaction or happening of any other condition or contingency.
"Second Purchasers" has the meaning given to that term in the Purchase
Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and (unless the context otherwise indicates) the
rules and regulations of the Commission promulgated thereunder, as they each
may, from time to time, be in effect.
"Selling Investors" means, with respect to any Demand Registration or
Piggyback Registration, any Investors holding any Registrable Shares which are
or are to be included in such Demand Registration or Piggyback Registration in
accordance with this Agreement.
"Series A Preferred Stock" means the Series A Senior Convertible Preferred
Stock, no par value, of the Company.
"Series A Share" means, as of any time, any share of Series A Preferred
Stock then issued and outstanding.
"Shelf Registration" has the meaning set forth in Section 2.11.
------------
"Tag-Along Notice" shall have the meaning assigned to it in Section 9.6(c).
--------------
"Tag-Along Rights" shall have the meaning assigned to it in Section 9.6(a).
--------------
"Tag-Along Shares" shall have the meaning assigned to it in Section 9.6(c).
--------------
"Tendered Sales" shall have the meaning assigned to it in Section 9.6(b).
--------------
"Warrant Agreement" means the Warrant Agreement, dated the date hereof,
between the Company and the Initial Investors, as it may be amended from time to
time in accordance with its terms.
8
<PAGE>
"Warrants" means the Warrants to purchase shares of Common Stock issued and
sold by the Company to, and purchased by, the Initial Investors and the Second
Purchasers pursuant to the Securities Purchase Agreement and the Warrant
Agreement.
"Warrant Securities" means, with respect to any Warrant at any time, each
class and series of Conversion Stock, each class, series and issue of any other
securities, and any Rights with respect to any of such Conversion Stock or other
securities, any shares, number or other amount of which at such time are
deliverable upon exercise of such Warrant.
"Warrant Stock" means, with respect to any Warrant at any time, the Common
Stock, each other class or series of capital stock and any Rights with respect
to any of the foregoing any shares, number or other amount of which at such time
is deliverable upon exercise of such Warrant.
Section 1.2 Terms Generally; Certain Rules of Construction.
----------- ----------------------------------------------
(a) The definitions of terms contained in this Agreement shall apply
equally to both the singular and plural forms of the terms defined and words in
the singular include the plural and words in the plural include the singular.
(b) Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms.
(c) The words "include", "includes" and "including" shall be deemed to
be followed by the phrase "without limitation." The words "herein", "hereof"
and "hereunder" and words of similar import refer to this Agreement in its
entirety and not to any part hereof unless the context shall otherwise require.
(d) All references herein to Sections shall be deemed references to
Sections of this Agreement unless the context shall otherwise require.
(e) Unless otherwise expressly provided herein or unless the context
shall otherwise require, any references as of any time to any agreement or other
Contract, instrument or document or to any statute or regulation or any specific
section or other provision thereof are to it as amended and supplemented through
such time (and, in the case of a statute or regulation or specific section or
other provision thereof, to any successor of such statute, regulation, section
or other provision).
(f) Any reference herein to a "day" or number of "days" (without the
explicit qualification of "Business") shall be interpreted as a reference to a
calendar day or number of calendar days. If any action or notice is to be taken
or given on or by a particular calendar day, and such calendar day is not a
Business Day, then such action or notice shall be deferred until, or may be
taken or given on, the next Business Day.
9
<PAGE>
(g) Unless otherwise expressly provided herein or unless the context
shall otherwise require, any provision of this Agreement using a defined term
(by way of example and without limitation, such as "Investors") which is based
on a specified characteristic, qualification, feature or status shall, as of any
time, refer only to such Persons who have the specified characteristic,
qualification, feature or status as of that particular time.
(h) For purposes of this Agreement, (i) any acquisition or transfer of
any Rights to subscribe for, purchase or otherwise acquire any Registrable
Shares shall also constitute an acquisition or transfer or proposed transfer of
the Registrable Shares issuable upon the exercise, exchange or conversion
thereof and (ii) any Person who holds any Right to subscribe for, purchase or
otherwise acquire any Common Stock, Registrable Shares or other securities shall
be deemed to hold all such Common Stock, Registrable Shares or other securities
which then would be issuable if it were assumed that such Right were then duly
exercised, exchanged or converted in full. When used with reference to any
Right, the term "exercise" shall mean to exercise the right to exchange or
convert such Right for or into, subscribe for, purchase or otherwise acquire
shares of Common Stock represented by such Right, and variants of such word
(including "exercised" and "exercisable") shall have correlative meanings.
(i) The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
ARTICLE II
DEMAND REGISTRATION
Section 2.1 Right to Demand Registration. The Investors shall have the
----------- ----------------------------
right to require the Company to register Registrable Shares under the Securities
Act (a "Demand Registration"), which right shall be exercisable in the manner
set forth in this Article II at any time or from time to time on or after the
----------
Commencement Date until the third anniversary of the First Closing Date. For
the sake of certainty, if a request for a Demand Registration is properly made
pursuant to the first sentence of Section 2.2 at any time before the third
anniversary of the First Closing Date, then the rights and obligations of the
Investors and the Company under this Agreement with respect to Demand
Registration shall survive such third anniversary.
Section 2.2 Registrations. Any Investor or Investors holding in the
----------- -------------
aggregate more than one-third of the Registrable Shares (the "Initiating
Investors") then held by all Investors may request, in writing, that the Company
effect a Demand Registration on any form available for such registration under
the Securities Act, of Registrable Shares constituting at least 33% of the
Registrable Shares owned by the Investors. If the Initiating Investors intend
to distribute the Registrable Shares by means of an underwriting, they shall so
advise the Company in their request. In the event such Demand Registration is
underwritten, the right of any other Investor to participate in such Demand
Registration shall be conditioned on such Investor's participation in such
underwriting on the same terms as the Initiating Investors. Upon receipt of any
such request, the
10
<PAGE>
Company shall promptly give written notice of such proposed registration to
all other Investors. Such Investors shall have the right, by giving
written notice to the Company within thirty days after the Company
provides its notice, to elect to have included in such Demand Registration such
of their Registrable Shares as such Investors may request in such notice of
election. Subject to Section 2.3, the Investors shall be entitled in the
-----------
aggregate to require the Company to effect two Demand Registrations pursuant to
this Section 2.2, one of which may (but need not) be a Shelf Registration as set
-----------
forth in Section 2.11 and, except as provided in Section 5.1, a Demand
------------ -----------
Registration shall not be deemed to have been effected unless such registration
has been declared or ordered effective and the securities offered pursuant to
such registration have been sold.
Section 2.3 Continuing Demand Registration. Subject to Sections 2.6,
----------- ------------------------------ ------------
2.10 and 4.5, holders of Existing Piggyback Rights may participate in the
- ---- ---
Investors' Demand Registrations; provided, however, that if the number of
-------- -------
Registrable Shares sought to be included by the Investors in the first of their
two Demand Registrations is reduced pursuant to Section 2.6, by reason of the
-----------
inclusion in such Demand Registration of shares of Common Stock held by any
Person(s) other than Investors, by more than 25%, the registration shall not
count as a Demand Registration and if the number of Registrable Shares sought to
be included by the Investors in the second of their two Demand Registrations is
reduced pursuant to Section 2.6, by reason of the inclusion in such Demand
-----------
Registration of shares of Common Stock held by any Person(s) other than
Investors, by more than 10%, the registration shall not count as a Demand
Registration.
Section 2.4 Reasonable Efforts by the Company. Subject to Section 2.5,
----------- --------------------------------- -----------
if a Demand Registration is requested pursuant to Section 2.2 the Company shall,
-----------
as soon as practicable after the period of thirty days referred to in such
Section, file with the Commission and use its reasonable efforts to cause to
become effective a Registration Statement which shall cover the Registrable
Shares requested to be registered by the Selling Investors and shall take all
other actions (including those required by Article IV) as may be necessary or
----------
advisable to permit the Selling Investors to dispose of all such Registrable
Shares requested to be included in such Demand Registration in accordance with
the intended method(s) of distribution and in compliance with the Securities Act
and state "blue sky" and securities laws.
Section 2.5 Withdrawals. The Majority Selling Investors may, at any
----------- -----------
time and from time to time reasonably in advance of the planned date of
consummation of the sale or other distribution of Registrable Shares pursuant to
any Demand Registration, (i) permit any Selling Investor to withdraw, in whole
or in part, from participation in such Demand Registration, (ii) permit any
Investor who was not originally a Selling Investor to become a Selling Investor
and include in such Demand Registration any or all of such Investor's
Registrable Shares or (iii) otherwise increase or decrease the number of
Registrable Shares to be included in such Demand Registration; provided,
--------
however, that if any such decrease would result in the reduction of the number
- -------
of Registrable Shares to be registered in such Demand Registration to a number
that would not be sufficient to satisfy the condition stated in Section 2.2,
-----------
then such decrease shall not be effective unless approved by the Majority
Selling Investors and, if so approved, the Selling Investor(s) shall be deemed
to have
11
<PAGE>
abandoned and terminated such Demand Registration. The Majority Selling
Investors may terminate or abandon such Demand Registration upon written notice
to the Company to that effect.
Section 2.6 Methods of Distribution; Reduction in Shares to be
----------- --------------------------------------------------
Registered.
- ----------
(a) Subject to the last sentence of this Section 2.6(a) and to the
--------------
provisions of Section 2.6(b), the Registrable Shares of any Selling Investor
--------------
included in a Demand Registration may be registered for sale by such Selling
Investor directly or through sale or placement agents or to or through one or
more underwriters designated from time to time by such Selling Investor and
approved by the Company in its reasonable discretion and for resale by any such
underwriter or broker-dealer, through broker-dealers or in any other manner, in
one or more transactions and at a fixed price or prices, which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at prices determined on a negotiated or competitive
bid basis or at a price or prices otherwise determined by such Selling Investor.
Notwithstanding the preference of any Selling Investor in any Demand
Registration, if the Majority Selling Investors, in their sole discretion,
determine that the offering and sale of Registrable Shares pursuant to such
Demand Registration should be pursuant to an underwriting or through a selling
or placement agent or syndicate, then such Majority Selling Investors shall have
the right to select the underwriters or managing underwriter, selling or
placement agent or managing selling or placement agent or syndicate manager for
such offering and sale and to establish, by agreement with such underwriters,
managing underwriter, selling or placement agents, managing selling or placement
agent or syndicate manager or otherwise the price or prices and other terms of
such underwriting, offering and sale, and in such event no Selling Investor who
otherwise would be entitled to include Registrable Shares in such Demand
Registration shall be entitled to have such Registrable Shares so included
unless they are included in such underwritten offering or offered and sold
through such selling or placement agent or syndicate at such price or prices and
on such terms. Any such managing underwriter, managing selling or placement
agent or syndicate manager selected by the Majority Selling Investors, other
than Jeffries & Co., shall be subject to the Company's approval, which shall not
be unreasonably withheld or delayed.
(b) If a Demand Registration is for or includes an underwritten
offering or an offering through a sales or placement agent or syndicate, and the
managing underwriter, such sales or placement agent, or the managing sales agent
or the syndicate manager determines in good faith that inclusion in such
registration of all Registrable Shares and other securities, if any, requested
or proposed to be included in such offering exceeds the number that could be
sold without having an adverse effect on such offering, including the price at
which the Majority Selling Investors propose to sell their Registrable Shares
included in such offering, then the number of Registrable Shares to be offered
for the accounts of the Selling Investors shall be reduced or limited on such
basis in proportion to the respective numbers of Registrable Shares requested to
be included in such offering by the Selling Investors, to the extent necessary
to reduce the total number of shares to be included in such offering to the
amount recommended by such managing underwriter, agent, managing sales agent or
syndicate manager; provided, however, that if, without violation of Section
-------- ------- -------
2.10, in connection with such Demand Registration securities other than
- ----
Registrable Shares held by Selling
12
<PAGE>
Investors are being offered (whether for the account of the Company or any
Person other than an Investor), such reduction shall be made (i) first, from any
shares proposed to be sold for the accounts of the Company or other Persons who
are neither Investors nor Pari Passu Registration Rights Holders, allocated
among the Company and such other Persons in such manner as may be acceptable to
the Company and (ii) second, from the Registrable Shares requested to be
included in such registration by the Investors and Pari Passu Registration
Rights Holders (allocated, if necessary, pro rata among all such Investors and
--- ----
such Pari Passu Registration Rights Holders on the basis of the relative numbers
of shares each such Person has requested to be included in such registration),
it being understood and agreed that the securities referred to in clause (i)
above shall not be included in any such offering unless or until all the
Registrable Shares requested to be included in such offering by the Investors
are so included.
Section 2.7 Right of the Company to Suspend Registration. The Company
----------- --------------------------------------------
shall be entitled to suspend, for a reasonable period of time not in excess of
ninety days after its receipt of a request for a Demand Registration pursuant to
Section 2.2, the filing of any Registration Statement which it otherwise would
- -----------
be required to file pursuant to this Article II, if (i) at any time prior to the
----------
filing of such Registration Statement the Board of Directors of the Company
determines, in good faith and in the exercise of reasonable business judgment,
that such filing would materially interfere with or otherwise adversely affect
in any material respect any material planned financing, acquisition, corporate
reorganization or other transaction involving the Company (a "Disadvantageous
Effect") and (ii) the Company gives all Selling Investors written notice of such
suspension; provided, however, that a suspension pursuant to this Section 2.7 or
-------- ------- -----------
pursuant to Section 4.2 by reason of the existence of one or more
-----------
Disadvantageous Effects shall be authorized only once during any twelve-month
period. In the event of any suspension pursuant to this Section 2.7, then
-----------
unless the request for the Demand Registration is withdrawn pursuant to the last
sentence of this Section 2.7, the Company shall file such Registration Statement
-----------
as soon as practicable after the first to occur of (w) the consummation of the
transaction which is the asserted basis for such Disadvantageous Effect, (x) the
abandonment or termination of such transaction prior to consummation, (y) the
determination by the Board of Directors of the Company that such filing would
not or would no longer result in such Disadvantageous Effect and (z) the ninety-
first (91st) day after the receipt of the applicable Demand Notice. If the
Company shall suspend the filing of any Registration Statement pursuant to this
Section 2.7, the Majority Selling Investors shall have the right to withdraw the
- -----------
Demand Notice for such registration by giving written notice to the Company
prior to expiration of such suspension period.
Section 2.8 [Intentionally Left Blank.]
----------- ------------------------
Section 2.9 Form of Registration Statement. If in connection with a
----------- ------------------------------
Demand Registration, the Company proposes to effect such registration through
the filing of a Registration Statement on a particular registration form
available for such registration under the Securities Act and either the
underwriters or managing underwriter, selling or placement agent or managing
selling or placement agent or syndicate manager, if any, in connection with such
Demand Registration shall advise the Company in writing of its or their
reasonable and good faith opinion that the use of another available
13
<PAGE>
form is of material importance to the success of the proposed offering or sale
or other distribution contemplated, then such Demand Registration shall be
effected on such other form.
Section 2.10 No Other Participants in Demand Registration. Unless
------------ --------------------------------------------
otherwise agreed by the Majority Investors, neither the Company nor any other
Person except Investors and holders of Existing Registration Rights shall be
permitted to include any shares of Common Stock, Rights or other securities for
registration, offering, sale or distribution in any Demand Registration.
Section 2.11 Shelf Registration.
------------ ------------------
(a) Any request by any Investor for a Demand Registration pursuant to
Section 2.2 or Section 2.3 may, at the election of the Initiating Investor by
- ----------- -----------
specification in the applicable request, include a request that all or any of
the Registrable Shares requested to be included in such Demand Registration be
registered under the Securities Act for offering and sale on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act (a "Shelf
Registration") to be made effective on or after the first anniversary of the
First Closing (and after the Commencement Date). In the event of any such
request for a Shelf Registration, the notice given by the Initiating Investor
pursuant to Section 2.2 shall state that such request was for or included a
-----------
Shelf Registration. To the extent that a request for a Demand Registration is
for or includes a Shelf Registration, no Selling Investor participating in such
Shelf Registration shall be required to provide information with respect to the
desired price range for the Registrable Shares requested to be included therein
by any Selling Investor or the intended method(s) of disposition or distribution
thereof except to the extent and at the time or times required in order to
satisfy the applicable requirements of Regulation S-K promulgated by the
Commission. The method(s) of distribution of the Registrable Shares of any
Selling Investor included in any Shelf Registration may be any method or methods
permitted by Rule 415 of the Securities Act and any such Selling Investor may
change such method or methods of distribution at any time and from time to time
while the Registration Statement relating to such Shelf Registration is required
to remain effective in accordance with the terms of Section 2.11(b) hereof,
---------------
provided that such Selling Investor provides to the Company the information
reasonably required to permit compliance with the applicable requirements of
Regulation S-K promulgated by the Commission.
(b) The Company shall use all reasonable efforts to keep each
Registration Statement filed with respect to any Shelf Registration continuously
effective until the earlier of (i) two years from the date on which the
Commission declares such Registration Statement effective or (ii) three years
from the First Closing Date. Such period shall be automatically extended by the
aggregate number of days, if any, during which any delay, deferral, postponement
or suspension is in effect with respect to such Registration Statement.
(c) The Company shall effect any Shelf Registration requested pursuant
to this Agreement on a Registration Statement of the Company under the
Securities Act on any form, including Form S-3, for which the Company then
qualifies and which permits the offering and
14
<PAGE>
distribution thereunder of the number of Registrable Shares to be included
therein in accordance with the method(s) of distribution determined in
accordance with this Agreement.
(d) The fact that a Registration Statement with regard to a Shelf
Registration is effective as of a particular time shall not prejudice or
otherwise affect the rights of the Selling Investors or any other Investor to
request a Demand Registration pursuant to this Article II, to participate in any
----------
such Demand Registration requested by any other Investors or to participate in
any Piggyback Registration.
ARTICLE III
PIGGYBACK REGISTRATION
Section 3.1 Right to Require Piggyback Registration. If at any time or
----------- ---------------------------------------
from time to time, the Company shall determine to register any of its
securities, either for its own account or the account of a security holder or
holders (other than (i) a registration statement on Form S-4 or S-8 (or any
substitute form that may be adopted by the SEC) or (ii) a registration statement
filed in connection with an offer of securities solely to the Company's existing
security holders) in a transaction that may be used for the registration of
Registrable Shares for distribution by any one or more of the methods permitted
by Section 3.2(a), then upon each and every such occasion the Company shall give
--------------
prior written notice of such proposed registration to each Investor of its
intention to do so promptly and in any event not later than the tenth Business
Days before the anticipated filing date of the applicable Registration
Statement. Such notice shall specify whether the proposed registration is for
the account of the Company, for the account of one or more other Persons or both
and also specify the kind and number or amount of securities proposed to be
registered on behalf of each thereof and the proposed offering price or prices
and distribution methods and arrangements. Upon the terms and subject to the
conditions and limitations set forth in this Article III, each Investor may
elect to participate in such registration by giving the Company, within ten days
after such notice has been given by the Company, a written request to register
any or all of such Investor's Registrable Shares in connection with such
registration (any such registration as to which any such request is made being
sometimes referred to as an "Piggyback Registration"); provided, however, that
-------- -------
(i) the Investors may not require a Piggyback Registration on the IPO
unless such offering consists or includes a secondary offering of
securities by any Person other than holders of Existing
Registration Rights who are not Insiders;
(ii) the Investors may not require a Piggyback Registration on the first
registered offering of Common Stock by the Company which is made after
the IPO pursuant to a Registration Statement that becomes effective
within six months after the IPO unless such offering consists or
includes a secondary offering of securities by any Person other than
(A) holders of Existing Registration Rights who are not Insiders or
(B) Insiders, provided that each participating Insider registers
fewer than 10% of the shares of Common Stock he then Beneficially
Owns; and
15
<PAGE>
(iii) if the registration is a "demand" registration made by the holders
of warrants issued to the purchasers of the Notes at the time of
original issuance of the Notes in accordance with the registration
rights granted at such time (and as originally granted) and if, by the
original terms of such registration rights, the holders of such
warrants having such registration rights have the right to exclude
from such demand registration securities proposed to be registered by
any Persons except holders of such warrants, then the Investors shall
not be entitled to participate in such registration unless the holders
of such warrants participating in such registration otherwise agree in
writing.
Any such request by an Investor shall state (i) the kind and number of
Registrable Shares to be included in such registration by such Investor (ii)
such Investor's preferred method of distribution of such Registrable Shares
permitted by Section 3.2(a) and (iii) any other information that the Company
reasonably requests in such notice given by it to the Investors. Upon receipt
of one or more of such requests, the Company shall, subject to Section 3.3 as
soon as practicable, file with the Commission and use its reasonable efforts to
cause to become effective, a Registration Statement which shall cover the
Registrable Shares requested to be registered by the requesting Investors and
shall take all such other actions (including those required by Article IV) as
may be necessary or advisable to permit the requesting Investors to dispose of
all such Registrable Shares requested to be included in such Piggyback
Registration in accordance with the permitted intended method or methods of
distribution in compliance with the Securities Act and state "blue sky" and
securities laws.
Section 3.2 Methods of Distribution; Reduction in Number of Shares to be
----------- ------------------------------------------------------------
Registered.
- ----------
(a) Subject to Section 3.2(b), Section 3.2(c) and Section 4.5, the
-------------- -------------- -----------
Registrable Shares of any Investor included in an Piggyback Registration may be
registered for sale by such Investor directly or through sales or placement
agents designated from time to time or to or through one or more underwriters or
broker-dealers designated from time to time by such Investor and for resale by
any such underwriter or broker-dealer, in one or more transactions and at a
fixed price, which may be changed, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at prices determined
on a negotiated or competitive bid basis or at a price otherwise determined by
such Investor.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Investors as a part of the written notice given pursuant to Section
-------
3.1. In such event, the right of any Investor to participate in such
- ---
registration pursuant to this Article III shall be conditioned upon such
-----------
Investor's participation in such underwriting and the inclusion of Registrable
Shares in the underwriting to the extent provided herein. Subject to Section
-------
4.5, if any Piggyback Registration is for (or includes) an underwritten
- ---
offering, the Company will permit each Investor who elects to include any of his
Registrable Shares in such Piggyback Registration to elect to include any or all
of such Registrable Shares in such
16
<PAGE>
underwritten offering on the same terms and conditions as any similar securities
included therein. In a registration pursuant to Section 3.1 hereof involving an
-----------
underwritten public offering, if the managing underwriter or underwriters of
such underwritten offering have informed, in writing, the Company and each
Investor who requested Registrable Shares to be included in such offering that
in such underwriter's or underwriters' reasonable opinion the total number of
securities which the Company, the Investors who requested Registrable Shares to
be included in such offering and any other Persons desiring to participate in
such registration intend to include in such offering is such as to materially
and adversely affect the success of such offering, including the price at which
such securities can be sold, then the Company will be required to include in
such registration only the amount of securities which it so advised should be
included in such registration. In such event:
(i) if the registration was initiated by any security holder(s) of the
Company exercising "demand" registration rights, securities shall be
registered in such offering in the following order of priority (unless
a different order is specified in the document granting such holder's
demand rights which is in effect prior to the First Closing Date):
(A) first, the securities, if any, which the Company proposes to
-----
register and the securities such security holder(s) initiating
such registration propose to register, allocated, if necessary,
pro rata among the Company and such holder(s) on the basis of the
--- ----
relative numbers of shares each such Person proposes to include
in the registration, provided that if such initiating holder or
--------
holders are Investors, the Company shall not be entitled to
include any securities in such registration without the prior
written consent of the Majority Investors and, as among Investors
there shall be no priority and Registrable Securities sought to
be included by Investors shall be included pro rata based on the
--- ----
amount of securities sought to be registered by such Persons
(B) second, provided that no securities sought to be included by the
------ --------
Company or such initiating holder(s) have been excluded from such
registration, the securities which have been requested to be
included in such registration by Investors pursuant to this
Agreement (unless the initiating holder(s) are Investors, in
which case clause (i)(A) shall govern the priority of the
Investors) or by Pari Passu Registration Rights Holders
(allocated, if necessary, pro rata among all such Investors and
--- ----
Pari Passu Registration Rights Holders on the basis of the
relative numbers of shares each such Person has requested to
include in registration), and
(C) third, provided that no securities sought to be included under
----- --------
clause(i)(A) or (i)(B) have been excluded, the securities of all
other Persons sought to be included in such registration
(allocated, if necessary, among such Persons in such manner as
the Company deems acceptable); or
17
<PAGE>
(ii) if the registration was initiated by the Company, otherwise than by
reason of any such exercise of "demand" registration rights,
securities shall be registered in such offering in the following order
of priority:
(A) first, the securities, if any, which the Company proposes to
-----
register,
(B) second, provided that no securities sought to be included by the
------ --------
Company have been excluded from such registration, the securities
which have been requested to be included in such registration by
Investors pursuant to this Agreement or by Pari Passu
Registration Rights Holders (allocated, if necessary, pro rata
--- ----
among all such Investors and Pari Passu Registration Rights
Holders on the basis of the relative numbers of shares each such
Person has requested to include in registration), and
(C) third, provided that no securities sought to be included under
----- --------
clause(ii)(A) or (ii)(B) have been excluded, the securities of
all other Persons sought to be included in such registration
(allocated, if necessary, among such Persons in such manner as
the Company deems acceptable).
(c) If, as a result of the provisions of Section 3.2(b) any Investor
shall not be entitled to include all Registrable Securities in a Piggy-Back
Registration that such Investor has requested to be included, such Investor may
elect to withdraw his request to include Registrable Securities in such
registration.
Section 3.3 Withdrawal of Registration. The Company may, without the
----------- --------------------------
consent of any Investor, delay, suspend, abandon or withdraw any Piggyback
Registration and any related proposed offering or other distribution in which
any Investor has requested inclusion of Registrable Shares pursuant to this
Article III.
- -----------
ARTICLE IV
OBLIGATIONS WITH RESPECT TO REGISTRATION
Section 4.1 In General. Whenever the Company is obligated by the
----------- ----------
provisions of Article II or Article III to effect the registration of any
---------- -----------
Registrable Shares under the Securities Act, the Company shall use its
reasonable efforts to effect the registration of all Registrable Shares which
any Investor has requested to be included therein for offering, sale and
distribution in accordance with the permitted intended methods of distribution
thereof as quickly as practicable, and in connection therewith the Company will
do the following as expeditiously as possible:
(a) (i) prepare and file with the Commission a Registration Statement
on any form for which the Company then qualifies and which is available for the
registration of the Registrable Shares requested to be registered in accordance
with the intended methods of distribution thereof, (i) include in the
Registration Statement all Registrable Shares requested to be included pursuant
to
18
<PAGE>
Article II or Article III (as the case may be), and (ii) use its reasonable
- ---------- -----------
efforts to cause such Registration Statement to become effective;
(b) prepare and file with the Commission such amendments and post-
effective amendments and supplements to the Registration Statement or any
prospectus as may be necessary to keep the Registration Statement effective,
current and in compliance with the provisions of the Securities Act, until the
last to occur of (i) the sale or other distribution of all of the Registrable
Shares covered by such Registration Statement in accordance with the intended
methods of distribution thereof, (ii) the expiration of all periods during which
transactions in Registrable Shares by a dealer are not exempt from the
provisions of Section 5 of the Securities Act by virtue of Section 4(3) of the
Securities Act or during which any dealer is obligated under the Securities Act
to deliver a prospectus in connection with transactions involving Registrable
Shares and (iii) the expiration of all other periods, if any, during which the
Registration Statement is required to remain effective in order to avoid a
violation of applicable law by any Investor or the Company related to the sale
or other distribution of all of the Registrable Shares covered by such
Registration Statement in accordance with the intended methods of distribution
thereof;
(c) at least three Business Days prior to filing any Registration
Statement or prospectus or any amendment or supplement thereto, furnish to each
Investor and each underwriter, if any, of the Registrable Shares covered by
such Registration Statement copies of the current draft of such Registration
Statement or prospectus (including documents to be incorporated by reference
therein), which documents will be subject to the reasonable review and comments
of such Investors (and their respective counsel) during such three-Business-Day
period, and if any Investor objects in writing to any statements in any such
documents with respect to such Investor or the distribution of the Registrable
Shares to be included by him in such Registration Statement, the Company shall
promptly revise such statements to such Investor's reasonable satisfaction;
(d) promptly notify each Investor of the effectiveness of the
Registration Statement;
(e) furnish to each Investor without charge and as soon as such
documents become available to the Company, at least one copy of the Registration
Statement and each amendment thereto, and such number of conformed copies
thereof, copies of the prospectus (including each preliminary prospectus and
each amendment or supplement thereto), in each case together with all exhibits
thereto and all documents incorporated by reference in any of such documents as
such Investor may reasonably (in light of such Investor's intended method of
distribution) request in order to facilitate the disposition of the Registrable
Shares being sold by such Investor (it being understood that the Company
consents to the use, in compliance with the Securities Act, of each preliminary
prospectus and prospectus and each amendment or supplement thereto by each
Investor, each underwriter, broker, dealer, placement agent and other securities
industry professional and each agent of each Investor in connection with the
offering, sale and distribution of the Registrable Shares covered thereby);
19
<PAGE>
(f) promptly notify each Investor, at any time when a prospectus
relating to Registrable Shares of such Investor covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the preliminary prospectus or prospectus
included in such Registration Statement or any prospectus supplement contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and the Company will, as promptly as
practicable thereafter, prepare and file with the Commission and furnish to each
Investor a supplement or amendment to such preliminary prospectus, prospectus or
prospectus supplement so that, as thereafter delivered to the prospective
purchasers of the Registrable Shares being distributed by such Investor, such
preliminary prospectus, prospectus or prospectus supplement will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(g) enter into customary agreements (including, in the case of an
underwritten offering, an underwriting agreement in customary form); make such
representations and warranties, to any underwriters, brokers, dealers, placement
agents and other Persons involved in the distribution of the Registrable Shares
included in such Registration Statement as in form, substance and scope are
customarily made by issuers in similar circumstances or which may be reasonably
requested;
(h) furnish to each underwriter, broker, dealer or placement agent
participating in any offering or sale or other distribution pursuant to such
Registration Statement a signed counterpart of (i) an opinion of counsel to the
Company addressed to such underwriter, broker, dealer or placement agent (as the
case may be) and (ii) a "cold comfort" letter or letters from the Company's
independent certified public accountants, each in customary form and covering
such matters of the type customarily covered by legal opinions or "cold comfort"
letters (as the case may be) in similar offerings, sales or distributions of
securities of similarly situated issuers and such other matters as the Majority
Selling Investors may reasonably request;
(i) prepare and file with the Commission promptly upon the request of
any such Investor, any amendments or supplements to such Registration Statement
or the applicable prospectus which, in the reasonable opinion of counsel for
such Investor, is required under the Securities Act in connection with the
distribution of Registrable Shares by such Investor;
(j) effective on or prior to the date the Registration Statement
becomes effective, use its reasonable efforts to register or qualify the
Registrable Shares covered by a Registration Statement under the securities or
blue sky laws of such jurisdictions in the United States as the Majority Selling
Investors or any underwriter, broker, dealer or placement agent participating in
the offering or sale or other distribution of the Registrable Shares covered
thereby shall reasonably request, and do any and all other acts and things which
may be reasonably necessary to enable each Selling Investor to consummate the
offering and disposition of such Registrable Shares in such jurisdictions of
such Registrable Shares in accordance with the permitted methods of distribution
described in such Registration Statement; provided, however, that the Company
-------- -------
shall in no event
20
<PAGE>
be required to qualify generally to do business as a foreign corporation in any
jurisdiction where it is not otherwise required to be so qualified or, to
conform its capitalization or the composition of its assets at the time to the
securities or blue sky laws of such jurisdiction;
(k) make generally available to the Company's security-holders
earnings statements satisfying the provisions of the last sentence of Section
11(a) of the Securities Act no later than forty-five days after the end of the
twelve-month period beginning with the first month of the first fiscal quarter
commencing after the effective date of the Registration Statement, which
earnings statements shall cover said twelve-month period;
(l) promptly notify each Selling Investor and each underwriter,
broker, dealer and placement agent participating in any offering or sale or
other distribution of securities covered by such Registration Statement of the
issuance or threatened issuance of any stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the use
of any preliminary prospectus, prospectus or prospectus supplement; use
reasonable efforts to prevent the issuance of any such threatened stop order or
other order, and; if any such order is issued, use its best efforts to obtain
the lifting or withdrawal of such order at the earliest possible moment and
promptly notify each Selling Investor and each such underwriter, broker, dealer
and placement agent of any such lifting or withdrawal;
(m) as promptly as practicable after filing with the Commission of any
document which is incorporated by reference into a Registration Statement,
notify each Selling Investor of such filing and deliver a copy of such document
to each Selling Investor;
(n) cooperate with each Selling Investor and the underwriters,
brokers, dealers and placement agents participating in any offering or sale or
other distribution of securities covered by such Registration Statement to
facilitate the timely preparation and delivery of certificates, not bearing any
restrictive legends, unless otherwise required by such Investor, representing
the securities covered by such Registration Statement, and enable all
Registrable Shares of such Selling Investor covered thereby to be in such
denominations and registered in such names as such Selling Investor may request;
(o) use its reasonable efforts to cause the Registrable Shares covered
by the Registration Statement to be registered with or approved by such other
governmental authorities within the United States and its territories as may be
necessary to enable the Selling Investors to consummate the disposition of such
securities in accordance with the intended methods of disposition;
(p) cooperate with the Selling Investors and the underwriters,
brokers, dealers and placement agents participating in any offering or sale or
other distribution of securities covered by such Registration Statement in
making any filings or submissions required to be made, and in furnishing all
appropriate information in connection therewith, with the National Association
of
21
<PAGE>
Securities Dealers, Inc., any national securities exchange, any other "self-
regulatory organization" (as defined in the Exchange Act) or with any
governmental authority;
(q) promptly notify each Selling Investor and each underwriter,
broker, dealer and placement agent participating in any offering or sale or
other distribution of securities covered by such Registration Statement of the
issuance or threatened issuance of any order suspending the registration or
qualification of any Registrable Shares covered by such Registration Statement
for disposition in any jurisdiction; use its reasonable efforts to prevent the
issuance of any such threatened order and; if any such order is issued, use its
best efforts to obtain the lifting or withdrawal of such order at the earliest
possible moment and promptly notify each Selling Investor and each such
underwriter, broker, dealer and placement agent of any such lifting or
withdrawal;
(r) if any shares of Common Stock or any other capital stock or
securities of the same class, series, issue or other type as any Registrable
Shares covered by such Registration Statement are or upon consummation of all
sales and other distributions covered by such Registration Statement will be
listed, qualified or otherwise eligible for trading or quotation on a national
securities exchange or The Nasdaq Stock Market, use its best efforts to cause,
by the date of the first sale of any Registrable Shares pursuant to such
Registration Statement, all Registrable Shares covered by such Registration
Statement to be listed, qualified or eligible for trading or quotation on each
such exchange or quotation system;
(s) cause each of the Company, and use its reasonable efforts to cause
each of the respective Affiliates of the Company, to take all action necessary
to effect each registration, offering, sale and distribution of the Registrable
Shares contemplated hereby, including preparing and filing any required
financial or other information;
(t) make available to each registrar, transfer agent, trustee or
similar agent or fiduciary for each class, series, issue or other type of
Registrable Shares a supply of certificates or other instruments evidencing or
constituting such Registrable Shares which shall be in a form complying with the
requirements of such registrar, transfer agent, trustee or similar agent or
fiduciary promptly after the registration of such Registrable Shares; and
(u) take all other actions which are reasonably necessary or which may
be reasonably requested by the Majority Selling Investors or the Majority
Investors or any underwriter, broker, dealer or placement agent participating in
any offering or sale or other distribution of securities covered by such
Registration Statement to effect the registration and qualification of the
Registrable Shares covered by such Registration Statement and to facilitate the
disposition thereof in accordance with the respective plans of distribution of
the Selling Investors.
Section 4.2 Suspension of Registration Proceedings. Notwithstanding
----------- --------------------------------------
anything to the contrary contained herein, if at any time after the filing of a
Registration Statement in a Demand Registration but before it is declared
effective by the Commission the Company determines, in its reasonable business
judgment, that such offering, sale or other distribution covered thereby would
22
<PAGE>
result in a Disadvantageous Effect, then the Company may suspend the offering,
sale or distribution of any of the Registrable Shares pursuant to such
Registration Statement by giving written notice to such effect to each Selling
Investor; provided, however, that (i) the Company may not require such
-------- -------
suspension unless such suspension is also required on the part of each and every
Person (including the Company) who proposes to offer, sell or otherwise
distribute any securities pursuant to such Registration Statement and (ii) a
suspension pursuant to this Section 4.2 or pursuant to Section 2.7 by reason of
----------- -----------
the existence of one or more Disadvantageous Effects shall be authorized only
once during any twelve-month period. Any such suspension pursuant to this
Section 4.2 shall terminate upon the first to occur of (i) the consummation of
- -----------
the transaction which is the asserted basis for such Disadvantageous Effect,
(ii) the abandonment or termination of such transaction prior to consummation,
(iii) the determination by the Board of Directors of the Company that such
offering, sale or other distribution would not or would no longer result in such
Disadvantageous Effect and (iv) the ninety-first day after the written notice of
such suspension is given in accordance with this Section.
Section 4.3 Procedures if Stop Order Issued. Each Selling Investor,
----------- -------------------------------
upon receipt of any written notice from the Company of the happening of any
event of the kind described in Section 4.1(f), will forthwith discontinue
--------------
disposition of Registrable Shares pursuant to the applicable Registration
Statement until such Selling Investor's receipt of the copies of the
supplemented or amended preliminary prospectus, prospectus or prospectus
supplement contemplated by Section 4.1(f), and, if so directed by the Company,
--------------
such Selling Investor will deliver to the Company all copies in its possession
of the most recent preliminary prospectus, prospectus or prospectus supplement
covering such Registrable Shares at the time of receipt of such notice. In the
event the Company shall give any such notice after a Registration Statement has
become effective, the Company shall extend the period during which the
effectiveness of such Registration Statement shall be maintained pursuant to
Section 4.1(b) hereof by the number of days during the period from and including
- --------------
the date of the giving of notice pursuant to Section 4.1(f) to the date when the
--------------
Company shall make available to each Selling Investor the copies of the
supplemented or amended preliminary prospectus, prospectus or prospectus
supplement contemplated by Section 4.1(f).
--------------
Section 4.4 Restriction on Other Sales.
----------- --------------------------
(a) If, in the case of either (or each) of the first two
underwritten offerings that consist of or include offerings of Common Stock for
the account of the Company registered pursuant to Section 5 of the Securities
Act, the managing underwriter(s) for such offering determine in good faith that
public sales of Common Stock by the Investors otherwise than as part of such
offering would adversely affect the success of such offering, and if the
Investors, collectively, then own Registrable Shares constituting 5% or more of
the fully diluted shares of Common Stock then outstanding (after giving effect
to all sales, including any by Investors, and issuances of Common Stock or
Rights to acquire Common Stock pursuant to the Registration Statement covering
such offering), then to the extent requested by such managing underwriter(s), no
Investor shall effect any sale or distribution into the public market of any
Common Stock owned by such Investor, other than as part of such underwritten
offering (to the extent that such Investor has the right or is otherwise allowed
to participate therein), for such period after the effective date of the
Registration Statement covering such offering as such managing underwriter(s)
shall specify,
23
<PAGE>
provided that (i) such period shall not exceed ninety days, in the case of an
- --------
offering that is not the IPO, or 180 days, in the case of the IPO and (ii) each
of the executive officers and the directors of the Company who beneficially own
Common Stock or Rights to acquire Common Stock, and each Person who holds a
number of shares of Common Stock (including shares issuable upon exercise of
Rights but excluding shares acquired in a public market) equal to or greater
than the number of Registrable Shares held (after giving effect to any sales
pursuant to such Registration Statement) by the Investors, collectively, also
agree to be subject to the same restrictions for the same period and any waiver
or release from such restriction granted to any such officer, director or Person
is also granted to each of the Investors with respect to the same number of
shares. Any contract or agreement entered into on or after the date hereof
pursuant to which the Company issues any securities or becomes or may become
obligated to register or to permit the participation in the registration of any
securities of the Company shall contain restrictions upon the holders of such
securities equivalent to those imposed upon the Investors under this Section.
The provisions of this Section 4.4 shall not prevent the conversion, exchange or
-----------
exercise of any securities pursuant to their respective terms into or for other
securities of the Company or any public sale or other distribution by any of the
Investors with the prior consent of the Company or transactions relating to
shares of Common Stock or other securities acquired in open market transactions
after the completion of either of the two offerings referred to in the first
sentence of this Section, and are supplemental to any similar requirements
imposed by the Securities Act.
(b) Each of the Investors acknowledges that Goldman, Sachs &
Co. ("Goldman Sachs") proposes to enter into an underwriting agreement with the
Company providing for an IPO by certain underwriters, including Goldman Sachs.
Each Investor, severally, not jointly, agrees that, subject to the condition
stated in clause (ii) of the proviso of the first sentence of Section 4.4(a) and
to the last two sentences of Section 4.4(a), such Investor will not, during the
period commencing on the date hereof and ending 180 days after the date of the
IPO (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock or securities described
in clause (i), whether any such transaction described in clause (i) or (ii) is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise, except that such restriction shall not prevent assignments by the
"Initial Purchasers" of their rights to acquire "Second Closing Securities" in
accordance with the Purchase Agreement; provided, however, that this Section
4.4(b) shall automatically terminate upon the 181st day after the date of this
Agreement if the IPO shall not have been consummated before that date or, if
earlier, the decision of the Company or Goldman Sachs to terminate its
discussion with the other relating to Goldman Sachs serving as the managing
underwriter or one of the managing underwriters of the IPO. The Investors shall,
if requested by the Company, execute and deliver to Goldman Sachs a separate
letter by which they make the undertakings expressly provided in this section
4.4(b).
Section 4.5 Participation in Underwritten Offers. No Investor or other
----------- ------------------------------------
Person who otherwise has a right to participate in any underwritten offering in
connection with a Demand Registration or a Piggyback Registration shall be
entitled to so participate unless such Person (i) agrees to sell its securities
on the basis provided in any underwriting arrangements applicable to all
stockholders who participate therein (including so-called "lock-up"
arrangements) and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and this Agreement;
provided, that in the case of any Demand Registration, the Majority Selling
- --------
Investors shall have the right to determine those arrangements by agreement with
the managing underwriter(s) as provided in Section 2.6(a). .
ARTICLE V
EXPENSES OF REGISTRATION
Section 5.1 Expenses. Except as provided in the last sentence of this
----------- --------
Section 5.1, all Registration Expenses incurred in connection with or otherwise
- -----------
incident to any Demand Registration or Piggyback Registration and the offering
or sale or other distribution of any Registrable Shares in connection therewith
shall be borne by the Company, whether or not any Registration Statement filed
in connection therewith ever becomes effective or any such sale or other
distribution ever is consummated. Underwriting Discounts and selling
commissions attributable to the Registrable Shares included in such registration
shall be borne by the holders of such Registrable Shares pro rata on the basis
of the respective numbers of such included Registrable Shares. Subject to the
last sentence of this Section 5.1, the Company shall not be required to pay the
-----------
Registration Expenses of any Demand Registration begun pursuant to Section 2.2
-----------
that is withdrawn at the request of the Majority Selling Investors, unless the
Majority Investors elect in writing to have such registration
24
<PAGE>
counted as a Demand Registration. In any such case, (i) the Holders of
Registrable Shares to have been registered shall bear all such Registration
Expenses pro rata on the basis of the number of shares to have been registered,
and (ii) the Company shall not be deemed to have effected a Demand Registration
for purposes of the last sentence of Section 2.2. Notwithstanding the foregoing,
-----------
however, the Company shall pay such Registration Expenses (and shall not be
deemed to have effected a Demand Registration for purposes of the last sentence
of Section 2.2) if the withdrawal is pursuant to Section 2.7 or Section 3.2.
----------- ----------- -----------
ARTICLE VI
INDEMNIFICATION AND CONTRIBUTION
Section 6.1 Indemnification by the Company. The Company shall indemnify
----------- ------------------------------
and hold harmless each Investor, each former Investor, each Person (if any) who
controls such Investor or former Investor within the meaning of the Securities
Act or the Exchange Act and each of their respective Affiliates, partners,
directors, officers, employees and agents (collectively, the "Investor
Indemnified Parties") from and against any liabilities, obligations, losses,
damages, assessments, fines and penalties of any kind or nature, including all
amounts paid or agreed to be paid in settlement of any claim, action, suit,
hearing, proceeding or investigation (collectively, "Losses"), whether direct,
indirect, joint or several, and subject to Section 6.3, also shall indemnify and
-----------
reimburse each Investor Indemnified Party for all reasonable fees, costs and
expenses (including reasonable fees and disbursements of counsel) in connection
with preparing for, defending against or settling, prosecuting any appeal of any
judgment entered in, or otherwise as a result of, any claim, action, suit,
hearing, proceeding or investigation, in each case which in any manner results
from, arises out of, or is based upon or related or attributable to (i) any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement as originally filed or in any amendment thereof, or
in any preliminary, final or summary prospectus, or in any amendment thereof or
supplement thereto, or any omission or alleged omission to state in any thereof
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any violation by the Company of any
federal or state law, rule or regulation or common law applicable to the Company
and relating to action required of or inaction by the Company in connection with
any Demand Registration or Piggyback Registration; provided, however, that, in
-------- -------
the case of clause (i), the Company shall not be obligated to indemnify any
Investor or any of its controlling Persons, Affiliates, partners, directors,
officers, employees or agents for any Loss to the extent (and only to the
extent) that such Loss arises from any such untrue statement made in or omission
from the Registration Statement or any amendment thereof, or any related
preliminary, final or summary prospectus or any amendment thereof or supplement
thereto, which statement or omission related to information about such Investor
or its proposed plan of distribution of the Registrable Shares of such Investor
covered by such Registration Statement and was made or omitted in reliance upon
and in conformity with the latest information about such Investor or its
proposed plan of distribution of the Registrable Shares of such Investor covered
by such Registration Statement which was provided to the Company by such
Investor in writing and stated in writing to be specifically for use in such
Registration Statement (or amendment thereto) or such prospectus (or amendment
thereof or supplement thereto). The Company will also indemnify each
underwriter,
25
<PAGE>
selling broker, dealer manager, placement agent and similar securities
industry professional participating in the distribution of Registrable Shares,
its officers and directors and each Person who controls such Person (within the
meaning of the Securities Act) to the extent required by such underwriter;
provided, however, that if the Company and any such underwriter, selling broker,
- -------- -------
dealer manager or similar industry professional enters into an underwriting,
purchase or other agreement relating to such distribution which contains
provisions relating to indemnification and contribution between the Company and
such Person, such provisions shall be deemed to govern indemnification and
contribution as between the Company and such Person.
Section 6.2 Indemnification by Each Investor. Each Investor,
----------- --------------------------------
individually and not jointly, shall indemnify and hold harmless the Company and
each Person, if any, who controls the Company within the meaning of the
Securities Act and the Exchange Act (the "Company Indemnified Parties") and the
Investor Indemnified Parties (other than such indemnifying Investor and its
controlling Persons, Affiliates, partners, directors, officers, employees and
agents) from and against any Loss to which such Company Indemnified Parties
and/or Investor Indemnified Parties may become subject, and subject to Section
-------
6.3, also shall indemnify and reimburse each Company Indemnified Party for all
- ---
reasonable fees, costs and expenses (including reasonable fees and disbursements
of counsel) in connection with preparing for, defending against or settling,
prosecuting any appeal of any Judgment entered in, or otherwise as a result of
any claim, action, suit, hearing, proceeding or investigation, in each case
insofar and to the extent (and only insofar and to the extent) as such Loss or
such claim, action, suit, hearing, proceeding or investigation arises out of or
is based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement pursuant to which any Registrable
Shares of such Investor were offered and sold or in any related preliminary,
final or summary prospectus, or in any amendment thereof or supplement thereto,
or any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, if the statement or
omission related to information about such Investor or its proposed plan of
distribution of the Registrable Shares of such Investor covered by such
Registration Statement and was made or omitted in reliance upon and in
conformity with the latest information about such Investor or its proposed plan
of distribution of the Registrable Shares of such Investor covered by such
Registration Statement which was provided by such Investor in writing and stated
in writing to be specifically for inclusion therein; provided, however, that
-------- -------
such Investor will not indemnify or hold harmless any Company Indemnified Party
and/or Investor Indemnified Party from or against any such Loss, fee, cost or
expense if the untrue statement, omission or alleged untrue statement or
omission upon which such Losses or expenses are based was contained in or
omitted from (as the case may be) any preliminary prospectus, prospectus or
summary prospectus, or any amendment thereof or supplement thereto, used after
such time as the Company was advised by or on behalf of such Investor or the
Company had knowledge that the information about such Selling Investor contained
therein needs to be corrected, revised or supplemented.
Section 6.3 Procedures. Each party claiming a right to indemnification
----------- ----------
under this Article VI (the "Indemnified Party") shall give notice to the party
----------
from whom such indemnification is or may be sought (the "Indemnifying Party")
promptly after such Indemnified Party has actual
26
<PAGE>
knowledge of any claim as to which indemnification may be sought, and the
Indemnifying Party may participate at its own expense in the defense, or if it
so elects, assume the defense of any such claim and any action or proceeding
resulting therefrom, including the employment of counsel and the payment of all
expenses. The failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party from its obligations to indemnify such
Indemnified Party, except to the extent the Indemnified Party's failure to so
notify actually and materially prejudices the Indemnifying Party's ability to
defend against such claim, action or proceeding. In the event that the
Indemnifying Party elects to assume the defense in any action or proceeding, an
Indemnified Party shall have the right to employ separate counsel in any such
action or proceeding and to participate in the defense thereof, but such
Indemnified Party shall pay the fees and expenses of such separate counsel
unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii)
any relief other than the payment of money is sought against the Indemnified
Party or (iii) the named parties to any such action or proceeding (including any
impleaded parties) include such Indemnified Party and the Indemnifying Party,
and such Indemnified Party shall have been advised by counsel that there is a
conflict of interest between such Indemnified Party and the Indemnifying Party
in the conduct of the defense of such action (in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not assume the defense of such action or proceeding on such
Indemnified Party's behalf, it being understood, however, that the Indemnifying
Party shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any time for
all Indemnified Parties, which firm shall be designated in writing by the
applicable Indemnified Parties). If the Indemnifying Party elects not to defend,
or if, after commencing or undertaking any such defense, the Indemnifying Party
fails to prosecute or withdraws from such defense or fails to appeal any
Judgment adverse or unfavorable to the Indemnified Party, the Indemnified Party
shall have the right to undertake the defense, settlement or appeal thereof (as
the case may be), at the Indemnifying Party's expense. If the Indemnified Party
assumes the defense of any such claim, investigation, action, suit, hearing or
proceeding pursuant to this Section 6.3 and proposes to settle the same prior to
-----------
a final judgment thereon or to forgo or abandon any appeal available after final
judgment thereon, then the Indemnified Party shall give the Indemnifying Party
prompt written notice thereof and the Indemnifying Party shall have the right to
participate in the settlement, assume or reassume the defense thereof or
prosecute such appeal, in each case at the Indemnifying Party's expense. The
Indemnifying Party shall not, without written consent of such Indemnified Party,
settle or compromise or consent to entry of any judgment with respect to any
such claim, investigation, action, suit, hearing or proceeding (i) in which any
relief other than the payment of money damages is or may be sought against such
Indemnified Party or (ii) which does not include as an unconditional term
thereof the giving by the claimant, Person conducting such investigation or
initiating such hearing, plaintiff or petitioner to such Indemnified Party of a
release from all liability with respect to such claim, investigation, action,
suit or proceeding and all other claims or causes of action (known or unknown)
arising or which might arise out of the same facts.
27
<PAGE>
Section 6.4 Contribution. In order to provide for just and equitable
----------- ------------
contribution if a claim for indemnification pursuant to the indemnification
provisions of this Article VI is made but it is found in a final judgment by a
----------
court of competent jurisdiction (not subject to further appeal) that such
indemnification may not been enforced in such case, even though the express
provisions hereof provide for indemnification in such case or the
indemnification provided for under this Article VI, even though so provided for,
----------
otherwise is unavailable to or insufficient to hold any Indemnified Party
harmless to the full extent provided herein with respect to any Loss (or any
fees, costs or expenses) for which such indemnification is provided for, then
the Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses (i) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party, on the one
hand, and such Indemnified Party, on the other, in connection with the
statements or omissions which resulted in such Losses or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative fault referred to
in clause (i) above but also the relative benefits received by the Indemnifying
Party, on the one hand, and such Indemnified Party, on the other, from the
subject offering or distribution, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by (or omitted to be supplied by) the Indemnifying Party or the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The relative benefits received by the Indemnifying Party, on the one hand, and
the Indemnified Party, on the other, shall be deemed to be in the same
proportion as the net proceeds of the offering or other distribution received by
the Indemnifying Party bears to the net proceeds of the offering or other
distribution received by the Indemnified Party. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Company and the Investors agree that it would
not be just and equitable if contributions pursuant to this Section 6.4 were to
-----------
be determined by pro rata allocation (even if all Investors were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
-------
6.4.
- ---
Section 6.5 Limit on Liability of Investors. The parties agree, to the
----------- -------------------------------
maximum extent permitted by law, that the obligations and liability of each
Selling Investor with respect to any Demand Registration or Piggyback
Registration, whether for indemnification pursuant to Section 6.2, contribution
-----------
pursuant to Section 6.4 or otherwise, shall not in any event exceed in the
-----------
aggregate the amount of net proceeds received by such Selling Investor from the
sale of the Registrable Shares sold by such Selling Investor in such Demand
Registration or Piggyback Registration.
ARTICLE VII
RIGHT OF FIRST OFFER
Section 7.1 Issuance of New Securities. Subject to Section 7.4, if and
----------- -------------------------- -----------
whenever the Company issues any New Securities, each Investor will have the
right, but not the obligation, to
28
<PAGE>
purchase such New Securities up to an amount sufficient to permit it to maintain
its percentage common equity interest in the Company (based on the Number of
Common Shares Outstanding immediately prior to the issuance of the New
Securities). The "Number of Common Shares Outstanding" as of any time means the
sum of (i) the number of shares of Common Stock which then are actually issued
and outstanding, plus (ii) the total number of additional shares of Common Stock
which would then be issued and outstanding if it were assumed that all
Qualifying Rights, if any, then held by the Investors and other holders of
Qualifying Rights were then duly exercised in full (whether or not then
exercisable). Within ten Business Days after the receipt of such Preissuance
Notice, each Investor may exercise its rights under this Section 7.1 by giving
-----------
written notice to that effect to the Company. Failure to give such notice within
that ten Business Days period or failure to pay at the required time the
purchase price for any New Securities as to which a right to purchase will have
been exercised will constitute a waiver of the rights granted by this Section
-------
7.1 as to the particular issuance of New Securities specified in the Company's
- ---
Preissuance Notice. The Investors rights set forth in this Section 7 shall
---------
terminate upon the Qualifying IPO; provided, subject to the next sentence, that
--------
the pre-emptive rights, if any, of all other Persons also terminate upon the
Qualifying IPO. If there are, as of the date of this Agreement, any Persons who
had pre-emptive rights to acquire securities of the Company that were granted
prior to February 1, 1999 (and were not subsequently released or terminated) and
that, by the terms of such rights as in effect on February 1, 1999, mandatorily
continue beyond a Qualifying IPO, then the pre-emptive rights of the investors
pursuant to this Section 7.1 shall terminate upon the Qualifying IPO,
-----------
notwithstanding the proviso of the immediately preceding sentence, even if such
rights do not terminate or are not voluntarily terminated upon the IPO, provided
--------
that (i) such preemptive right of each such Person is to acquire a portion of
- ----
any issuance of securities subject to such right that is not in excess of such
Person's percentage of the Common Stock outstanding from time to time, and (ii)
the percentage of the Common Stock Beneficially Owned by such Persons
immediately after the Qualifying IPO does not exceed one percent in the
aggregate for all such Persons. If the Company grants preemptive rights to third
parties after the termination of the Investors' rights under this Section, such
preemptive rights of the Investors will not be reinstated.
Section 7.2 Per Share Price; Valuations. The per share purchase price
----------- ---------------------------
to be paid upon exercise of the rights granted under this Article VII will be
-----------
equal to the lowest per share consideration at which the New Securities are
offered or proposed to be offered by the Company to any New Securities
Purchaser. The consideration for which New Securities are offered or proposed
to be offered will be determined as follows: (iii) in case of the proposed
issuance of New Securities for cash, the consideration to be received by the
Company will be the amount of cash for which the New Securities are proposed to
be issued and (iv) in case of the proposed issuance of New Securities in whole
or in part for consideration other than cash, the value of the consideration to
be received by the Company other than cash will be the fair market value of that
consideration as reasonably determined by the Board of Directors of the Company
in good faith. If any Investor within five days of receipt of any Preissuance
Notice notifies the Company in writing that it objects to any statement of the
fair market value of any security or other property contained therein, the
Company and the Investors shall attempt in good faith to agree on the fair
market value of such security or other property. If they are unable to so agree
within five Business Days after such notice of
29
<PAGE>
objection was given, then within five Business Days thereafter, the Company and
the Majority Investors shall select one appraiser and the Company and the
Majority Investors shall submit to such appraiser (and each other) a brief
written statement of their position regarding the matter in dispute and
supporting arguments, and each shall be given a period of five Business Days
thereafter to submit to the other and to the appraiser a written response to
such written statement of the other. Such appraiser shall within fifteen days of
the date of its selection, resolve such dispute by choosing either the position
of the Company set forth in such written statement so submitted by the Company
or the position of the Investors set forth in such written statement so
submitted by the Majority Investors, whichever in the opinion of the appraiser,
in its sole discretion, is more consistent with the purposes and intent of this
Agreement. Decisions with respect to such determination made pursuant to this
Section 7.2 by the Majority Investors shall be binding on all Investors. Any
- -----------
determination of Fair Market Value for purposes of this Article VII by agreement
-----------
of the Company and the Majority Investors or by an appraiser appointed as
provided in this Section 7.2 shall be final and binding on the Company, and each
Investor for all purposes of this Article VII. Promptly after any final
-----------
determination of Fair Market Value pursuant to this Section 7.2, the Company
-----------
shall give each Investor a written notice stating such Fair Market Value. Each
appraiser shall be a nationally recognized appraiser or investment banking firm
which has substantial experience in making appraisals similar to that being
made, which is not directly or indirectly affiliated with the Company or any
other Person who is a party to or otherwise interested in the event resulting in
the need for such appraisal and which has no interest (other than the receipt of
customary fees) in such event. In the event the appraiser agrees with the
written statement submitted by the Investors, the fees and expenses of any
appraiser appointed in connection with an appraisal pursuant to this Article VII
shall be paid by the Company. In the event the appraiser agrees with the written
statement submitted by the Company, the fees and expenses of any appraiser
appointed in connection with an appraisal pursuant to this Article VII shall be
paid by the Investors.
Section 7.3 Representations, Warranties and Certain Covenants. In
----------- -------------------------------------------------
connection with each issuance of New Securities to any Investor pursuant to this
Article VII, the Company shall, in the event the Company is making
- -----------
representations, warranties and/or covenants to the New Securities Purchaser,
make to each Investor such representations, warranties, and covenants as are
customarily made by issuers in similar instances (but which in no event shall be
less favorable to the Investors than those contemplated by the Preissuance
Notice or otherwise made to or for the benefit of any New Securities Purchaser)
and each Investor shall be separately and independently entitled to rely on such
representations and warranties, to the benefit of such covenants and to exercise
all available rights and remedies in the event of any breach or violation of any
such representations, warranties and covenants. Any representations and
warranties made by an Investor shall consist solely of such representations and
warranties relating to (i) such Investor's authority to consummate the purchase
of the New Securities from the Company and (ii) other similar representations
and warranties as are customarily given by similarly situated purchasers of
securities similar to those being purchased by an Investor in a similar
transaction but no Investor shall be required to give any such representation or
warranty which the New Securities Purchaser does not give. The representations,
warranties, covenants and agreements of each Investor shall be several and not
joint and the representations and warranties of the Investor and of the Company
(unless, in the case of the Company, otherwise
30
<PAGE>
required by the New Securities Purchasers) and shall terminate upon the earlier
of (i) the termination of any representation or warranty made by the New
Securities Purchaser or by the Company and (ii) one year after closing. The
right of each Investor to purchase the full number of New Securities which such
Investor is entitled to purchase under this Article VII shall not be subject to
-----------
any conditions whatsoever, other than the payment of the purchase price therefor
determined as provided herein, and the consummation of the transaction between
the Company and the New Securities Purchaser. If any Investor shall fail for any
reason to purchase any New Securities which it has elected to purchase, the sole
right, remedy and recourse of the Company, the New Securities Purchaser, and the
complying Investors, as the case may be, shall be the right of the Company to
issue to the New Securities Purchaser and the other Investors, pro rata based on
their respective participations in the transaction as determined pursuant to
Section 7.1, additional New Securities equal in kind and number or other
- -----------
relevant amount to the New Securities which such Investor failed to purchase at
the closing, in which event the Majority Investors may elect to postpone the
closing for five Business Days. Unless the Company and any Investor otherwise
agree, the closing of any issuance of New Securities to any Investor pursuant to
this Article VII shall take place at the principal executive offices of the
-----------
Company at 11:00 A.M., local time, on the later of (i) the thirtieth day
following the expiration of the period of fifteen Business Days after the later
of (A) the date of the relevant Preissuance Notice was given and (B) the date
all disputes as to the valuations have been resolved and (ii) the fifteenth
Business Day following the expiration of all applicable waiting periods, if any,
under the HSR Act and the receipt of all consents, approvals and authorizations
from governmental authorities or other Persons which the Majority Investors
believe to be necessary or desirable in connection with the acquisition of the
New Securities to be issued to the Investor. The Company shall execute such
documents and instruments as may be necessary or reasonably requested to
effectuate the issuance of New Securities to any Investor.
Section 7.4 Limitations. The provisions of this Article VII will not
----------- ----------- -----------
apply to (i) shares of Common Stock issued as a stock dividend to all holders of
shares of Common Stock or upon any subdivision or combination of shares of
Common Stock, (ii) securities issued for the acquisition by the Company of
another entity or business by merger or such other transaction as would result
in the ownership by the Company of not less than a majority of the voting power
of the other entity or for the purchase of all the assets of an entity or
business, (iii) shares of Common Stock or Rights that are sold by the Company
pursuant to a bona fide public offering pursuant to a registration statement
---- ----
filed under the Act, (iv) shares of Common Stock or Rights issued pursuant to
the Company's stock option plans in existence at the date of this Agreement or
other such stock option plans as approved by the Majority Investors, (v) the
shares of Series A Preferred Stock or Warrants issued pursuant to the Purchase
Agreement or any other Common Stock Rights or any shares of Common Stock issued
upon conversion or exercise thereof, (vi) shares of Common Stock issued upon
exercise of any Common Stock Rights as to which the Holders shall have been
afforded the opportunity to exercise their rights of first refusal pursuant to
this Article VII, or (vii) securities issued upon exercise of Common Stock
Rights outstanding on the Closing Date and described in the Purchase Agreement
or disclosed on a schedule to the Purchase Agreement.
31
<PAGE>
Section 7.5 Terms of Payment of Purchase Price. Subject to Section 7.3
----------- ---------------------------------- -----------
and the rest of this Section, each issuance of New Securities to each Investor
must be on terms not less favorable to such Investor than the most favorable
terms on which the Company issues or proposes to issue in the transaction in
connection with which the preemptive right is being exercised New Securities to
any New Securities Purchaser, any other Investor or any other Person (without
discrimination based on differences in the number or amount of New Securities to
be acquired). Without limiting the generality of the immediately preceding
sentence, (i) each Investor must be given the same options and rights of
election, if any, as to the kind(s) or amount(s) of consideration to be paid or
delivered for New Securities as any other purchaser is given or was proposed to
be given in the Preissuance Notice and (ii) the purchase price to be paid by
each Investor upon exercise of its rights under this Article VII will be paid
-----------
upon terms which are not less favorable than those on which the New Securities
are sold to any other purchaser, unless those terms provide for payment in a
manner which could not reasonably be duplicated by any Investor, such as the
transfer of specific property to the Company, in which event such payment will
be in cash in an amount equal to the fair market value of such specific property
as reasonably determined by the Board of Directors in good faith. The giving of
a Preissuance Notice shall constitute the representation and warranty by the
Company to each Investor that (i) the proposed issuance is not subject to
conditions, contingencies or material terms not disclosed in the Preissuance
Notice or in the accompanying documents delivered therewith; and (ii) neither
the amount or kind of consideration offered by the New Securities Purchaser for
the New Securities nor any other terms of the proposed issuance or of any other
transaction or proposed transaction with the New Securities Purchaser or any of
its Affiliates have been established for the purpose of circumventing,
increasing the cost of exercising or otherwise impairing any Investor's right of
first refusal pursuant to this Article VII or increasing the probability that
any Investor's right of first refusal will not be exercised in full.
Section 7.6 Issuance to Others Not Permitted Absent Compliance. If
----------- --------------------------------------------------
the Company does not issue and deliver, to each Investor, on or before the 120th
day after the date the applicable Preissuance Notice with respect to any
proposed issuance of New Securities is given, all New Securities which such
Investor is entitled to be issued in accordance with the provisions of this
Article VII for any reason other than the failure of such Exercising Holder to
- -----------
tender the purchase price therefor if and when required by this Article VII,
-----------
then the Company shall not be entitled to issue any New Securities pursuant to
the related Preissuance Notice. If, after compliance with Section 7.2, there
-----------
remains any portion of the New Securities specified in a Preissuance Notice
which have not been elected to be acquired by one or more Investors, the Company
shall be entitled to issue such remaining portion to the Persons, in the manner
and on terms and conditions not materially more favorable to the purchaser than
those specified in such Preissuance Notice, but only if such issuance is
consummated not later than the 120th day after the date such Preissuance Notice
was given. If such issuance is not so consummated within such period, then the
Company shall not be entitled to issue any such New Securities without again
complying with the provisions of this Article VII. Notwithstanding the
foregoing provisions of this Article VII, unless a binding purchase agreement
-----------
entered into pursuant to this Article VII by the Company and such Investor
-----------
otherwise provides, the Company may, without liability to any Investor, abandon
the proposed issuance of New Securities.
32
<PAGE>
Section 7.7 Rights Apply to Each Issuance of New Securities. Subject to
----------- -----------------------------------------------
the last sentence of Section 7.1, the provisions of this Article VII shall apply
-----------
successively to each and every issuance or proposed issuance of any New
Securities.
ARTICLE VII
CERTAIN OTHER COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
Section 8.1 Financial Information. So long as an Investor is a holder
----------- ---------------------
of 250,000 Registrable Shares (as adjusted for any stock splits, consolidations
and the like), the Company will furnish to such Investor the following reports:
(i) Within the applicable time period required under the Exchange
Act, after the end of each fiscal year of the Company, the information required
by Form 10-K (or any successor form thereto) under the Exchange Act with respect
to such period (including a "Management's Discussion and Analysis of Financial
condition and Results of Operations" section that describes the consolidated
financial condition and results of operations of the Company), together with a
report thereon by the Company's certified independent accountants;
(ii) Within the applicable time period required under the
Exchange Act after the end of each of the first three fiscal quarters of each
fiscal year of the Company, the information required by Form 10-Q (or any
successor from thereto) under the Exchange Act with respect to such period
(including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section that describes the consolidated financial
condition and results of operations of the Company);
(iii) Any current reports on Form 8-K (or any successor forms)
required to be filed under the Exchange Act; and
(iv) As soon as practicable upon approval or adoption by the
Company's Board of Directors, the Company will furnish such Investor with the
Company's budget and operating plan (including projected balance sheets and
profit and loss and cash flow statements) for such fiscal year.
Section 8.2 Board Representation; Observer.
----------- ------------------------------
(a) During the period commencing on the first date (after the date
hereof) as of which all outstanding Series A Shares shall have been converted
into Common Stock and ending on the first to occur of (i) the redemption of any
Series A Shares by the Company and (ii) the first date as of which the Initial
Investors and the Second Purchasers (and their respective Affiliates) hold, in
the aggregate, a number of Registrable Shares that is less than 50% of the
original number of Registrable
33
<PAGE>
Shares held by the Initial Purchasers immediately after the Second Closing (as
defined in the Purchase Agreement), as such number be appropriately adjusted by
reason of stock splits, stock combinations, recapitalizations and similar
events, the Initial Investors shall have the right to nominate a member of the
Company's board of directors. During such period, the Company shall propose and
recommend the Initial Investors' board nominee to the Company's shareholders.
(b) During the period commencing on the first date (after the date
hereof) as of which any outstanding Series A Shares shall have been redeemed by
the Company and ending on the first date as of which the Initial Investors and
the Second Purchasers (and their respective Affiliates) hold, in the aggregate,
a number of Registrable Shares that is less than 50% of the original number of
Registrable Shares held by the Initial Purchasers immediately after the Second
Closing, as such number be appropriately adjusted by reason of stock splits,
stock combinations, recapitalizations and similar events, the Initial Investors
shall have the right to have a representative appointed by them attend or
participate in any one or more meetings of the Company's board of directors as
an observer, and not as a director, and such representative shall be entitled to
receive the same notices of meetings of and proposed actions by the Company's
board of directors as the Company's directors generally, but shall not be
entitled to any voting or consent rights of a director; provided, that such
--------
right of the Initial Investors shall be suspended during any period that the
Company's directors include Michael J. Marocco or another principal or senior
employee of Sandler Capital Management.
(c) The Initial Investors' nominee pursuant to Section 8.2(a) and
observer pursuant to Section 8.2(b) shall be Michael J. Marocco or another
principal or senior employee of Sandler Capital Management approved by the
Company, such approval not to be unreasonably withheld. Each of the Investors
severally, not jointly, agrees that, while shares of Series A Preferred Stock
are outstanding, such Investor shall vote all Series A Shares held by such
Investor for the election of Mr. Marocco, or another principal or senior
employee of Sandler Capital Management approved by the Company (such approval
not to be unreasonably withheld) as the Series A Director (as defined in the
Series A Articles of Amendment).
Section 8.3 Additional Piggyback Registration Rights. From and after
----------- ----------------------------------------
the Closing Date, the Company shall not (i) grant to any Person rights to
participate in any Piggyback Registration that are more favorable than the
rights granted to the Investors in the case of a cut-back in a Piggyback
Registration or (ii) grant any Person a right to piggyback on a Demand
Registration unless such Persons agree that in the event of any required cut-
back, such Persons shall have their security proposed to be included in such
registration reduced prior to any reduction in Registrable Shares of the
Investors included in such registration.
.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Securities Act Legend. Except as otherwise provided in this
----------- ---------------------
Section 9.1, each stock certificate or other instrument evidencing the Series A
- -----------
Shares, the Warrants, any Conversion Stock or any Warrant Stock shall bear a
legend in substantially the following form:
34
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR OTHER
SECURITIES LAWS. THEY ARE 'RESTRICTED SECURITIES' WITHIN THE MEANING
OF SEC RULE 144. THE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
AND SUCH LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
ACT AND SUCH LAWS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE REASONABLE SATISFACTION OF THE COMPANY."
Any holder of any such certificate or instrument bearing the foregoing legend
shall be entitled to promptly receive from the Company, without expense, a new
certificate or instrument of identical tenor representing the same kind of
securities and the same number or other amount thereof not bearing such legend
if such securities shall have been effectively registered under the Securities
Act and are sold or otherwise disposed of in accordance with the intended method
of disposition by the seller thereof set forth in the registration statement, or
such securities may be freely transferred by such holder by reason of an
exemption from registration under the Securities Act, or such legend otherwise
is not required in order to ensure compliance with the Securities Act. The
written opinion of Baker & Botts, L.L.P., or other legal counsel selected by
such holder and reasonably satisfactory to the Company with respect to any of
the foregoing or with respect to any question concerning whether any proposed
transfer of any such securities would violate the Securities Act shall be
sufficient to determine the issue.
Section 9.2 Rule 144. The Company covenants that following the initial
----------- --------
registration of any Common Stock, it will file any reports required to be filed
by it under the Securities Act and the Exchange Act so as to enable Investors
who continue to hold any Registrable Shares to sell such Registrable Shares
without registration under the Securities Act within the limitation of the
exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may
be amended from time to time, or (ii) any similar rule or rules now in effect or
hereafter adopted by the Commission. Upon the request of any Investor, the
Company will promptly deliver to such Investor a written statement as to whether
it has complied with such requirements.
Section 9.3 Amendments and Waivers. The provisions of this Agreement,
----------- ----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers of or consents to departures from the provisions
hereof may not be given, unless approved in writing by the Company and by the
Majority Investors. Notwithstanding the foregoing, any waiver or departure with
respect to any matter which relates exclusively to the rights and obligations of
Investors in a specific Piggyback Registration or Demand Registration, which
relates only to the Registrable Shares being registered pursuant to that
Piggyback Registration or Demand Registration, which applies only to such
specific Piggyback Registration or Demand Registration, and which does not
35
<PAGE>
directly or indirectly adversely affect the rights of any other Investor with
respect to any Registrable Shares not being so registered, shall be authorized
and effective if approved in writing by the Company and the Majority Investors.
Section 9.4 Termination. The provisions of this Agreement shall
----------- -----------
terminate as to any particular Investor, other than the provisions of Article
VI, which shall survive any such termination indefinitely, at the first time as
of which all Registrable Shares held by such Investor may be publicly sold by
such Investor pursuant to Rule 144 under the Securities Act without registration
or qualification under the Securities Act or state securities laws, without
limitations as to volume or manner of sale and without any limitation,
restriction or condition; provided, however, that any obligations of the Company
-------- -------
pursuant to Article V or any other provision of this Investor Rights Agreement
---------
with respect to any pending or completed Demand Registration or Piggyback
Registration which have not been fully performed shall survive until fully
performed. In the case of any dispute concerning whether the condition stated
in the immediately preceding sentence has been satisfied as of any time, the
opinion of an independent law firm of nationally recognized standing selected by
the Majority Investors reasonably satisfactory to the Company shall be final and
conclusive. The fees and expense of such law firm will be paid by the losing
party to such dispute.
Section 9.5 Certain Mergers and Other Events. If the Company proposes
----------- --------------------------------
to consummate any consolidation, merger, binding share exchange or
reorganization in which the Company is not the continuing corporation or any
sale, conveyance, transfer or lease to another Person of the properties and
assets of the Company as an entirety or substantially as an entirety and if, as
a result of or in connection with such transaction, the Investors would receive
or would be entitled to receive, in exchange for or otherwise with respect to
the Registrable Shares held by them, any common stock, other capital stock or
other securities of the successor or acquiring corporation or any Affiliate
thereof or any Rights for any such common stock, capital stock or other
securities, then the Company shall not consummate such transaction unless the
successor or acquiring Person (as the case may be) shall, in a manner reasonably
satisfactory to the Majority Investors, grant to the Investors registration
rights which shall be no less favorable to the Investors than the provisions of
this Agreement. In the event of (i) any reclassification, reorganization or
change of the outstanding shares of Common Stock or other capital stock of the
Company, (ii) any consolidation, merger, binding share exchange or
reorganization to which the Company is party (other than a consolidation,
merger, share exchange or reorganization in which the Company is the continuing
corporation and which does not result in any reclassification of or change in
the Registrable Shares of any class, series or type), (iii) any event which
results in the securities deliverable upon exercise or conversion of any Common
Stock Rights referred to in the definitions of Registrable Shares in Section 1.1
-----------
consisting of or including any securities other than shares of Common Stock, or
(iv) any other event of any kind occurs which results in a change in the
securities constituting or included in the Registrable Shares immediately before
such event, then the Investors shall be entitled to registration rights with
respect to all such securities issued or issuable to them by reason thereof
which are comparable in all material respects to those provided for herein with
respect to Registrable Shares. In the event any dispute relating to this
Section 9.5 shall arise, then such dispute shall promptly thereafter be
- -----------
submitted for resolution by an independent law firm of recognized national
standing selected by the Company and reasonably
36
<PAGE>
acceptable to the Majority Investors (acting as provided above in this Section),
whose decision (with the advice of an independent investment banking firm of
recognized national standing selected by such law firm, if such law firm
believes it advisable to seek such advice) shall be final and conclusive. The
reasonable fees and expenses of such law firm (and of any such investment
banking firm) shall be paid by the Company.
Section 9.6 Tag-Along Rights.
----------- ----------------
(a) If, at any time or from time to time prior to the Qualifying IPO,
any Insider propose to effect any sale, transfer or conveyance for value (a
"Proposed Sale") that, if effected, would result in the number of shares of
Common Stock Beneficially Owned by the Insiders, collectively, being less than
eighty percent of the number of shares of Common Stock Beneficially Owned by the
Insiders, collectively, as of the date of this Agreement (as adjusted for stock
splits; reverse stock splits and similar events occurring after the date hereof)
other than a transfer to a Qualified Affiliate who agrees in writing with the
Investors to be bound by this Section 9.6 as an "Insider", such Insider will
-----------
afford the Investors the opportunity to include the Registrable Shares ratably
and proportionately in such sale and upon the same terms and conditions as are
applicable to the Proposed Sale by such Insider (such right for Investors to
participate in such sale is referred to herein as the "Tag-Along Rights").
(b) The selling Insider shall promptly notify, or cause to be
notified, Investors in writing of each Proposed Sale. Such notice (the
"Proposed Sale Notice") shall set forth: (i) the proposed purchaser ("Proposed
Purchaser"); (ii) the total number of shares of Common Stock to be sold by the
selling Insider (the "Tendered Shares"); (iii) the proposed amount and form of
consideration; and (iv) the terms and conditions of the Proposed Sale.
(c) The "Tag-Along Rights" may be exercised by Investors by delivery
of a written notice (the "Tag-Along Notice"), within fifteen days following
receipt of the Proposed Sale Notice, to the selling Insider. The Tag-Along
Notice shall state the number of Registrable Shares that Investors desire to
include in such sale to the Proposed Purchaser (the "Tag-Along Shares").
(d) If and to the extent that the Proposed Purchaser purchases the
Tendered Shares from the selling Insider but does not purchase, upon the same
terms and conditions and for the same consideration, the Tag-Along Shares of
Investors identified in the Tag-Along Notice, the selling Insider shall
purchase from Investors that number of Tag-Along Shares upon the same terms and
conditions and for the same consideration as are applicable to the Tendered
Shares such that, net of purchases by the selling Insider from Investors, each
of the Insider, on the one hand, and Investors, on the other, have disposed of
the same percentage of shares of Common Stock owned by them.
(e) The number of Tag-Along Shares with respect to any Tag-Along
Notice shall not exceed the product of (i) the total number of shares of Common
Stock Beneficially Owned by Investors as of the date of the Proposed Sale Notice
(not giving effect to any double counting of shares of Common Stock due to the
definition of "Beneficially Owned"), and (ii) a fraction, the
37
<PAGE>
numerator of which is the number of Tendered Shares and the denominator of which
is the total number of shares of Common Stock held by the Insider as of the date
of the Proposed Sale Notice.
(f) After the expiration of the fifteen day period in which Investors
may give their Tag-Along Notice, the selling Insider shall have the right, for a
period of ninety days after expiration of such thirty day period, to dispose of
its shares of Common Stock to the Proposed Purchaser upon the terms and
conditions stated in the Proposed Sale Notice. If the selling Insider fails to
consummate such sale within such ninety day period, Investors shall have the
right to once again exercise their Tag-Along Rights as set forth in this Section
-------
9.6, with respect to such sale, it being the intention of the parties that such
- ---
Tag-Along Rights shall automatically be re-instated upon expiration of each such
ninety day period.
(g) As an alternative to Sections 9.6(a) through 9.6(f), with respect
--------------- ------
to Proposed Sales of its Common Stock other than to Qualified Affiliates, the
selling Insider may enter into an agreement providing for the disposition of its
Common Stock if provision is made to allow Investors to participate on the same
terms and the same extent (in proportion to their respective holdings of Common
Stock, including Options). In the event the Proposed Purchaser breaches the
provisions of the purchase agreement with respect to the purchase of the
Registrable Shares from Investors, then the selling Insider shall purchase the
Tag-Along Shares of Investors as provided in Section 9.6(d).
--------------
Section 9.7 Determinations Generally. Unless otherwise expressly
----------- ------------------------
provided herein, all decisions and determinations required or permitted to be
made hereunder by any Investor (including any decision as to whether to give any
consent or approval) shall be made by such Person in its sole discretion.
Section 9.8 Binding Effect; Successors and Assigns; Entire Agreement.
----------- --------------------------------------------------------
Except as expressly provided in this Agreement, nothing in this Agreement,
express or implied, is intended or shall be construed to confer upon or give any
creditor, stockholder or Affiliate of the Company or any other Person except the
parties and the Persons who from time to time are Investors any remedy or claim
under or by reason of this Agreement or any term, covenant or condition hereof,
all of which shall be for the sole and exclusive benefit of the parties. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the Company and the Persons who from time to time are Investors
and their respective successors and permitted assigns. Except as otherwise
specifically permitted or contemplated by this Agreement, neither this Agreement
nor any of the rights, interests or obligations of the Company hereunder shall
be assigned or delegated without the prior written consent of the Majority
Investors. The provisions of Article VI shall inure to the benefit of, and be
----------
enforceable by, each of the Investor Indemnified Parties and the Company
Indemnified Parties. This Agreement constitutes the entire agreement of the
parties with respect to the subject matter herein and supersede all prior
agreements and undertakings, both written and oral, among the parties, or any of
them, with respect to the specific subject matter hereof.
38
<PAGE>
Section 9.9 Interpretation. The headings of the articles and sections
----------- --------------
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not affect the meaning or
interpretation of this Agreement.
Section 9.10 No Implied Waivers. No action taken pursuant to this
------------ ------------------
Agreement, including, without limitation, any investigation by or on behalf of
any party or beneficiary, shall be deemed to constitute a waiver by the party or
beneficiary taking such action of compliance with any agreements, covenants,
obligations or commitments contained herein or made pursuant hereto. The waiver
by any party of a breach or benefit of any provision of this Agreement shall not
operate or be construed as a waiver of any preceding or succeeding breach and no
failure by any party or beneficiary to exercise any right, privilege or remedy
hereunder shall be deemed a waiver of such party's or beneficiary's rights,
privileges or remedies hereunder or shall be deemed a waiver of such party's or
beneficiary's rights to exercise the same at any subsequent time.
Section 9.11 Further Assurances. Each party shall cooperate and take
------------ ------------------
such actions as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby. The obligations of the Company with respect to the
Registrable Shares of any Investor included in any Demand Registration or
Piggyback Registration are subject to the compliance by such Investor with the
immediately preceding sentence, but the failure of any Investor to so comply
shall not affect the Company's obligations with respect to the Registrable
Shares of any other Investor included therein.
Section 9.12 Counterparts. This Agreement may be executed in
------------ ------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to constitute one and the same agreement. In addition
to any other lawful means of execution or delivery, this Agreement may be
executed by facsimile signatures and may be delivered by the exchange of
counterparts of signature pages by means of telecopier transmission.
Section 9.13 Notices. All notices, requests, demands, claims, and other
------------ -------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two Business Days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
39
<PAGE>
If to the Company:
Convergent Communications, Inc.
400 inverness Drive South
Suite 400
Englewood, Colorado 80112
Attn: General Counsel
Telephone: (303) 749-3000
Telecopy: (303) 749-3113
with a copy to:
Richard M. Russo, Esq.
Gibson, Dunn and Crutcher, L.L.P.
1801 California Street
Suite 4100
Denver, Colorado 80202
Telephone: (303) 298-5715
Telecopy: (303) 296-5310
If to any Investor, to such Investor at such Investor's address specified
on Schedule 1 or supplied by such Investor in writing to the Company for
purposes hereof, with a copy to:
Baker & Botts L.L.P.
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Joseph Young
Telephone: (212) 705-5000
Telecopy: (212) 705-5125
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, facsimile transmission ordinary mail, or electronic mail), but
no such notice, request, demand, claim, or other communication shall be deemed
to have been duly given unless and until it actually is received by the intended
recipient. Any party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
Section 9.14 Governing Law. This Agreement shall be governed by and
------------ -------------
construed in accordance with the laws of the State of Colorado without giving
effect to any choice or conflict of
40
<PAGE>
law provision or rule (whether of the State of Colorado or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Colorado.
Section 9.15 Severability. If any provision of this Agreement or the
------------ ------------
application thereof to any person or circumstance is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to Persons or
circumstances other than those as to which it has been held invalid, void or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, provided, that if any provision
--------
hereof or thereof or the application of any such provisions shall be so held to
be invalid, void or unenforceable by a court of competent jurisdiction, then
such court may substitute therefor a suitable and equitable provision in order
to carry out, so far as may be valid and enforceable, the intent and purpose of
the invalid, void or unenforceable provision and, if such court shall fail or
decline to do so, the parties shall negotiate in good faith a suitable and
equitable substitute provision. To the extent that any such provision shall be
judicially unenforceable in any one or more states, such provision shall not be
affected with respect to any other state, each provision with respect to each
state being construed as several and independent.
Section 9.16 Specific Performance. Without intending to limit the
------------ --------------------
remedies available to any of the parties, each of the Investors and the Company
acknowledges and agrees that a violation, breach or threatened by the other of
any term of this Agreement will cause such party irreparable injury for which an
adequate remedy at law is not available. The parties agree that each party
shall have the right of specific performance and, accordingly, shall be entitled
to an injunction, restraining order or other form of equitable relief, in
addition to any and all other rights and remedies at law, from any court of
competent jurisdiction restraining any other party from committing any breach or
threatened breach of, or otherwise specifically to enforce, any provision of
this Agreement and all such rights will be cumulative. The parties further
agree that any defense in any action for specific performance that a remedy at
law would be adequate is waived.
(Signatures continued on the next page)
41
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Investor Rights
Agreement as of the date first written above.
CONVERGENT COMMUNICATIONS, INC.
By: /s/ John R. Evans
_____________________________________________
Name: John R. Evans
Title: Chief Executive Officer
SANDLER CAPITAL PARTNERS IV, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
____________________________
Name: Edward Grinacoff
Title: President
SANDLER CAPITAL PARTNERS IV, FTE, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
____________________________
Name: Edward Grinacoff
Title: President
APPLEWOOD ASSOCIATES, L.P.
By: /s/ Irwin Lieber
____________________________________________
Name: Irwin Lieber
Title: General Partner
<PAGE>
MICHAEL PRICE, individually
/s/ Michael Price
-------------------------------------------------
STEVE RATTNER, individually
/s/ Steve Rattner
-------------------------------------------------
HARVEY SANDLER, individually
/s/ Harvey Sandler
-------------------------------------------------
JOHN KORNREICH, individually
/s/ John Kornreich
-------------------------------------------------
MJM ASSOCIATES L.P.
By: /s/ Michael J. Marocco
____________________________________________
Name: Michael J. Marocco
Title: General Partner
ANDREW SANDLER, individually
/s/ Andrew Sandler
-------------------------------------------------
DAVID LEE, individually
/s/ David Lee
-------------------------------------------------
<PAGE>
DOUGLAS SCHIMMEL, individually
/s/ Douglas Schimmel
-------------------------------------------------
HANNAH STONE, individually
/s/ Hannah Stone
-------------------------------------------------
In order to induce the Initial Investors to enter into such Purchase
Agreement and consummate the transactions contemplated thereby and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each of the undersigned, intending to be legally bound, hereby
agrees to the provisions of, and to be bound as an "Insider" by, Section 9.6 of
-----------
the foregoing Agreement, effective as of the date of such Agreement.
JOHN R. EVANS, individually
/s/ John R. Evans
-------------------------------------------------
CATHY A. E. EVANS, individually
-------------------------------------------------
THE AUDREY L. R. EVANS TRUST
By: /s/ Ian Barclay
____________________________________________
Name: Ian Barclay
Title: Trustee
THE PETER H.R. EVANS TRUST
By: /s/ Ian Barclay
____________________________________________
Name: Ian Barclay
Title: Trustee
<PAGE>
THE MARYANNE M. EVANS TRUST
By: /s/ Ian Barclay
____________________________________________
Name: Ian Barclay
Title: Trustee
THE HILLARY A. J. EVANS TRUST
By: /s/ Ian Barclay
____________________________________________
Name: Ian Barclay
Title: Trustee
PHILIP G. ALLEN, individually
/s/ Philip G. Allen
-------------------------------------------------
NANCY L. THOMPSON, individually
-------------------------------------------------
AMY E. ALLEN, individually
-------------------------------------------------
ANTHONY P. ALLEN, individually
-------------------------------------------------
<PAGE>
PATRICIA A. DONNELLY, individually
-------------------------------------------------
KEITH V. BURGE, individually
/s/ Keith V. Burge
-------------------------------------------------
CYNTHIA A. BURGE, individually
-------------------------------------------------
THE ERIC S. BURGE TRUST
By:
____________________________________________
Name: James R. Miller
Title: Trustee
THE CHRISTOPHER K. BURGE TRUST
By:
____________________________________________
Name: James R. Miller
Title: Trustee
THE BRANDON M. BURGE TRUST
By:
____________________________________________
Name: James R. Miller
Title: Trustee
<PAGE>
Exhibit 4.7
WARRANT AGREEMENT
-----------------
WARRANT AGREEMENT, dated March 17, 1999, between Convergent
Communications, Inc., a Colorado corporation (the "Corporation"), and each of
the entities named on Exhibit A hereto (each an "Initial Purchaser" and
---------
collectively, the "Initial Purchasers").
The Corporation and the Initial Purchasers have entered into a certain
Securities Purchase Agreement, dated as of the date hereof, pursuant to which
each of the Initial Purchasers is purchasing from the Corporation,
simultaneously with the execution and delivery of this Agreement on the date
hereof, certain securities of the Corporation that are convertible into or
exercisable for shares of the Corporation's common stock, including certain
warrants issued by the Corporation. The Corporation and the Initial Purchasers
intend for this document to set forth the terms of such warrants.
In consideration of the premises and the covenants and agreement herein
contained, in order to induce the Purchasers to enter into such Securities
Purchase Agreement and consummate the transactions contemplated thereby and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows.
ARTICLE I
DEFINITIONS
Section 1.1 As used in this Agreement, the following terms have the
-----------
meanings indicated:
"Additional Shares of Common Stock" means any shares of Common Stock issued
or deemed to be issued by the Corporation after the Closing Time other than
shares issued upon conversion of any Series A Share or exercise of any Warrant.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act. The term "affiliated" (whether or not
capitalized) shall have a correlative meaning. For purposes hereof, neither the
Corporation nor any Subsidiary shall be deemed to be an Affiliate of any
Purchaser and no Purchaser nor any Affiliate of any Purchaser shall be deemed to
be an Affiliate of the Corporation.
"Agreement" means this Warrant Agreement, as amended from time to time in
accordance with the terms hereof.
<PAGE>
"Beneficial Owner" means a beneficial owner within the meaning of Rules
13d-3 and 13d-5 under the Exchange Act, as interpreted by the Commission,
provided that a Person shall be deemed to have beneficial ownership of all
securities that such Person has a right to acquire without regard to the 60 day
limitation in subdivision (d)(i) of such Rule 13d-3. The terms (whether or not
capitalized) "beneficially own" and "owned beneficially" shall have correlative
meanings.
"Board" means the Board of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in either New York, New York, or the city and state
in which the principal executive offices of the Corporation within the United
States are located are authorized or obligated by law or executive order to
close.
"capital stock" when used with respect to any corporation means (unless the
context otherwise indicates) any and all shares of capital stock (however
designated) of such corporation, including each class and series of common stock
and preferred stock of such corporation, any class or series, any and all stock
appreciation rights and any and all equivalents of any of the foregoing, and
including any security or interest convertible into or warrant, option or other
right (absolute or contingent) to subscribe for, purchase or otherwise acquire
any of the foregoing, in each case whether or not evidenced by any certificate,
instrument or other document and whether voting or nonvoting.
"Change of Control" has the meaning set forth in Section 101 of the
Indenture. The definition of such term, together with the definitions of all
capitalized terms used therein that are also defined in the Indenture, are
hereby incorporated herein by reference.
"Closing Date" means the date of the closing of the consummation of the
first issuance of Series A Shares to one or more of the Purchasers pursuant to
the Purchase Agreement.
"Closing Time" means 10:00 A.M., New York City time, on the Closing Date.
"Commission" means the Securities and Exchange Commission or any successor
federal agency administering the Securities Act.
"Common Stock" means the Common Stock, no par value, of the Corporation as
constituted on the Closing Date, and any capital stock into which such Common
Stock may thereafter be changed, and (except where the context otherwise
requires) shall also include (i) capital stock of the Corporation of each and
every other class or series (regardless of how denominated) which is also not
preferred as to dividends or assets on liquidation over any other class or
series of stock of the Corporation and which is not subject to redemption and
(ii) shares of common stock of any successor or acquiring corporation (as
defined in Section 3.13) received by or distributed to the holders of Common
------------
Stock of the Corporation in the circumstances contemplated by Section 3.13.
------------
2
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"Convertible Securities" means evidences of indebtedness, shares of stock
or other securities or obligations (except the Series A Preferred Stock and the
Warrants) that are convertible into or exchangeable, with or without payment of
additional consideration in cash or property, for any Common Stock, either
immediately or upon the occurrence of a specified date or a specified event or
the satisfaction or happening of any other condition or contingency.
"Corporation Parties" means the Corporation and its Subsidiaries.
"Current Market Price" means, in respect of any share of Common Stock as of
any time,
(i) if the Common Stock shall not then be Publicly Traded, the Fair Market
Value per share of Common Stock as at such date as determined by the
Board in good faith (subject to Section 3.8(e), if applicable), or
--------------
(ii) if the Common Stock is then Publicly Traded, the average of the
reported last sales prices for the ten consecutive Trading Days
commencing twenty Trading Days before the date in question.
The reported last sales price for each Trading Day shall be
(i) the reported last sales price, regular way, as reported on the New
York Stock Exchange Composite Tape, or
(ii) if not listed or admitted to trading on the New York Stock Exchange,
on the National Market tier of The Nasdaq Stock Market, or
(iii) if the Common Stock is not listed or admitted to trading on the
National Market tier of the Nasdaq Stock Market at such time, in the
principal consolidated or composite transaction reporting system on
the principal national securities exchange on which such security is
listed or admitted to trading, or
(iv) if such security is not quoted on such National Market tier, the
average of the highest bid and lowest asked prices on such day as
reported by The Nasdaq Stock Market.
As used herein, the term "Trading Day" means a day on which the New York Stock
Exchange, each national securities exchange on which the Common Stock is listed
and The Nasdaq Stock Market are open for business, provided that if no sales of
--------
the Common Stock take place on such day on the relevant exchange or stock market
determined under the immediately preceding sentence, such day shall not be a
Trading Day. The Common Stock shall be considered to be "Publicly Traded" as of
any date if on such date (i) the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act and (ii) the Common Stock is listed for trading on
a national securities exchange registered under the Exchange Act or traded in
the over-the-counter market and quoted on The Nasdaq Stock Market. The Common
Stock shall be considered to be "Publicly Traded" as of any
3
<PAGE>
date if on such date (i) the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act and (ii) the Common Stock is listed for trading on a
national securities exchange registered under the Exchange Act or traded in the
over-the-counter market and quoted on The Nasdaq Stock Market.
"Election to Convert" is defined in Section 2.3.
-----------
"Election to Exercise" is defined in Section 2.2.
-----------
"Employee Option" means any option to purchase Common Stock for cash which
is granted by or with the approval of the Board to any director, officer,
employee or consultant of the Corporation or any subsidiary of the Corporation
pursuant to (i) the Corporation's stock option plans disclosed in a schedule to
the Purchase Agreement and as in effect on the Closing Date or (ii) any other
option plan adopted by the Corporation after the Closing Date with (A) if
adopted before a Qualifying IPO, the prior approval of the Majority Holders or
(B) if adopted after a Qualifying IPO, with the prior approval of the
Corporation's common stockholders.
"Entity" means any corporation, limited liability company, general or
limited partnership, joint venture, association, joint stock company, trust,
other unincorporated business or organization or other Person which is not
either a natural person or a governmental authority or agency.
An "equity interest" in or of any Entity includes any capital stock or
other equity security issued by such Entity, any partnership (general or
limited) or joint venture interest in such Entity, any other equity, ownership,
participating or beneficial interest in such Entity, any stock appreciation or
other equity appreciation right with respect to such Entity, and any equivalent
of any of the foregoing, regardless of how denominated and whether voting or
non-voting, and any security or interest convertible into or warrant, option or
other right (absolute or contingent) to subscribe for, purchase or otherwise
acquire, any of the foregoing, in each case whether or not evidenced by any
certificate, instrument or other document and whether voting or nonvoting.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Rights" means all Rights (including stock options issued pursuant
to the Corporation's Stock Option Plans) and Convertible Securities, not
including any Series A Shares or Warrants, which were outstanding at the Closing
Time and disclosed on a schedule to the Purchase Agreement.
"Fair Market Value" means, in respect of any security, asset or other
property, the price at which a willing seller would sell and a willing buyer
would buy such security, asset or other property having full knowledge of the
facts, in an arm's-length auction transaction without time constraints, and
without being under any compulsion to buy or sell. The Fair Market Value of a
share of Common Stock as of any time shall be determined as of the last day of
the most recent calendar month which ended prior to such time, shall be
determined without giving effect to any discount for
4
<PAGE>
a minority interest, to any lack of liquidity of the Common Stock or to the fact
that the Corporation may have no class of equity security registered under the
Exchange Act. The Fair Market Value of the Corporation shall be determined on a
going concern basis, and on the basis that the management and other key
employees of the Corporation and its subsidiaries will continue to be employed
indefinitely and without treating as liabilities the amount, if any, payable or
which may be payable by the Corporation pursuant to the indemnification
provisions of the Purchase Agreement.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indenture" means the Indenture, dated as of April 2, 1998, between the
Corporation and Norwest Bank Colorado, N.A., a national banking association, as
Trustee, as in effect at the Closing Time, regardless of any subsequent
amendment, modification, termination or expiration thereof.
"Investor Rights Agreement" means the Investor Rights Agreement, dated as
of the Closing Date, among the Corporation and the Purchasers, as it may be
further amended from time to time in accordance with its terms.
"Majority Holders" means, as of any time, the holders of a majority of the
Warrants then outstanding.
"Outstanding Common Shares" means, as of any time, all issued and
outstanding shares of Common Stock as of such date, except shares then owned or
held by or for the account of the Corporation or any subsidiary thereof.
Outstanding Common Shares shall not include any shares issuable upon exercise,
conversion or exchange of any Rights or Convertible Securities or issuable in
payment of any dividend or other distribution which has been declared but not
actually paid, nor any other shares which have not actually been issued.
"Permitted Holders" has the meaning set forth in Section 101 of the
Indenture. The definition of such term, together with the definitions of all
capitalized terms used therein that are also defined in the Indenture are hereby
incorporated herein by reference.
"Person" means any individual, corporation, limited liability company,
general or limited partnership, joint venture, association, joint stock company,
trust, unincorporated business or organization, government or agency or
political subdivision thereof, or other entity, whether acting in an individual,
fiduciary or other capacity.
"Purchase Agreement" means the Securities Purchase Agreement, dated as of
the Closing Date, between the Corporation and the Purchasers, as the same may be
amended from time to time in accordance with its terms and with the prior
written consent of the Majority Holders.
"Purchasers" means the SCP Partnerships and each other Person, if any, who
purchases shares of Series A Preferred Stock and Warrants pursuant to the
Purchase Agreement, either at the
5
<PAGE>
First Closing (as defined in the Purchase Agreement) or at the Second Closing
(as defined in the Purchase Agreement).
"Qualifying IPO" means the consummation of a single public offering of the
Corporation's Common Stock registered under the Securities Act generating gross
proceeds to the Corporation of at least $50 million.
"Redeemable Stock" has the meaning set forth in Section 3.2(b).
--------------
"Reference Price" means, as of any time, the higher of (x) one-half of the
Warrant Price then in effect or (y) the Current Market Price per share of the
Common Stock determined as of such time.
"Reorganization Event" has the meaning assigned to it in the Series A
Articles of Amendment.
"Rights" means (i) any Convertible Securities and (ii) any options,
warrants or other rights (except Convertible Securities, the Series A Preferred
Stock and the Warrants), however denominated, to subscribe for, purchase or
otherwise acquire any Common Stock or Convertible Securities, with or without
payment of additional consideration in cash or property, either immediately or
upon the occurrence of a specified date or a specified event or the satisfaction
or happening of any other condition or contingency.
"Sale of the Company" means any of the following:
(i) any Change of Control; or
(ii) any "person" (within the meaning of that term as used in the
rules under Section 13(d) and 14(d) of the Exchange Act, as interpreted by the
Commission), other than any SCP Holder or any Affiliate of any SCP Partnership
or any group of persons acting in concert which includes any SCP Partnership or
any Affiliate of any SCP Partnership and other than the Permitted Holders, at
any time becomes the Beneficial Owner, directly or indirectly and whether as a
result of issuances, redemptions or repurchases by the Corporation of Common
Stock or transfers of Common Stock by stockholders of the Corporation, of Common
Stock representing 50% or more of the combined voting power with respect to the
election of directors of the Corporation represented by all then outstanding
Common Stock of the Corporation or, prior to a Qualifying IPO, representing more
voting power with respect to the election of directors of the Corporation than
the combined voting power of the Common Stock Beneficially Owned by the
Permitted Holders; or
(iii) the Corporation consolidates with, or merges with or
into, another Person, directly or indirectly sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
Person, or any Person consolidates with, or merges with or into, the Corporation
or any Subsidiary of the Corporation, in any such event pursuant to a
transaction in which the outstanding Common Stock of the Corporation is
converted into or exchanged for cash,
6
<PAGE>
securities, equity interests or other property and immediately after such
transaction the Persons who were the Beneficial Owners of the outstanding Common
Stock of the Corporation immediately prior to such transaction are not the
beneficial owners, directly or indirectly, of more than 50% of the combined
voting power represented by all then outstanding common stock of the surviving
or transferee Person; or
(iv) the Corporation or any of its Subsidiaries purchase, lease or
otherwise acquire assets of any Person or Persons, in one or a series of related
transactions, for consideration consisting in whole or in part of Common Stock,
Convertible Securities or Rights and the number of shares of Common Stock issued
by the Corporation (including all shares issuable or purchasable upon exercise
of all such Convertible Securities and Rights) in such transaction is equal to
50% or more of the number of fully diluted shares of Common Stock outstanding
immediately prior to such transaction (or the first of such series of
transactions); or
(v) any Reorganization Event.
"SCP Holder" means (i) each of the SCP Partnerships and (ii) each other
Person who (A) at any time acquires any Series A Shares directly or indirectly
from any SCP Holder in a transaction or chain of transactions not involving a
public offering within the meaning of the Securities Act and (B) was designated,
by the SCP Holder from whom such Series A Shares were acquired, as an SCP Holder
in a written notice delivered to the Corporation, in each case for so long as
any such Person continues to hold any Warrant.
"SCP Partnerships" means Sandler Capital Partners IV, L.P., a Delaware
limited partnership, and Sandler Capital FTE Partners, L.P., a Delaware limited
partnership, or their respective successors.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Series A Articles of Amendment" means the Articles of Amendment to the
Amended and Restated Articles of Incorporation of the Corporation setting forth
the resolution of the Board creating and authorizing the issuance of the Series
A Preferred Stock and filed with the Colorado Secretary of State pursuant to
Section 7-106-102 of the Colorado Business Corporation Act or any successor
provisions of the Corporation's Articles of Incorporation, as the same may have
been amended prior to or concurrently with the Closing Time and thereafter may
be amended.
"Series A Preferred Stock" means the Series A Senior Convertible Preferred
Stock, no par value, of the Corporation as constituted on the Closing Date, and
any capital stock into which such Preferred Stock may thereafter be changed
(otherwise than upon conversion thereof).
7
<PAGE>
"Series A Share" means any issued and outstanding share of Series A
Preferred Stock. In no event shall shares of Series A Preferred Stock owned or
held by or for the account of the Corporation or any subsidiary thereof be
deemed to be issued and outstanding for any purpose.
"Warrant Certificate" means a certificate, substantially in the form
attached hereto, evidencing one or more Warrants.
"Warrant Price" means, as of any time and with respect to any Warrant, the
price payable upon exercise of such Warrant, in whole or in part, for one share
of Common Stock, which price initially shall be the initial price of Ten Dollars
per share of Common Stock, as such price shall have from time to time been
cumulatively adjusted pursuant to Article III through such time.
-----------
"Warrant Securities" means, with respect to any Warrant at any time, each
class and series of Warrant Stock, each class, series and issue of any other
securities, and any Rights with respect to any of such Warrant Stock or other
securities, any shares, number or other amount of which at such time are
deliverable to a holder of any Warrant upon exercise of such Warrant.
"Warrant Stock" means, with respect to any Warrant at any time, the Common
Stock, each other class or series of capital stock and any Rights or Convertible
Securities with respect to any of the foregoing any shares, number or other
amount of which at such time is deliverable to a holder of any Warrant upon
exercise of such Warrant.
"Warrants" means all Warrants issued by the Corporation to the Purchasers
or any of them pursuant to the Purchase Agreement (whether at the "First
Closing" or the "Second Closing" referred to therein) and all Warrants issued
upon transfer, division or combination of, or in substitution for or replacement
of, any thereof.
Section 1.2 Terms Generally; Certain Rules of Construction. This
----------------------------------------------
Agreement is to be interpreted in accordance with the following rules of
construction:
(i) Number and Gender. All definitions of terms apply equally to both the
-----------------
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms.
(ii) "Including," "Herein," Etc. The words "include," "includes" and
-------------------------
"including" are deemed to be followed by the phrase "without limitation". The
words "herein", "hereof", and "hereunder" and words of similar import refer to
this Agreement (including all Exhibits and Schedules) in its entirety and are
not limited to any part hereof unless the context shall otherwise require. The
word "or" is not exclusive and means "and/or."
(iii) Subdivisions and Attachments. All references in this Agreement
----------------------------
to Articles, Sections, subsections, Exhibits and Schedules are, respectively,
references to
8
<PAGE>
Articles, Sections and subsections of, and Exhibits and Schedules
attached to, this Agreement, unless otherwise specified.
(iv) References to Documents and Laws. Except as expressly provided
--------------------------------
herein, all references to (x) any other agreement or instrument or (y) any law,
statute, rule, regulation, permit, license or similar item are to it as amended
and supplemented from time to time (and, in the case of a law, statute, rule or
regulation, to any corresponding provisions of successor laws, statutes, rules
or regulations).
(v) References to Days. Any reference in this Agreement to a "day" or
------------------
number of "days" (without the explicit qualification "Business") is a reference
to a calendar day or number of calendar days. If any action or notice is to be
taken or given on or by a particular calendar day, and such calendar day is not
a Business Day, then such action or notice may be taken or given on the next
Business Day.
(vi) Examples. If, in any provision of this Agreement, any example is
--------
given (through the use of the words "such as," "for example," "e.g." or
---
otherwise) of the meaning, intent or operation of any provision, such example is
intended to be illustrative only and not exclusive or limiting.
(vii) Participation in Drafting. The parties and their respective
-------------------------
legal counsel have participated in the drafting of this Agreement, and this
Agreement will be construed simply and according to its fair meaning and not
strictly for or against any party.
(viii) Headings. The table of contents and section headings contained in
--------
this Agreement are inserted for convenience only and shall not affect
in any way the meaning or interpretation of this Agreement.
(ix) "Exercise". When used with reference to any Series A Share, Warrant,
--------
Convertible Security or Right, the term "exercise" shall mean the
exercise of the right to exchange or convert such Series A Share,
Warrant, Convertible Security or Right for or into, subscribe for,
purchase or otherwise acquire shares of Common Stock or other
underlying securities represented by such Series A Share, Warrant,
Convertible Security or Right, including an exercise, conversion or
exchange of a Warrant pursuant to Section 2.2, 2.3 or 2.4. Variants
----------- --- ---
of such word (including "exercised" and "exercisable") shall have
correlative meanings.
(x) "Issue" and "Property". Whenever used with respect to any Additional
---------------------
Share of Common Stock or any other share of Common Stock, the word "issue"
includes any issuance, sale or other method of transfer or delivery of such
share, whether such share is newly issued or is a treasury share and
variants of such word (including "issued", "issuance" or "issuable") used
with respect to any Additional Share of Common Stock or any other share of
Common Stock shall have correlative
9
<PAGE>
meanings; therefore, any provision of this Agreement which is stated to be
applicable if the Corporation issues or shall issue any share is applicable
both to a newly issued share and to a treasury share sold or otherwise
transferred or delivered. The word "property" shall include assets or
property of any kind, real, personal, tangible or intangible.
ARTICLE II
EXERCISE OF WARRANTS
Section 2.1 Exercise of Warrants. Any Warrant or Warrants may be
--------------------
exercised, in whole or in part, as provided in this Article II at any time and
----------
from time to time during the period five consecutive years beginning ont he
earliest of (i) the consummation of the Corporation's initial public offering of
Common Stock registered under the Securities Act, (ii) 180 days after the
Closing Date or (iii) immediately before the occurrence of any Sale of the
Company or any liquidation, dissolution or winding up of the Corporation.
Section 2.2 Mechanics of Exercise. Subject to Section 2.3 and Section
--------------------- ----------- -------
2.4, any Warrant or Warrants may be exercised by any Warrantholder, at any time
- ---
and from time to time and in whole or in part, upon delivery to the Corporation
at its principal executive offices within the United States or at another office
or agency designated by the Corporation pursuant to Section 4.3, of the Warrant
-----------
Certificate(s) evidencing the Warrant(s) to be exercised, together with the form
of election to purchase (the "Election to Purchase") substantially in the form
annexed to this Agreement duly completed and signed by such Warrantholder or by
such Warrantholder's duly appointed legal representative or attorney-in-fact,
and payment in full to the Corporation of the aggregate Warrant Price with
respect to each Warrant exercised. Payment of the aggregate Warrant Price for
the Warrant(s) exercised shall be made in cash, by bank wire transfer or by
check payable to the order of the Corporation. Unless such Warrantholder is a
Purchaser, if such payment is made by check, such check shall be certified or an
official bank check. Subject to Section 2.7, any Warrant (or portion thereof)
-----------
exercised shall be deemed to have been exercised immediately prior to the close
of business on the day of delivery of the last to be delivered of such items.
Section 2.3 Conversion In Lieu of Exercise. Any Warrantholder, in its
------------------------------
sole discretion may elect, in lieu of the exercise of any Warrant held by such
Warrantholder or any portion thereof in accordance with Section 2.2, to convert
-----------
such Warrant or portion thereof into
(i) the nearest whole number of shares of Common Stock equal to the
quotient obtained by dividing "A" by "B" where
"A" is the product of (x) the number of shares of Common Stock then
issuable if such Warrant (or portion thereof) were exercised on the
date of conversion and (y) the excess, if any, of (1) the Current
Market Price per share of Common Stock as of
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<PAGE>
the date of conversion over (2) the Warrant Price in effect on the
date of conversion, and
"B" is the Current Market Price per share of Common Stock as of the
date of conversion, and
(ii) the kind and amount of cash, other securities and other property, if
any, to which such Warrantholder would be entitled upon an exercise of
such Warrant or portion thereof.
The conversion right provided for in this Section 2.3 may be exercised in whole
-----------
or in part and at any time and from time to time while any Warrant or any
portion of any Warrant is outstanding. The conversion right may be exercised by
any Warrantholder in whole or in part upon delivery to the Corporation at its
principal executive offices within the United States or at another office or
agency designated by the Corporation pursuant to Section 4.3 of the Warrant
-----------
Certificate(s) evidencing the Warrant(s) to be converted, together with a form
of election to convert (the "Election to Convert") substantially in the form
attached to this Agreement duly completed and signed by such Warrantholder or by
such Warrantholder's duly appointed legal representative or attorney-in-fact.
Any Warrant (or portion thereof) converted shall be deemed to have been
converted immediately prior to the close of business on the day of surrender of
such Warrant for conversion in accordance with the foregoing.
Section 2.4 Exchange of Warrants In a Recapitalization. The
------------------------------------------
Corporation, with the prior written consent of the holders of a majority of the
Warrants then outstanding, may elect to effect a partial recapitalization of the
Corporation pursuant to which all or a portion of the Warrants then outstanding
are exchanged, on a per Warrant basis, into the number of shares of Common Stock
and the kind and amount of cash, other securities and other property, if any,
into which a Warrant could be converted pursuant to Section 2.3 as of the date
-----------
of such recapitalization. Any such exchange of less than all outstanding
Warrants will be made on a pro rata basis, and shall be effective (subject to
--- ----
Section 2.7) on such date as may be determined by the Corporation with the
- -----------
consent of the Majority Holders.
Section 2.5 Delivery of Warrant Securities. As promptly as practicable
------------------------------
after exercise, conversion or exchange of any Warrant (or portion thereof) as
provided in Section 2.2, 2.3 or 2.4, and in any event within five Business Days
----------- --- ---
thereafter, the Corporation shall issue and deliver to the holder, or to his
nominee(s) or, subject to compliance with the Securities Act, transferee(s), a
certificate or certificates for the number of whole shares of Common Stock to
which such holder shall be entitled, registered in such name or names as such
Warrantholder may designate in writing. Subject to Section 2.7, each such
-----------
certificate shall be dated as of the effective date of exercise as determined
pursuant to Section 2.2, Section 2.3 or Section 2.4, as applicable, and such
----------- ----------- -----------
Warrantholder shall be deemed to have become a holder of record of such Common
Stock for all purposes as of such date. Simultaneously with the delivery of
such certificate(s) for such Common Stock, the Corporation also shall deliver to
such holder all cash, other securities and other property,
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<PAGE>
if any, to which he is entitled by virtue of the Warrants exercised. If fewer
than all of the Warrants evidenced by any Warrant Certificate delivered to the
Corporation for exercise, conversion or exchange are exercised, converted or
exchanged, the Corporation shall also deliver to the Warrantholder, at the time
of delivery of the certificate(s) representing such Common Stock, a new Warrant
Certificate, dated as of the Closing Date, evidencing the number of Warrants
remaining unexercised and otherwise identical to the Warrant Certificate so
delivered, or if requested in writing by the holder, in lieu of issuing such new
Warrant Certificate, the Corporation shall make an appropriate notation on such
Warrant Certificate so delivered for exercise indicating the number of Warrants
evidenced thereby which remain unexercised and shall return such Warrant
Certificate to the holder.
Section 2.6 Expenses and Taxes. The Corporation shall pay all expenses
------------------
in connection with, and all taxes and other governmental charges that may be
imposed with respect to, the issue or delivery of the Warrant Securities and
other property which any holder is entitled to receive upon exercise of any
Warrant or Warrants pursuant to Section 2.2, Section 2.3 or Section 2.4. The
----------- ----------- -----------
Corporation shall not be required, however, to pay any stamp, stock transfer or
other similar tax or other governmental charge required to be paid solely by
virtue of any transfer involved in the issue of Warrant Securities in any name
other than that of the holder of the Warrant(s) exercised at the order of such
Holder, and if any such transfer is involved, the Corporation shall not be
required to issue or deliver the Warrant Securities as to which such tax or
charge is applicable until such tax or other charge shall have been paid or it
has been established to the Corporation's reasonable satisfaction that no such
tax or other charge is due.
Section 2.7 Exercise Associated With Public Offerings or Requiring
------------------------------------------------------
Governmental Action. Any Warrantholder may, by a letter or other written notice
- -------------------
to the Corporation accompanying such Warrantholder's Notice of Election to
Exercise or Election to Convert state that the exercise or conversion by such
Warrantholder of any Warrant or portion thereof (i) is in connection with an
offering of securities registered or to be registered pursuant to the Securities
Act and is conditioned upon, and subject to withdrawal or revocation (in whole
or in part) at the election of such Warrantholder at any time prior to, the
closing of the sale of such securities pursuant to such offering or (ii) is
subject to one or more filings with, reviews or approvals by or other
requirements of any governmental authority or agency and is conditioned upon,
and is subject to withdrawal or revocation (in whole or in part) at the election
of such Warrantholder at any time prior to, the completion of such filings or
reviews, the receipt of such approvals or the satisfaction of such other
requirements. In such event, if such exercise or conversion is not so withdrawn
or revoked, the delivery to or upon the order of the exercising or converting
Warrantholder of the certificate(s) or instrument(s) representing or evidencing
the Warrant Shares deliverable by reason of such exercise or conversion shall be
at such time or times as such Warrantholder shall specify in a written notice to
the Corporation. During any period following delivery of the Election to
Exercise or the Election to Convert until such time or times (or such withdrawal
or revocation) such Warrant or portion thereof shall continue to be outstanding
for all purposes, including for purposes of adjustments pursuant to Article III.
The Majority Holders shall have similar rights in the event of any exchange
pursuant to Section 2.4.
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12
<PAGE>
Section 2.8 Fractional Shares of Common Stock. If the number of shares
---------------------------------
of Common Stock issuable on the exercise of any Warrant is not a whole number,
the Corporation shall not be required to issue any fraction of a share of Common
Stock and such number of shares issuable shall be rounded up to the next highest
whole number. If more than one Warrant shall be surrendered for conversion at
one time by the same holder, the number of full shares which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of Warrants so surrendered for conversion. Notwithstanding the provisions of
this Section 2.8, in computing adjustments to the Exercise Price pursuant to
-----------
Article III, fractional shares of Common Stock shall be taken into account and
- -----------
any outstanding Warrant may at any time represent the right to receive upon
conversion less than one share of Common Stock or some other number of shares of
Common Stock which is not a whole number.
Section 2.9 Covenant to Reserve Shares for Issuance on Exercise. The
---------------------------------------------------
Corporation shall at all times reserve and keep available out of the authorized
but unissued shares of Common Stock, solely for the purpose of issue upon
exercise of the Warrants, the full number of shares of Common Stock issuable if
all outstanding Warrants were to be converted in full. All shares of Common
Stock which shall be issuable upon exercise of any Warrant (or portion thereof)
shall be newly issued, duly authorized, validly issued, fully paid and
nonassessable and without any personal liability attaching to the ownership
thereof, and the issuance thereof shall not give rise or otherwise be subject to
preemptive or similar purchase rights on the part of any Person or Persons, and
the Corporation shall take any corporate and other actions that may, in the
opinion of its counsel, be necessary in order that the Corporation may comply
with the foregoing. The Corporation hereby irrevocably authorizes and directs
its current and future transfer agents, if any, for the Common Stock and for any
shares of the Corporation's capital stock of any other class or series issuable
upon the conversion of the exercise of the Warrants at all times to reserve such
number of authorized shares as shall be requisite for such purpose. The
Corporation shall supply such transfer agents with duly executed stock
certificates for such purposes.
Section 2.10 Compliance with Governmental Requirements; Listing of
-----------------------------------------------------
Shares.
(a) General. If issuance of any Warrant Securities issuable upon
-------
exercise of any Warrant(s) require, under any applicable federal, state, local
or foreign law, rule or regulation or any applicable requirement of any national
securities exchange or inter-dealer quotation system, any registration,
qualification, listing or approval before such shares may be issued upon
conversion, the Corporation shall in good faith, as promptly as practicable and
at its expense, diligently endeavor to cause such shares to be duly registered,
qualified, approved or listed, as the case may be and Section 2.7 shall apply.
-----------
(b) Listing. Without limiting the generality of Section 2.10(a), if
------- ---------------
any shares of Common Stock or other capital stock or securities required to be
reserved for issuance upon exercise of any Warrant(s) require registration or
qualification with any governmental authority under any federal or state law
before such shares may be so issued, the Corporation will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered.
13
<PAGE>
During all periods during which shares of Common Stock or any other capital
stock or securities of the same class, series or issue as are issuable upon
exercise of any Warrant are listed, qualified or otherwise eligible for trading
or quotation on any national securities exchange or The Nasdaq Stock Market or
any similar quotation system, the Corporation shall cause all shares of Common
Stock, and all such other capital stock and securities, issuable upon conversion
of such Warrant to be listed, qualified or eligible for trading or quotation
thereon upon issuance thereof.
(c) HSR Act, Etc. Without limiting the generality of Section 2.10(a),
------------ ---------------
if any holder's intended exercise of any Warrant (alone or with other proposed
acquisitions of Common Stock or other securities of the Corporation) would or
might be subject to the HSR Act, the Corporation shall promptly comply with any
applicable requirements under the HSR Act relating to filing and furnishing of
information to the Federal Trade Commission and the Antitrust Division of the
Department of Justice and shall cooperate, and cause all Persons which are part
of the same "person" (as defined for purposes of the HSR Act) as the Corporation
to cooperate and assist in such filing and compliance. If any holder is advised
by its legal counsel that its intended exercise of Warrant(s) would or might be
subject to any other law, rule or regulation which requires any filing with or
review or approval by any governmental authority or agency, the Corporation
shall promptly comply with any requirements of such law, rule or regulation
applicable to it and shall cooperate with such holder in such holder's efforts
to comply with the requirements of such law, rule or regulation applicable to it
on a timely basis.
(d) Expenses. Each of the Corporation and such holder shall bear and
--------
pay any costs or expenses that it incurs in complying with this Section 2.10,
------------
except that each shall pay one half of any filing fee payable to the FTC or the
Department of Justice pursuant to Section 2.10(c) and the HSR Act.
---------------
ARTICLE III
ADJUSTMENT OF WARRANT PRICE AND
WARRANT SECURITIES PURCHASABLE
------------------------------
Section 3.1 Adjustment Generally. Initially as of the Closing Time,
--------------------
each Warrant issued on the Issue Date shall represent the right to purchase one
share of Common Stock for an initial Warrant Price of Ten Dollars per share.
The Warrant Price payable and the type and number and amount of securities and
other property deliverable upon exercise of a Warrant shall be subject to
adjustment from time to time as set forth in this Article III. Such adjustments
-----------
shall be cumulative and shall be made successively on each and every occasion
that any event requiring any such adjustment shall occur. The form of Warrant
Certificate need not be changed because of any adjustment made pursuant to this
Article III, and Warrant Certificates outstanding at the time of such adjustment
- -----------
or issued after such adjustment may state the same Warrant Price and the same
number of shares of Common Stock as are stated in the Warrant Certificates prior
to such adjustment.
Section 3.2 Stock Dividends, Subdivisions, Combinations and
-----------------------------------------------
Recapitalizations.
- -----------------
14
<PAGE>
(a) Adjustment. If the Corporation shall at any time (i) declare or
----------
pay a dividend or declare, pay or make any other distribution on the Common
Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock into a greater number of shares, (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, (iv) declare or pay a dividend or
declare, pay or make a distribution on the outstanding shares of Common Stock in
capital stock of the Corporation other than Common Stock or (v) issue any shares
of capital stock of the Corporation by way of reclassification of the Common
Stock, then in each and every such event, the number of shares of Common Stock
purchasable upon exercise of each Warrant shall be adjusted so that the holder
of any Warrant thereafter surrendered for exercise shall be entitled to receive
the aggregate number of shares of Common Stock or other capital stock of the
Corporation which such holder would have owned and would have been entitled to
receive by virtue of the happening of any of the events described above had such
Warrant been exercised (x) in the case of a dividend or distribution,
immediately prior to the record date for the determination of the stockholders
entitled to receive such dividend or distribution (or, if no such record date is
fixed, immediately prior to any other time as of which the holders of Common
Stock entitled to participate in such distribution was determined) or (y) in the
case of a subdivision, combination or reclassification, on the effective date of
such subdivision, combination or reclassification. Upon such adjustment by
reason of an event described in clause (i), (ii) or (iii) of the first sentence
of this Section 3.2(a), the Warrant Price shall be adjusted to be the Warrant
--------------
Price in effect immediately prior to the effectiveness of such adjustment
multiplied by the quotient obtained by dividing the number of shares of Common
Stock for which a Warrant was exercisable immediately prior to effectiveness by
the number of shares of Common Stock for which a Warrant shall be exercisable
immediately after such effectiveness. If after an adjustment pursuant to clause
(iv) or (v) of the first sentence of this Section 3.2(a) a holder of a Warrant
--------------
upon exercise may receive shares of two or more classes of capital stock of the
Company, the Board shall determine, in good faith, the allocation of the
adjusted Warrant Price between the classes of capital stock. After such
allocation, the exercise privilege and the Exercise Price of each class of
capital stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this Article. An adjustment made pursuant
to this Section 3.2 shall become effective immediately after such record date
-----------
(or other applicable date referred to in subclause (A)(x) of the immediately
preceding sentence) in the case of a dividend or distribution, subject to
Section 3.9(d) and 3.9(e), and shall become effective immediately after the
- -------------- ------
effective date in the case of a subdivision, combination or reclassification.
(b) Exclusion of Distributions of Redeemable Stock. Notwithstanding
----------------------------------------------
Section 3.2(a), if an event listed in clause (iv) or (v) of the first sentence
- --------------
of Section 3.2(a) would result in the Warrants being exercisable for shares or
--------------
units of more than one class or series of capital stock of the Corporation and
any such class or series of capital stock provides by its terms a right in favor
of the Corporation to call, redeem, exchange or otherwise acquire all of the
outstanding shares or units of such class or series (such class or series of
capital stock being herein referred to as "Redeemable Stock"), then in lieu of
the adjustment pursuant to Section 3.2(a), the adjustment contemplated by
Section 3.3 shall be made with the same effect as if the dividend or
- -----------
distribution of such Redeemable Stock or the issuance of the additional class or
series of such Redeemable Stock by reclassification had been a distribution of
assets of the Corporation.
15
<PAGE>
Section 3.3 Certain Other Distributions.
---------------------------
(a) Other Distributions. Subject to Section 3.3(b) and Section
------------------- -------------- -------
3.3(c), if the Corporation shall at any time declare or make any distribution,
by dividend or otherwise, to all holders of outstanding shares of Common Stock
of any cash or other assets or property of any nature whatsoever, any debt
securities or other evidences of its indebtedness, any capital stock, any other
securities of any nature whatsoever or any warrants, options or other Rights to
subscribe for, purchase or otherwise acquire any assets, property, capital
stock, debt or other securities or evidences of indebtedness (excluding
dividends or distributions referred to in Section 3.2, Rights referred to in
-----------
Section 3.5 and Convertible Securities referred to in Section 3.6), or shall
- ----------- ------------
take a record of such holders for the purpose of entitling them to receive such
a distribution, then (i) the number of shares of Common Stock for which each
Warrant is exercisable shall be adjusted to equal the product of the number of
shares of Common Stock for which such Warrant is exercisable immediately prior
to the applicable Adjustment Date determined pursuant to Section 3.3(d),
--------------
multiplied by a fraction the numerator of which shall be the Current Market
Price per share of the Outstanding Common Shares immediately before such
Adjustment Date and the denominator of which shall be the excess of (x) such
Current Market Price per share of the Outstanding Common Shares as of the
Adjustment Date over (y) the amount allocable to one share of the Outstanding
Common Shares as of such Adjustment Date of any such cash so distributable and
of the Fair Market Value (as determined as of such date in good faith by the
Board) of any and all such evidences of indebtedness, shares of capital stock,
debt securities, other securities, property, assets or Rights so distributable
and (ii) the Warrant Price shall be adjusted to equal (A) the Warrant Price in
effect immediately prior to such adjustment multiplied by the quotient obtained
by dividing the number of shares of Common Stock for which a single Warrant is
exercisable immediately prior to the adjustment by (B) the number of shares of
Common Stock for which a single Warrant is exercisable immediately after such
adjustment.
(b) When Adjustment Is Not to be Made. No adjustment pursuant to the
---------------------------------
provisions of Section 3.3(a) shall be made if such adjustment would result in
--------------
the number of shares of Common Stock for which each Warrant is exercisable being
lower, or a Warrant Price that is higher, than was the case immediately prior to
such adjustment. In the event that, with respect to any such distribution, the
Current Market Price referred to in clause (i)(x) of Section 3.3(a) less than
--------------
the amount referred to in clause (i)(y) of Section 3.3(a), then the adjustment
--------------
provided for in Section 3.3(a) shall not be made. In lieu thereof, but subject
--------------
to Section 3.3(c), the type and number and amount of securities and other
--------------
property deliverable upon exercise of any Warrant determined as of immediately
prior to the effective date for such adjustment specified in Section 3.3(c)shall
--------------
be adjusted so that the holder of any such Warrant thereafter surrendered for
conversion shall be entitled to receive the kind and number or amount of shares
of Common Stock (or other capital stock of the Corporation), other Warrant
Securities and other property which such holder would have received had such
Warrant been exercised immediately prior to
(i) the record date for the determination of the stockholders entitled
to receive such distribution, or
16
<PAGE>
(ii) if no such record date is fixed, as of any other time as of
which the holders of Common Stock entitled to participate in such
distribution was determined,
plus the kind and amount of cash, other assets or property, debt securities,
other evidences of indebtedness, other securities or Rights which such holder
would have been entitled to receive by virtue of being the record holder, as of
such record date or other time, of such kind and number or amount of shares of
Common Stock or other Conversion Securities. For such purpose, it shall be
assumed that such holder of Common Stock or other Conversion Securities failed
to exercise rights of election, if any, as to the kind or amount of shares or
stock, other securities or property receivable in such distribution, provided
--------
that if the kind or amount of shares of stock, other securities or property
receivable in such distribution is not the same for each non-electing share,
then the kind and amount of shares of stock, other securities or property
receivable upon consummation of such transaction for each non-electing share
shall be deemed to be the kind and amount so receivable per share by a plurality
of the non-electing shares. If after an adjustment a holder of a Warrant upon
exercise may receive shares of two or more classes of capital stock of the
Company, the Board shall determine, in good faith, the allocation of the
adjusted Warrant Price between the classes of capital stock. After such
allocation, the exercise privilege and the Exercise Price of each class of
capital stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this Article.
(c) Special Rule for Distributions of Redeemable Stock. If by virtue
--------------------------------------------------
of the applicability of Sections 3.2(b) and 3.3(b) in any one or more events,
---------------------------
the Warrant Securities issuable upon conversion of any Warrant consist of or
include any shares of Redeemable Stock and if the Corporation redeems all or any
part of the outstanding shares of such Redeemable Stock prior to the date on
which such Warrant is exercised, then upon exercise of such Warrant the holder
thereof shall be entitled to receive, in lieu of such shares of Redeemable Stock
or, in the event of such a partial redemption, a pro rata portion of such
--- ----
shares, the kind and amount of cash or other assets, securities or other
property or consideration paid by the Corporation with respect to its redemption
of an equal number of shares of such Redeemable Stock. If the consideration so
paid upon the Corporation's redemption of any such Redeemable Stock consists of
or includes any other class or series of Redeemable Stock which is also redeemed
before exercise of any Warrant, then the provisions of the first sentence of
this Section 3.3(c) (and of this sentence) shall apply to successively to the
--------------
shares of such other class or series of Redeemable Stock.
(d) Adjustment Date. The "Adjustment Date" for any distribution in
---------------
respect of which an adjustment is required by this Section 3.3 shall be either
-----------
(i) the date of taking of a record of holders of Common Stock for the purpose
of entitling them to receive such distribution or, if no record is taken, at the
date as of which the holders of Common Stock entitled to participate in such
distribution were determined or (ii) the date of such distribution, whichever
date yields the largest increase in the number of shares of Common Stock
issuable upon exercise of a Warrant in applying the formula contained in the
first sentence of Section 3.3(a).
--------------
17
<PAGE>
(e) Adjustment Effective Date. An adjustment made pursuant to this
-------------------------
Section 3.3 shall become effective, subject to Section 3.8(d), immediately after
- ----------- --------------
such record date or, if no such record date is fixed, immediately after the time
as of which holders of Common Stock entitled to participate in such distribution
were determined or, if no such time is fixed, as of the date of such
distribution.
Section 3.4 Issuance of Additional Shares of Common Stock.
---------------------------------------------
(a) Adjustment Formula. Subject to Section 3.4(b), if at any time the
------------------ --------------
Corporation shall issue, or pursuant to Section 3.5, Section 3.6, or Section 3.7
----------- ----------- -----------
be deemed to issue, any Additional Shares of Common Stock in exchange for
consideration in an amount, determined in accordance with Section 3.8(a) and
--------------
Section 3.8(e), per Additional Share of Common Stock less than the Reference
- --------------
Price as of the applicable time of determination specified in the last sentence
of this Section 3.4(a), then (i) the number of shares of Common Stock which each
--------------
Warrant is exercisable shall be adjusted to equal the product obtained by
multiplying the number of shares of Common Stock for which such Warrant was
exercisable immediately prior to such time of determination by a fraction (x)
the numerator of which shall be the number of Outstanding Common Shares
immediately before such issuance or deemed issuance plus the number of
Additional Shares of Common Stock so issued or deemed to be issued and (y) the
denominator of which shall be the number of Outstanding Common Shares
immediately before such issuance or deemed issuance plus the number of shares
which the aggregate amount of consideration, if any, received by the Corporation
upon such issuance or deemed issuance of all such Additional Shares of Common
Stock would purchase at the Reference Price determined as of such time and (ii)
the Warrant Price shall be adjusted to equal the Warrant Price immediately prior
to such adjustment multiplied by the quotient obtained by dividing the number of
shares of Common Stock for which such Warrant was exercisable immediately prior
to the adjustment under clause (i) by the number of shares of Common Stock for
which such Warrant is exercisable immediately after the adjustment under clause
(i). The applicable time of determination shall be:
(i) if the event requiring the adjustment is the taking of a record date
for any dividend or distribution referred to in Section 3.5 or Section
----------- -------
3.6, as of either the close of business on such record date or the
---
date such dividend or distribution is paid, whichever produces the
highest Reference Price, or
(ii) in the case of any other issuance or deemed issuance, immediately
prior to the time of such issuance or deemed issuance.
(b) When Adjustment is Not Required. The provisions of Section 3.4(a)
------------------------------- --------------
shall not apply to any issuance of Additional Shares of Common Stock for which
an adjustment is made under Section 3.2 or Section 3.3. Subject to Section 3.7,
----------- ----------- -----------
no adjustment of the Conversion Rate shall be made under this Section 3.4 upon
-----------
the issuance of any Additional Shares of Common Stock which are or are deemed to
be issued pursuant to (i)the exercise of any Existing Rights in accordance with
the terms thereof in effect on the Closing Date or (ii) the exercise
18
<PAGE>
of any other Rights or the exercise of any conversion or exchange rights in any
other Convertible Securities if, in the case of any such Rights or Convertible
Securities referred to in this clause (ii) any such adjustment shall previously
have been made, or no such adjustment shall have been required to be made, upon
the issuance of such Rights or upon the issuance of such Convertible Securities
(or upon the issuance of any Rights therefor) pursuant to Section 3.5 or
-----------
Section 3.6.
- -----------
(c) Effective Date. Each adjustment pursuant to this Section 3.4 by
-------------- -----------
reason of any issuance or deemed issuance of any Additional Shares of Common
Stock shall be effective as of the date of such issuance or deemed issuance.
Section 3.5 Issuance of Rights.
------------------
(a) If at any time the Corporation shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive a dividend or
other distribution of, or shall in any manner (whether directly or indirectly by
assumption in a consolidation or in a merger in which the Corporation is the
surviving corporation or otherwise) issue to any Person or Persons, any Rights
to subscribe for, purchase or otherwise acquire any Additional Shares of Common
Stock or any Convertible Securities, in any case whether or not such Rights or
the right to exchange or convert such Convertible Securities are immediately
exercisable, and the consideration per share for which Common Stock is issuable
upon the exercise of such Rights or upon conversion or exchange of such
Convertible Securities determined pursuant to Section 3.8(a) and Section 3.8(e)
-------------- --------------
shall be less than the Reference Price determined as of the applicable time of
determination specified in the last sentence of this Section 3.5(a), then the
--------------
maximum number of shares of Common Stock issuable upon the exercise of such
Rights or, in the case of Rights for Convertible Securities, upon the conversion
or exchange of such Convertible Securities determined as of such applicable time
shall be deemed to be Additional Shares of Common Stock issued as of such
applicable time for such consideration per share and the number of shares of
Common Stock for which each Warrant is exercisable and the Warrant Price shall
be adjusted as provided in Section 3.4(a). The applicable time of determination
--------------
shall be
(i) if the event requiring the adjustment is the taking of a record
date for any dividend or distribution of Rights referred to in
this Section 3.5(a), as of either the close of business on such
--------------
record date or the date such dividend or distribution is paid,
whichever produces the highest Reference Price, or
(ii) in the case of any other issuance of Rights, immediately prior to
the time of such issuance.
(b) No Further Adjustment on Exercise. Subject to Section 3.7, no
--------------------------------- -----------
further adjustments of the Warrants or the Warrant Price shall be made upon the
actual issuance of such Common Stock or of such Convertible Securities upon
exercise of such Rights or upon the actual issuance of such Common Stock upon
such conversion or exchange of such Convertible Securities for which an
adjustment pursuant to this Section 3.5 previously had been made or was not
-----------
required
19
<PAGE>
to be made. Subject to Section 3.7, no adjustment under this Section
----------- -------
3.5 shall be required by reason of the grant of Employee Options that have an
- ---
exercise price per share of Common Stock (i) if granted before a Qualifying IPO,
at least equal to five dollars or (ii) if granted after a Qualifying IPO, at
least equal to the Current Market Price at the time of grant.
Section 3.6 Issuance of Convertible Securities.
----------------------------------
(a) Adjustment. If at any time the Corporation shall take a record of
----------
the holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution of, or shall in any manner (whether directly or
indirectly by assumption in a consolidation or in a merger in which the
Corporation is the surviving corporation or otherwise) issue, to any Person or
Persons, any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange determined
pursuant to Section 3.8(a) and Section 3.8(e) shall be less than the Reference
-------------- --------------
Price determined as of the applicable time of determination specified in the
last sentence of this Section 3.6(a), then the maximum number of shares of
--------------
Common Stock issuable upon the conversion or exchange of such Convertible
Securities determined as of such applicable time shall be deemed to be
Additional Shares of Common Stock issued as of such applicable time for such
consideration per share and the number of shares of Common Stock for which each
Warrant is exercisable and the Warrant Price shall be adjusted as provided in
Section 3.4. If the terms of any Convertible Securities provide for any
- -----------
issuance of additional Convertible Securities (whether in payment of dividends
or interest or otherwise), then each occasion on which any such additional
Convertible Securities are issued shall be deemed a new issuance of Convertible
Securities for which an adjustment pursuant to this Section 10.6 shall be made.
------------
The applicable time of determination shall be:
(i) if the event requiring the adjustment is the taking of a record date
for any dividend or distribution of Rights referred to in this Section
-------
10.6(a), as of either the close of business on such record date or the date
-------
such dividend or distribution is paid, whichever produces the highest
Reference Price, or
(ii) in the case of any other issuance of Rights, immediately prior to the
time of such issuance.
(b) No Further Adjustment Upon Conversion. Subject to Section 3.7, no
------------------------------------- -----------
further adjustment of the Warrants or the Warrant Price shall be made under this
Section 3.6 upon the issuance of any Convertible Securities which are issued
- -----------
pursuant to the exercise of any Rights therefor if any such adjustment shall
previously have been made upon the issuance of such Rights pursuant to Section
-------
3.5. Subject to Section 3.7, no further adjustments of the Warrants or the
- --- -----------
Warrant Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of Convertible Securities for which an adjustment
pursuant to this Section 3.6 previously had been made or was not required.
-----------
20
<PAGE>
Section 3.7 Superseding Adjustment.
----------------------
(a) Readjustment if Adjustment Previously Made. If, at any time after
------------------------------------------
any adjustment of the number of shares of Common Stock for which each Warrant is
exercisable and the Warrant Price shall have been made pursuant to Section 3.5
-----------
or Section 3.6:
-----------
(i) the consideration paid or payable to the Corporation, or the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange of the Rights or Convertible Securities in respect of which such
adjustment was made is increased, in the case of such consideration, or
decreased in the case of such number of shares, by virtue of provisions
contained therein for an automatic increase or decrease (as the case may be)
upon the occurrence of a specified date or event, any amendment or modification
of or departure from the terms thereof previously in effect or otherwise (other
than under or by reason of an event resulting in a change pursuant to the
provisions set forth in the documents governing such Rights or Convertible
Securities designed to protect against dilution, which event also results in an
adjustment pursuant to this Article III), the adjustments to Warrant Price and
-----------
the number of shares of Common Stock issuable upon exercise of each Warrant
computed upon the original issuance thereof (or upon the taking of a record date
with respect thereto), and any subsequent adjustments based thereon, shall, upon
any such increase or decrease becoming effective, be readjusted to the Warrant
Price and number of shares issuable upon exercise of a single Warrant which
would then be in effect had such adjustment originally been made on the basis
that such increased or decreased consideration payable or such increased or
decreased number of shares of Common Stock issued or issuable was the
consideration payable or the number of shares issued or issuable in respect of
such outstanding Rights or Convertible Securities which are actually outstanding
on the effective time of such increase or decrease (but no such readjustment
shall be made with respect to any Rights or Convertible Securities which for any
reason no longer are outstanding as of such time); or
(ii) any Rights or any rights of conversion or exchange under
Convertible Securities in respect of which such adjustment was made shall expire
without having been fully exercised, the Warrant Price computed upon the
original grant, issuance or sale thereof or upon the taking of a record date
with respect thereto (as the case may be), and any subsequent adjustments based
thereon, shall, upon such expiration, be recomputed as if:
(A) in the case of such Rights or Convertible Securities, the only
Additional Shares of Common Stock issued were the shares of Common Stock, if
any, actually issued upon the exercise of such Rights or the conversion or
exchange of such Convertible Securities and the consideration received for such
Additional Shares of Common Stock was, in the case of Rights, the consideration
actually received by the Corporation for the grant, issuance or sale of all such
Rights, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or, in the case of Convertible Securities,
the consideration actually received by the Corporation for the issuance or sale
of all such Convertible Securities which were actually converted or exchanged,
plus the additional consideration, if any, actually received by the Cor
poration upon such conversion or exchange; and
21
<PAGE>
(B) in the case of any such Rights for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issuance or sale of such Rights, and
the consideration received by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration actually
received by the Corporation for the grant, issuance or sale of all such Rights,
whether or not exercised, plus the additional consideration, if any, actually
received by the Corporation upon the issuance or sale of the Convertible
Securities with respect to which such Rights were actually exercised.
(b) When Readjustment is Not to be Made. No readjustment pursuant to
-----------------------------------
this Section 3.7 shall have the effect of (i) decreasing the number of shares of
-----------
Common Stock or the amounts of other Warrant Securities, cash or other property
for which any Warrant is exercisable below the number of such shares and the
amounts of such other Warrant Securities, cash and property for which such
Warrant would have been exercisable if the original adjustment had not been
made, but all subsequent adjustments, if any, required by this Article IV had
----------
been made or (ii) requiring any surrender, return or redelivery of any shares of
Common Stock, other Conversion Securities, cash or other property delivered upon
any exercise of any Warrant prior to the time such readjustment is made,
requiring that the exercising holder or any subsequent holder of any such shares
of Common Stock, Warrant Securities or other property make any payment to the
Corporation or otherwise affecting such shares of Common Stock, other Warrant
Securities or other property or the rights or obligations of the exercising
Holder or any such subsequent holder with respect thereto. From and after any
adjustment or adjustments provided for in this Section 3.7, the Warrants and the
-----------
Warrant Price shall continue to be subject to further adjustment as provided in
this Article III.
-----------
(c) Adjustment When No Adjustment Was Previously Made. If, at any
-------------------------------------------------
time after any grant, sale or other issuance of any Rights or Convertible
Securities for which an adjustment of the Conversion Rate shall not have been
required to be made pursuant to the provisions of Section 3.5 or Section 3.6 (as
----------- -----------
the case may be), the consideration paid or payable to the Corporation upon the
exercise of such Rights or Convertible Securities is decreased, or the number of
shares of Common Stock issued or issuable upon the exercise of such Rights or
Convertible Securities is increased, in either case by virtue of provisions
contained therein for an automatic decrease or increase (as the case may be)
upon the occurrence of a specified date or event, any amendment or modification
of or departure from the terms thereof previously in effect or otherwise (other
than under or by reason of an event resulting in a change pursuant to the
provisions set forth in the documents governing such Rights or Convertible
Securities designed to protect against dilution, which event also results in an
adjustment pursuant to this (Article III), then such event shall, for purposes
-----------
of Section 3.5 (in the case of such Rights) or Section 3.6 (in the case of such
----------- -----------
Convertible Securities) be deemed to be a new issuance, as of the date of the
effectiveness of such decrease or increase (as the case may be) of Rights or
Convertible Securities having terms reflecting such changes.
(d) Adjustment for Events Affecting Existing Rights. If the number of
-----------------------------------------------
shares of Common Stock issued or issuable upon exercise of any Existing Right is
increased as a direct or
22
<PAGE>
indirect result of any amendment or modification of or departure from the terms
thereof previously in effect, then such increased number of shares of Common
Stock issued or issuable upon exercise thereof shall be deemed to be Additional
Shares of Common Stock issued as of the effective date of such increase for the
additional consideration, if any, payable to acquire such increased number of
shares upon exercise of such Existing Right, and the number of shares of Common
Stock for which each Warrant is exercisable and the Warrant Price shall be
adjusted as provided in Section 3.4. If the consideration payable for shares of
-----------
Common Stock issued or issuable upon exercise of any Existing Right is decreased
as a direct or indirect result of any amendment or modification of or departure
from the terms thereof previously in effect, then such event shall be deemed to
be the issuance, as of the effective date of such decrease, of a number of
Additional Shares of Common Stock equal to the excess of (i) the maximum number
of shares of Common Stock issuable upon exercise of such Existing Right over
(ii) the number of shares of Common Stock determined by dividing the total
consideration, if any, that would be payable to the Corporation upon the
exercise in full of such Existing Right after giving effect to such decrease by
the amount of consideration per share of Common Stock issuable upon exercise of
such Existing Right that would have been payable to the Corporation absent such
decrease.
Section 3.8 Other Provisions Applicable to Adjustments. The
------------------------------------------
following provisions shall be applicable to the making of adjustments provided
for in this Article III:
-----------
(a) Computation of Consideration.
----------------------------
(i) To the extent that any Additional Shares of Common Stock,
any Convertible Securities or any Rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be issued
or deemed to be for cash consideration, the consideration received or deemed to
be received by the Corporation therefor shall be the net amount of the cash
received or deemed to be received by the Corporation therefor (in any such case
subtracting any amounts received in respect of accrued interest, accrued
dividends or other similar amounts which the Corporation may be obligated to pay
to the holders thereof in the future and any compensation, discounts or expenses
paid or incurred by the Corporation in connection with the issuance thereof).
(ii) To the extent that such issuance or deemed issuance shall
be for a consideration other than cash, then, except as herein otherwise
expressly provided, the amount of such consideration shall be deemed to be the
Fair Market Value of such consideration at the time of such issuance or deemed
issuance as determined in good faith by the Board.
(iii) In case any Additional Shares of Common Stock, any
Convertible Securities or any Rights to subscribe for, purchase or otherwise
acquire Additional Shares of Common Stock or Convertible Securities shall be
issued or deemed to be issued in connection with any merger, consolidation,
share exchange or similar transaction, the amount of consideration therefor
shall be deemed to be the Fair Market Value, as determined in good faith by the
Board, of such portion of the assets and business of the nonsurviving
corporation as the Board in good faith
23
<PAGE>
shall determine to be attributable to such Additional Shares of Common Stock,
Convertible Securities, or Rights, as the case may be.
(iv) In case any Additional Shares of Common Stock, any
Convertible Securities or any Rights to subscribe for, purchase or otherwise
acquire Additional Shares of Common Stock or Convertible Securities are issued
or deemed to be issued in combination with each other or with any other
securities or property in connection with any transaction in which the
Corporation receives cash, securities, property or other consideration, or any
combination of the foregoing, then the amount of consideration therefor shall be
deemed to be such portion of the cash, securities, property and other
consideration received by the Corporation as the Board in good faith shall
determine to be attributable to such Additional Shares of Common Stock,
Convertible Securities or Rights, as the case may be, with any noncash
consideration being valued at its Fair Market Value as determined by the Board
in good faith. The consideration for any Additional Shares of Common Stock
issuable or deemed to be issuable pursuant to any Rights to subscribe for,
purchase or otherwise acquire the same shall be the consideration received or
deemed to be received by the Corporation for issuing such Rights plus the
minimum additional consideration, if any, paid or payable to the Corporation
upon the exercise or deemed exercise of such Rights.
(v) The consideration for any Additional Shares of Common Stock issued
or issuable pursuant to the terms of any Convertible Securities covered by any
Rights to subscribe for, purchase or otherwise acquire such Convertible
Securities shall be the consideration received or deemed to be received by the
Corporation for issuing such Rights, plus the minimum additional consideration,
if any, paid or payable to the Corporation in respect of the subscription for,
purchase or other acquisition of such Convertible Securities, plus the minimum
additional consideration, if any, paid or payable to the Corporation upon the
exercise or deemed exercise of the right of conversion or exchange in such
Convertible Securities.
(vi) The consideration for any Additional Shares of Common Stock
issuable or deemed to be issuable pursuant to the terms of any Convertible
Securities, other than any covered by any Rights to subscribe for, purchase or
acquire the same, shall be the consideration received or deemed to be received
by the Corporation for issuing such Convertible Securities plus the minimum
additional consideration, if any, paid or payable to the Corporation upon the
exercise of the right of conversion or exchange in such Convertible Securities.
(vii) For all purposes of this Article III, all Rights or
-----------
Convertible Securities issued or deemed to be issued to directors, officers,
employees or consultants of the Corporation or any Subsidiary shall be deemed to
be issued for no consideration except to the extent the Corporation receives in
exchange for the issuance thereof consideration other than services rendered or
to be rendered.
(b) When Adjustments to Be Made. The adjustments required by this
---------------------------
Article III shall be made whenever and as often as any specified event requiring
- -----------
an adjustment shall occur, except that any adjustment of the number of shares of
Common Stock for which a Warrant is
24
<PAGE>
exercisable that would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common Stock) up to, but
not beyond the date of conversion if such adjustment either by itself or with
other adjustments not previously made adds or subtracts less than 1% of the
shares of Common Stock for which a Warrant is exercisable immediately prior to
the making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) which is postponed shall be carried
forward and made as soon as such adjustment, together with other adjustments
required by this Article III and not previously made by virtue of this Section
----------- -------
3.8(b), would result in a minimum adjustment or on the date of conversion. For
- ------
the purpose of any adjustment, any specified event shall be deemed to have
occurred at the close of business on the date of its occurrence.
(c) Fractional Interests. In computing adjustments under this Article
-------------------- -------
III, fractional interests in Common Stock shall be taken into account to the
- ---
nearest 1/100th of a share.
(d) Delivery of Due Bills. If, after the taking of any record of the
---------------------
holders of any class or series of capital stock of the Corporation for the
purpose of entitling them to receive a dividend or distribution for or in
connection with any other event in respect of which an adjustment pursuant to
this Article III is required, but prior to the occurrence of the event for which
-----------
such record is taken, any Warrant is exercised, the Corporation shall deliver to
the exercising Warrantholder a due bill or other appropriate instrument
evidencing such holder's right to receive the additional shares of Common Stock,
other securities, cash and other property receivable upon conversion by reason
of an adjustment pursuant to this Article III that would have been required by
-----------
reason of such dividend, distribution or other event if the Warrant had
continued to be outstanding immediately after the occurrence of the event
requiring such adjustment.
(e) Certain Determinations. Any determination of the Current Market
----------------------
Price of any share of Common Stock or the Fair Market Value of any other
security, asset, property or consideration which may be required to be made by
the Board pursuant to or in connection with the application of any provision of
this resolution may be disputed in good faith by the Majority Holders and any
such dispute shall be resolved by an independent investment banking firm of
recognized national standing selected by the Majority Holders and reasonably
acceptable to the Corporation (and whose fees and expenses shall be paid by the
Corporation), whose decision with respect to such dispute shall be final and
conclusive and binding on the Corporation and all holders of Series A Shares.
Any determination by the Board pursuant to Section 3.9(b) or Section 3.13 may be
-------------- ------------
disputed in good faith by the Majority Holders, and any such dispute shall be
resolved in accordance with Section 3.11.
------------
(f) Other Action Affecting Common Stock. In case at any time or from
-----------------------------------
time to time the Corporation shall take any action in respect of its Common
Stock which is not one described in any other provision of Article III as
-----------
requiring an adjustment, then, unless such action will not have an adverse
effect upon the rights and intended benefits of the holders of Warrants, the
number of shares of Common Stock and the kind and amount of other securities and
property for
25
<PAGE>
which each Warrant is exercisable shall be increased in such manner as may be
equitable in the circumstances.
Section 3.9 Multiple Classes of Common Stock.
--------------------------------
(a) Election Right. If, at any time while any Warrants are
--------------
outstanding, the Corporation's authorized capital stock shall include two or
more classes or series of Common Stock, then each Warrantholder shall have the
right, upon each exercise of any of his Warrant(s), to elect to receive such
number of shares of each such class or series as such holder desires, provided
that the total number of shares of all classes and series selected by such
holder shall not exceed the aggregate number of shares of Common Stock issuable
upon exercise of such Warrants(s).
(b) Adjustment Rights Apply. If, as a result of any adjustment made
-----------------------
pursuant to Article III, by virtue of the existence of Section 3.9(a), as a
----------- --------------
result of any event referred to in Section 3.13, or otherwise, the holder of a
------------
Warrant would, upon exercise thereof, become the holder of more than one class
or series of capital stock of the Corporation, then (i) the Warrant Price shall
be allocated among such classes or series in such manner as the Board shall
determine in good faith and (ii) number, amount and type of shares of Common
Stock and other securities and property for which any Warrant may be exercised
and the Warrant Price shall be subject to adjustment in respect of each such
class and series of capital stock in a manner and on terms as nearly as
equivalent as practicable to the provisions set forth in this Article III, which
-----------
manner and terms shall be determined by the Board promptly after each such
adjustment, each such action by the Corporation and each other event which has
or might have such result. Promptly after the Board makes any such
determination, the Corporation shall deliver to each Warrantholder a written
notice which shall describe in reasonable detail the manner and terms so
determined.
Section 3.10 Notices to Warrant Holders.
--------------------------
(a) Notice of Adjustments. Whenever the Warrant Price or the number
---------------------
of shares of Common Stock or the kind or amount of other securities or property
for which any Warrant is exercisable shall be adjusted pursuant to Article III,
-----------
the Corporation at its expense shall forthwith prepare a certificate to be
executed by the chief financial officer of the Corporation setting forth, in
reasonable detail, the event requiring the adjustment, the nature and amount of
such adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Board made any determination required by
any provision of Article III), the date as of which such adjustment was or will
-----------
be effective as provided herein, the number of shares of Common Stock and the
kinds and amounts, other securities, cash and other property for which and the
Warrant Price at which each Warrant was exercisable immediately prior to such
event and for and at which such Warrant is exercisable immediately after such
adjustment and all other relevant information. The Corporation shall promptly
cause to be delivered to each Warrantholder a signed copy of such certificate.
The Corporation shall, upon the written request at any time of any
Warrantholder, furnish or cause to be furnished to such Warrantholder a like
certificate setting forth (i) the Warrant Price at the time in effect and
showing how such Warrant Price was calculated, and
26
<PAGE>
(ii) the number of shares of each class or series of Warrant Stock and the kind
and amount, if any, of other Warrant Securities, cash and other property which
at the time would be received upon the exercise of a Warrant at the time and
showing how the same were calculated.
(b) Notice of Corporate Action. If at any time
--------------------------
(i) the Corporation shall take a record of the holders of
any class, series or issue of its capital stock or other securities for the
purpose of entitling them to receive a dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any evidences of its
indebtedness, any shares of capital stock of any class or series, any cash or
any other securities or property, or to receive any other right, interest or
benefit, or
(ii) there shall be any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation or any Sale of the Company or any other event referred to in
Section 3.2 or 3.13 shall occur or be proposed, or
- -------------------
(iii) there shall be any tender offer or exchange offer for
Warrant Securities of any class, series or issue, or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation,
then the Corporation shall (x) give to each Warrantholder at least 20 days'
prior written notice of the date on which a record date shall be fixed for such
dividend, distribution or right or for determining rights to vote in respect of
any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up, (y) promptly
after learning of any such tender or exchange offer, deliver to each
Warrantholder notice thereof, a copy of all written offering material which the
Corporation possesses or reasonably can obtain or if no such materials exist or
are possessed or can reasonably be obtained by the Corporation, a written
summary of all material terms and conditions of and other material facts
relating thereto known to the Corporation and (z) give each Warrantholder at
least 20 days' prior written notice of the scheduled, planned or anticipated
date when any such reorganization, reclassification, Sale of the Company,
merger, consolidation, sale, transfer, dissolution, liquidation, winding up or
other event shall take place. Such notice in accordance with clause (x) of the
immediately preceding sentence also shall specify (i) the date on which any such
record is to be taken for the purpose of the event covered by the notice or any
related event, and (ii) the date on which such event or related event is to take
place and, if applicable, the time, if any such time is to be fixed, as of which
the holders of Common Stock shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable as a result of such
event.
(c) Notices To Stockholders. In addition to the foregoing, each
-----------------------
Warrantholder shall be given the same notices of corporate action or proposed
corporate action as any holder of Common Stock.
27
<PAGE>
Section 3.11 No Impairment. The Corporation shall not by or through
-------------
amending its certificate of incorporation, any reorganization, transfer of
assets, consolidation, merger, share exchange, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of any Warrant or Warrant Certificate, but
will at all times in good faith carry out and assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights and intended benefits of the Warrantholders
against impairment. Without limiting the generality of the foregoing, the
Corporation (i) will not directly or indirectly increase the par value of any
shares of Common Stock or other capital stock receivable upon the exercise of
any Warrant above the amount payable therefor upon such exercise immediately
prior to such increase in par value, (ii) will not take any action that results
in any adjustment to the Warrant Price if after such adjustment the total number
of shares of Common Stock or shares of any other class or series of Warrant
Stock issuable upon the exercise of all of the outstanding Warrants would exceed
the total number of shares of Common Stock or such other Warrant Stock,
respectively, then authorized by the Corporation's Certificate of Incorporation
and available and reserved for the purpose of issuance upon such exercise, and
(iii) will take all such action as may be necessary or appropriate in order that
the Corporation may validly and legally issue shares of each class and series of
Warrant Stock and other Warrant Securities upon the exercise of any Warrant
which in each case are fully paid, non-assessable and without personal liability
attaching to the ownership thereof and not subject to preemptive and similar
purchase rights. Upon the request of any Warrantholder, at any time, the
Corporation will acknowledge in writing, in form satisfactory to such
Warrantholder, the continuing validity of each Warrant and Warrant Certificate
then held by such Warrantholder and the obligations of the Corporation with
respect thereto and thereunder.
Section 3.12 Resolution of Certain Disputes.
------------------------------
(a) Consultation. If there shall arise any dispute between the
------------
Corporation and the Majority Holders concerning the interpretation, application
or operation of the adjustment provisions of Article III (other than any such
-----------
dispute referred to in the first sentence of Section 3.8(e), which shall be
--------------
resolved as stated therein), the Corporation and the Majority Holders will
promptly attempt to settle such dispute through consultation and negotiation in
good faith and in a spirit of mutual cooperation. If agreement is reached
concerning the resolution of such dispute, then such agreement shall be final,
conclusive and binding on the Corporation and all Warrantholders.
(b) Arbitration. If, on or before the thirtieth day after written
-----------
notice of such dispute is given by the Corporation to the Warrantholders or the
Majority Holders to the Corporation, such dispute has not been resolved by the
agreement of the Corporation and the Majority Holders, such dispute shall be
settled by an expedited arbitration proceeding conducted in accordance with the
then current Commercial Arbitration rules of the American Arbitration Society in
New York, New York by a single arbitrator who satisfies the requirements of
Section 3.15(e) and who is mutually acceptable to the Corporation and the
- ---------------
Majority Holders or, in the event such Persons fail to agree upon such
arbitrator within ten Business Days after such written notice of dispute is
given, an arbitrator who satisfies such requirements appointed by the American
Arbitration
28
<PAGE>
Association upon application of either the Corporation or the Majority Holders.
Neither the Corporation nor the Majority Holders shall unreasonably withhold its
approval of the selection of an arbitrator satisfying the requirements of
Section 3.12(e).
- ---------------
(c) Certain Provisions Applicable to Arbitration. The Corporation and
--------------------------------------------
the Majority Holders shall provide such arbitrator with such information as may
be reasonably requested in connection with the arbitration of such dispute and
shall otherwise cooperate with each other and such arbitrator in good faith and
with the goal of resolving such dispute as promptly as reasonably practicable.
The arbitrator shall not have authority to award damages, but shall have only
the authority to determine disputes regarding the matters set forth in the first
sentence of Section 3.12(a). Subject to the immediately preceding sentence and
to Section 3.12(f), the arbitrator's decision with respect to the dispute
---------------
referred to such arbitration shall be final and binding and may be entered in
any court with jurisdiction, and the Corporation and the Warrantholders shall
abide by such decision and award. Each party shall bear its own costs and
expenses, including attorney's fees, incurred in connection with any arbitration
proceeding, except that the Corporation and the Warrantholders (as a group) each
shall pay one-half of all fees, costs and disbursements of the arbitrator and of
or charged by the American Arbitration Society.
(d) Other Remedies. The provisions of this Section 3.12 shall not in
-------------- ------------
any way limit or otherwise affect (i) the right of any Warrantholder to seek,
with regard to the matter in dispute, specific performance or other injunctive
relief in any court of competent jurisdiction or (ii) the rights or remedies of
any Warrantholder with respect to any claim, controversy or dispute not
submitted to and decided by or within the authority of an arbitrator pursuant to
this Section 3.12.
------------
(e) Arbitrators. Each arbitrator appointed pursuant to Section
----------- -------
3.12(a) shall be an attorney who practices law in New York City, who has
- -------
substantial experience in sophisticated corporate and securities transactions
generally and in negotiating and drafting "antidilution" provisions of warrants
and convertible securities in particular and who has not, and who is not a
member or employee of any firm which has, rendered legal services to any of the
parties to the dispute or any of their respective Affiliates within the
preceding two years and who has no interest (other than the receipt of customary
fees for his services as an arbitrator) in the matter in dispute.
(f) Other Rights Unaffected. Nothing contained in this Section 3.12
----------------------- ------------
or any other provision hereof is intended to or shall preclude any holder of any
Warrant or Warrant Stock from exercising or pursuing or otherwise limiting or
affecting the rights or remedies which such holder may have pursuant to the
Purchase Agreement, at law, in equity or otherwise by reason of any matter which
is the subject of or basis for any dispute referred to in Section 3.12(a) (or
---------------
any other matter), and the dispute resolution mechanisms provided for in this
Section 3.12 are intended solely as a means of resolving bona fide disputes
- ------------ ---- ----
concerning the interpretation, application or operation of the adjustment
provisions of Article III (other than any such dispute referred to in the first
-----------
sentence of Section 3.8(e), which shall be resolved as stated therein) or bona
-------------- ----
fide disputes which the last sentence of Section 3.8(e) provides will be
- ---- --------------
resolved pursuant to this Section 3.12, and not for the purpose of determining
------------
the rights of holders of Warrants or Warrant Stocks or the liabilities or
29
<PAGE>
obligations of the Corporation, for the purpose of resolving or settling any
claim by any such holder of any breach or inaccuracy of any representation or
warranty of, or any breach or failure to perform any covenant, agreement or
obligation, of the Corporation contained herein or in the Purchase Agreement or
any other Transaction Agreement (as defined in the Purchase Agreement) or any
other purpose. Without limiting the generality of the immediately preceding
sentence, no decision of any arbitrator appointed pursuant to this Section 3.12
------------
shall have or be given any res judicata or similar effect in any action, suit or
--- --------
proceeding in which any claim by any holder of any Warrant or Warrant Stock of
any breach or inaccuracy of any representation or warranty of, or any breach or
failure to perform any covenant, agreement or obligation, of the Corporation
contained herein or in the Purchase Agreement or any other agreement or
instrument is to be adjudicated.
Section 3.13 Reclassification, Consolidation, Merger or Sale,
------------------------------------------------
Conveyance or Lease or Assets.
- -----------------------------
(a) Adjustments. If any of the following shall occur while any
-----------
Warrants are outstanding:
(i) any consolidation, merger, binding share exchange or
reorganization to which the Corporation is party (other than a
consolidation, merger, share exchange or reorganization in which
the Corporation is the continuing corporation and which does not
result in any reclassification of or change in the outstanding
shares of Warrant Securities issuable upon exercise of the
Warrants); or
(ii) any sale, conveyance, transfer or lease to another Entity of the
properties and assets of the Corporation as an entirety or
substantially as an entirety,
then the Corporation or the successor or acquiring Entity, as the case may be,
shall thereupon make appropriate provision, reasonably satisfactory to the
Majority Holders, so that the holders of the Warrants then outstanding shall
have the right at any time thereafter, upon exercise of the Warrants, to
purchase the kind and amount of shares of common stock of such successor or
acquiring Entity, other capital stock or equity interests, other securities and
property receivable or purchasable (as the case may be) upon such
reclassification, change, consolidation, merger, sale, conveyance, transfer or
lease as would be received by a holder of the number of shares of Common Stock,
the number of shares of each other class or series of Warrant Stock and the kind
and amount of all other Warrant Securities issuable upon exercise of such
Warrant immediately prior to such consolidation, merger, sale, conveyance,
transfer or lease (after giving effect to all adjustments required by this
Article III, including any adjustment required by Section 3.15). If the holders
- ----------- ------------
of the Common Stock or any other shares of Warrant Stock of any class or series
have rights of election as to the kind or amount of capital stock or other
equity interests, other securities or other property receivable upon
consummation of any such transaction, then the same right of election shall be
given to the holders of the Warrants. For purposes of this Section 3.13,
--------------
"common stock of the successor or acquiring Entity" shall include capital stock
(or other equity interests if such Entity is not a corporation) of such Entity
of any class which is not preferred as to dividends or assets on liquidation
over any other
30
<PAGE>
class or series of stock of such corporation (or other equity interests of a
non-corporate Entity) and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of capital stock, equity interests
or other securities which are convertible into or exchangeable for any such
capital stock (or other equity interests), either immediately or upon the
arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such capital stock (or
other equity interests).
(b) Express Assumption by Successor or Acquiring Corporation. In case
--------------------------------------------------------
of any such merger, consolidation, share exchange, reorganization, or
disposition of assets, the successor or acquiring Entity shall expressly assume
the due and punctual observance and performance of each and every covenant and
condition of this resolution to be performed and observed by the Corporation and
all the obligations and liabilities thereunder or otherwise with respect
thereto, subject to such modifications as may be deemed appropriate (as
determined by resolution of the Board) in order to provide for adjustments of
shares of the capital stock, other securities or other property for which
Warrants may be exercised which shall be as nearly equivalent as practicable to
the adjustments provided for in Article III. Promptly after the Board makes any
-----------
such determination, the Corporation shall deliver to each Warrantholder a
written notice which shall describe in reasonable detail the manner and terms so
determined.
(c) Provisions Apply Successively. The foregoing provisions of this
-----------------------------
Section 3.13 shall similarly apply to successive reorganizations, mergers,
- ------------
consolidations or disposition of assets.
Section 3.14 Adjustment Relating to Qualifying IPO.
-------------------------------------
(a) Applicability; Certain Definitions. The provisions of this
----------------------------------
Section 3.14 shall apply if the Corporation consummates a Qualifying IPO while
- ------------
any Warrants are outstanding. For purposes of this Section:
(i) the term "IPO Effective Time" means the time of the closing of
the consummation of a Qualifying IPO; and
(ii) the term "Offering Price" means the price to the public per
share of Common Stock in a Qualifying IPO.
(b) Adjustment. If the Corporation consummates a Qualifying IPO
----------
following the Closing Date and if the Offering Price is less than Ten Dollars
per share, as such amount shall be appropriately adjusted in the event of any
stock split or reverse stock split of the Common Stock after the Closing Time
and prior to the IPO Effective Time (such amount, as it may be so adjusted,
being referred to as the "Original Exercise Price"), then:
(i) the Warrant Price of each Warrant in effect as of the IPO
Effective Time shall be recomputed, giving effect to all
adjustments provided for in Section 3.1 through Section 3.8,
----------- -----------
inclusive, by reason of all events (including the
31
<PAGE>
consummation of the Qualifying IPO but not including the issuance
of the shares of Common stock sold to the public in the
Qualifying IPO) occurring after the date of original issuance of
such Warrant and as of or prior to the IPO Effective Time, to be
the amount which would have been, as of the IPO Effective Time,
the Warrant Price of a Warrant that was issued as of such date of
original issuance and continued to be outstanding at all times
thereafter through and including the IPO Effective Time if the
Warrant Price as of the date of such original issuance had
initially been equal to the Offering Price (as appropriately
adjusted for any stock split and reverse stock split of the
Common Stock after the Closing Time and prior to the IPO
Effective Time so that such adjusted Offering Price is the price
per share which, if it had been proportionately adjusted for all
such stock splits and reverse stock splits, would have been equal
to the Offering Price);
(ii) the number of shares of Common Stock and the type, number and
amount of other securities, cash and property for which each
Warrant is exercisable shall be recomputed, giving effect to all
adjustments provided for in Section 3.1 through Section 3.8,
----------- -----------
inclusive, by reason of all events (including the consummation of
the Qualifying IPO but not including the issuance of the shares
of Common Stock sold to the public in the Qualifying IPO)
occurring after the Closing Time and as of or prior to the IPO
Effective Time, to be the number of shares of Common Stock and
the kind and number or amount of other securities, cash and other
property for which a Warrant that was issued as of the Closing
Time and continued to be outstanding at all times thereafter
through and including the IPO Effective Time would have been
exercisable as of the IPO Effective Time if such Warrant had
initially as of such time of original issuance been exercisable
for the number of whole and fractional shares of Common Stock
equal to the absolute number determined by dividing the Original
Exercise Price by the Offering Price (as appropriately adjusted
for any stock split and reverse stock split of the Common Stock
after the Closing Time and prior to the IPO Effective Time so
that such adjusted Offering Price is the price per share which,
if it had been proportionately adjusted for all such stock splits
and reverse stock splits, would have been equal to the Offering
Price); and
(iii) effective as of the IPO Effective Time, the Warrant Price and
the number of shares of Common Stock and the type, number and
amount of other securities, cash and property for which each
Warrant is exercisable shall be as recomputed under clause (i)
and clause (ii) of this sentence, respectively.
(c) Subsequent Adjustment Events. From and after the effective time
----------------------------
of any adjustment made pursuant to this Section 3.14, the Warrant Price and the
------------
number of shares of
32
<PAGE>
Common Stock and other securities and property for which a Warrant shall be
exercisable shall continue to be subject to further adjustment as provided in
Article III.
- -----------
Section 3.15 Adjustment Relating to Certain Other Events.
-------------------------------------------
(a) Applicability; Certain Definitions. The adjustments provided for
----------------------------------
in Section 3.15(b) shall be made if either (i) the closing of the consummation
of a Qualifying IPO by the Corporation does not occur at any time within the
period of twenty-one consecutive months after the Closing Date or (ii) a Special
Event occurs at any time prior to a Qualifying IPO and within twenty-one months
after the Closing Date. For purposes of this Section, the term "Special Event"
shall mean any of the either (i) Sale of Company or (ii) the liquidation,
dissolution or winding up of the Corporation. If such adjustment is required
pursuant to clause (i) of the first sentence of this Section 3.15(a), the term
---------------
"Adjustment Time" shall mean 5:00 P.M., New York City time, on the last day of
the period of twenty-one consecutive months after the Closing Date. If such
adjustment is required pursuant to clause (ii) of the first sentence of this
Section 3.15(a), the term "Adjustment Time" shall mean the time of the
- ---------------
particular Special Event.
(b) Adjustment. If an adjustment shall be required by Section
---------- -------
3.15(a), then:
(i) the Warrant Price of each Warrant in effect as of the
Adjustment Time shall be recomputed, giving effect to all
adjustments provided for in Section 3.1 through Section 3.8,
----------- -----------
inclusive, by reason of all events occurring after the date
of original issuance of such Warrant and as of or prior to
the Adjustment Time, to be the amount which would have been,
as of the Adjustment Time, the Warrant Price of a Warrant
that was issued as of such date of original issuance and
continued to be outstanding at all times thereafter through
and including the Adjustment Time if the Warrant Price as of
the date of such original issuance had initially been equal
to Seven Dollars;
(ii) the number of shares of Common Stock and the type, number
and amount of other securities, cash and property for which
each Warrant is exercisable shall be recomputed, giving
effect to all adjustments provided for in Section 3.1
-----------
through Section 3.8, inclusive, by reason of all events
-----------
occurring after the Closing Time and as of or prior to the
Adjustment Time, to be the number of whole and fractional
shares of Common Stock and the kind and number or amount of
other securities, cash and other property for which a
Warrant that was issued as of the Closing Time and continued
to be outstanding at all times thereafter through and
including the Adjustment Time would have been exercisable as
of the Adjustment Time if such Warrant had initially as of
such time of original issuance been exercisable for 1.429
shares of Common Stock; and
33
<PAGE>
(iii)effective as of the Adjustment Time, the Warrant Price and
the number of shares of Common Stock and the type, number
and amount of other securities, cash and property for which
each Warrant is exercisable shall be as recomputed under
clause (i) and clause (ii) of this sentence, respectively.
(c) Subsequent Adjustment Events. From and after the effective time
----------------------------
of any adjustment made pursuant to this Section 3.15, the Warrant Price and the
------------
number of shares of Common Stock and other securities and property for which a
Warrant shall be exercisable shall continue to be subject to further adjustment
as provided in Article III.
-----------
Section 3.16 Taking of Record; Stock and Warrant Transfer Books. In the
--------------------------------------------------
case of all dividends or other distributions by the Corporation to the holders
of its Common Stock with respect to which any provision of Article III refers to
the taking of a record of such holders, in each such case the Corporation will
not declare, pay or make any such dividend or distribution unless it shall take
such a record and the Corporation take each such record as of the close of
business on a Business Day. The Corporation will not at any time, except upon
dissolution, liquidation or winding up of the Corporation, close its stock
transfer books or Warrant transfer books so as to result in preventing or
delaying the exercise or transfer of any Warrant.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS
OF HOLDERS OF WARRANTS
----------------------
Section 4.1 No Rights or Obligations as Warrant Securityholder Conferred
------------------------------------------------------------
by Warrants or Warrant Certificates. Except as otherwise provided herein, no
- -----------------------------------
Warrant Certificate or Warrant evidenced thereby shall, prior to exercise
thereof, entitle the holder thereof to any of the rights of a holder of Warrant
Securities, including the right to vote at or to receive notice of any meeting
of stockholders of the Corporation or any consent action or other proceeding of
the Corporation. Neither the ownership of any Warrants or Warrant Certificate
nor any provision of any Warrant Certificate shall give rise to any liability of
the holder thereof for the purchase price of any Warrant Security or as a holder
of any Warrant Security, whether such liability is asserted by or on behalf of
the Corporation, creditors of the Corporation or any other Person.
Section 4.2 Holder of Warrant Certificate May Enforce Rights.
------------------------------------------------
Notwithstanding any of the provisions of any Warrant Certificate, any holder of
a Warrant or a Warrant Certificate, without the consent of the holder of any
Warrant Securities or the holder of any other Warrant or Warrant Certificate
may, on his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Corporation suitable to
enforce, or otherwise in respect of, his rights under his Warrant Certificate(s)
or otherwise with respect to his Warrant(s).
34
<PAGE>
Section 4.3 Office of the Corporation. As long as any of the Warrants
-------------------------
remain outstanding, the Corporation shall maintain one or more offices or
agencies where the Warrants may be presented for exercise and Warrants and
Warrant Securities may be presented for registration of transfer, division or
combination. Warrants and Warrant Securities may, in any event, be presented
for such purposes at the principal executive offices of the Corporation in the
United States.
Section 4.4 Uniform Terms. The substantive terms, conditions and other
-------------
provisions of all Warrants and Warrant Certificates shall at all times be
uniform and identical (except, in the case of Warrant Certificates, as to the
number of Warrants evidenced thereby). The Corporation shall not issue any
Warrants except pursuant to the Purchase Agreement. All Warrants outstanding
from time to time shall be deemed to have been issued on the Issue Date, and all
Warrant Certificates, whenever issued, shall be deemed to have been issued, and
shall be dated, as of the Issue Date.
ARTICLE V
TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS
----------------------------------------------
Section 5.1 Exchange and Transfer. Transfer of Warrants shall be
---------------------
registered on the books of the Corporation to be maintained for such purpose,
upon surrender of the Warrant Certificate representing the Warrant or Warrants
to be transferred at the office of the Corporation referred to in Section 2.1 or
-----------
another office or agency designated by the Corporation pursuant to Section 4.3,
-----------
together with a written Assignment Form substantially in the form annexed to
this Agreement duly executed by the holder thereof or his duly appointed legal
representative or attorney-in-fact. Upon such surrender, the Corporation shall,
at its expense, execute and deliver a new Warrant Certificate or Warrant
Certificates in the name of the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and shall issue to the
assignor a new Warrant Certificate evidencing the Warrants not so assigned.
Warrants, if properly assigned in compliance herewith, may be exercised by a new
holder thereof without having a new Warrant Certificate issued. At the option
of any Warrantholder (i) a Warrant Certificate may be exchanged for other
Warrant Certificates representing, in the aggregate, the same number of Warrants
as the Warrant Certificate exchanged or (ii) two or more Warrant Certificates
may be exchanged for a single Warrant Certificate representing, or some other
number of Warrant Certificates representing in the aggregate, the same number of
Warrants as the Warrant Certificates exchanged, in each case upon surrender of
the Warrant Certificate(s) to be exchanged at the office of the Corporation
referred to in Section 2.1 or another office or agency designated by the
Corporation pursuant to Section 4.3. Whenever any Warrant Certificate is so
-----------
surrendered for exchange, the Corporation shall, at its expense, execute and
deliver the Warrant Certificate(s) which the Warrantholder making the exchange
is entitled to receive. Upon receipt by the Corporation of any mutilated
Warrant Certificate, or of evidence reasonably satisfactory to it of the loss,
theft or destruction of any Warrant Certificate and, in the case of loss, theft
or destruction, of indemnity reasonably satisfactory to it, the Corporation will
make and deliver a new Warrant Certificate of identical tenor and representing
the same number of Warrants as such mutilated, lost, stolen or destroyed Warrant
Certificate. Any Warrant Certificate issued in exchange for any Warrant
Certificate, in replacement of any mutilated,
35
<PAGE>
lost, stolen or destroyed Warrant Certificate or upon transfer of any Warrant
shall be dated the Issue Date and shall represent an additional contractual
obligation of the Corporation, whether or not the mutilated, lost, stolen or
destroyed Warrant Certificate shall be at any time enforceable by anyone, and
shall be entitled to rights and benefits equally and proportionately with any
and all other Warrant Certificates duly executed and delivered hereunder.
Section 5.2 Supplying Information. The Corporation shall cooperate with
---------------------
each Warrantholder and each holder of Warrant Securities in supplying such
information as may be reasonably necessary for such Warrantholder or holder to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from registration under the Securities Act for the sale or other transfer of any
Warrant or Warrant Securities. Without limiting the generality of the
immediately preceding sentence, Warrantholders and prospective purchasers of
Warrants designated by such holders will have the right to obtain from the
Corporation upon request by such holders or prospective purchasers, during any
period in which the Corporation is not subject to Section 13 or 15(d) of the
Exchange Act, the information required by paragraph d(4)(i) of Rule 144A in
connection with any transfer or proposed transfer of Warrants.
Section 5.3 Expenses. No service or other charge shall be made for any
--------
exchange, substitution, replacement or registration of transfer of Warrants or
Warrant Certificates and the Corporation shall bear its own costs and expenses
in connection therewith, but the Corporation may require payment of a sum
sufficient to cover any stamp, stock transfer or other similar tax or
governmental charge that is required to be paid by the Corporation solely by
virtue of any transfer. All Warrant Certificates issued upon any exchange,
substitution, replacement or registration of transfer of Warrant Certificates
shall be the valid obligations of the Corporation, evidencing the same
obligations, and entitled to the same benefits under this Agreement, as the
Warrant Certificate surrendered for such exchange, substitution, replacement or
registration of transfer.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Reacquired Warrants. All Warrants received by the
-------------------
Corporation upon exercise or redeemed, retired, purchased or otherwise lawfully
acquired by the Corporation or any of its Subsidiaries shall be retired and
canceled and shall not be deemed outstanding for any purpose or reissued.
Section 6.2 Amendment. The terms, conditions and other provisions of
---------
the Warrants and Warrant Certificates which, as indicated hereinabove, are
intended to be uniform may be amended only with the written consent of the
Corporation and the holders of a majority of the outstanding Warrants. Any such
amendment which is so consented to shall be conclusive and binding on all
present and future holders of Warrant Certificates whether or not they have
consented to such modification or amendment or waiver and whether or not
notation of such modification or
36
<PAGE>
amendment is made upon such Warrant Certificates. Any instrument given by or on
behalf of any holder of a Warrant Certificate in connection with any consent to
any modification or amendment will be conclusive and binding on all subsequent
holders of such Warrant Certificate.
Section 6.3 Determinations Generally. Unless otherwise expressly
------------------------
provided herein, all decisions and determinations required or permitted to be
made hereunder by any Investor (including any decision as to whether to give any
consent or approval) shall be made by such Person in its sole discretion.
Section 6.4 Binding Effect; Successors and Assigns; Entire Agreement.
--------------------------------------------------------
Except as expressly provided in this Agreement, nothing in this Agreement,
express or implied, is intended or shall be construed to confer upon or give any
creditor, stockholder or Affiliate of the Corporation or any other Person except
the parties and the Persons who from time to time are holders of Warrants any
remedy or claim under or by reason of this Agreement or any term, covenant or
condition hereof, all of which shall be for the sole and exclusive benefit of
the parties. This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties and the Persons who from time to
time are holders of Warrants and their respective successors and permitted
assigns. Except as otherwise specifically permitted or contemplated by this
Agreement, neither this Agreement nor any of the rights, interests or
obligations of the Corporation hereunder shall be assigned or delegated without
the prior written consent of the Majority Holders. This Agreement constitutes
the entire agreement of the parties with respect to the subject matter herein
and supersede all prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the specific subject matter
hereof.
Section 6.5 No Implied Waivers. No action taken pursuant to this
------------------
Agreement, including, without limitation, any investigation by or on behalf of
any party or beneficiary, shall be deemed to constitute a waiver by the party or
beneficiary taking such action of compliance with any agreements, covenants,
obligations or commitments contained herein or made pursuant hereto. The waiver
by any party of a breach or benefit of any provision of this Agreement shall not
operate or be construed as a waiver of any preceding or succeeding breach and no
failure by any party or beneficiary to exercise any right, privilege or remedy
hereunder shall be deemed a waiver of such party's or beneficiary's rights,
privileges or remedies hereunder or shall be deemed a waiver of such party's or
beneficiary's rights to exercise the same at any subsequent time.
Section 6.6 Further Assurances. Each party shall cooperate and take
------------------
such actions as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 6.7 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to constitute one and the same agreement. In addition
to any other lawful means of execution or delivery, this Agreement may be
executed by facsimile signatures and may be delivered by the exchange of
counterparts of signature pages by means of telecopier transmission.
37
<PAGE>
Section 6.8 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two Business Days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Corporation: Convergent Communications, Inc.
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
Attn: General Counsel
Telephone: (303) 749-3000
Telecopy: (303) 749-3113
with a copy to: Richard M. Russo, Esq.
Gibson, Dunn & Crutcher LLP
1801 California Street, Suite 4100
Denver, Colorado 80202
Telephone: (303) 298-5715
Telecopy: (303) 296-5310
If to any Warrantholder, to such Warrantholder at its address or supplied
by such Warrantholder form time to time in writing to the Corporation, with a
copy to:
Baker & Botts LLP
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Joseph Young
Telephone: (212) 705-5000
Telecopy: (212) 705-5125
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, facsimile transmission ordinary mail, or electronic mail), but
no such notice, request, demand, claim, or other communication shall be deemed
to have been duly given unless and until it actually is received by the intended
recipient. Any party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other parties notice in the manner herein set forth.
Section 6.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Colorado without giving
effect to any choice or conflict of
38
<PAGE>
law provision or rule (whether of the State of Colorado or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Colorado.
Section 6.10 Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to Persons or
circumstances other than those as to which it has been held invalid, void or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, provided, that if any provision
--------
hereof or thereof or the application of any such provisions shall be so held to
be invalid, void or unenforceable by a court of competent jurisdiction, then
such court may substitute therefor a suitable and equitable provision in order
to carry out, so far as may be valid and enforceable, the intent and purpose of
the invalid, void or unenforceable provision and, if such court shall fail or
decline to do so, the parties shall negotiate in good faith a suitable and
equitable substitute provision. To the extent that any such provision shall be
judicially unenforceable in any one or more states, such provision shall not be
affected with respect to any other state, each provision with respect to each
state being construed as several and independent.
Section 6.11 Specific Performance. Without intending to limit the
--------------------
remedies available to any of the parties, each of the parties acknowledges and
agrees that a violation, breach or threatened by the other of any term of this
Agreement will cause such party irreparable injury for which an adequate remedy
at law is not available. The parties agree that each party shall have the right
of specific performance and, accordingly, shall be entitled to an injunction,
restraining order or other form of equitable relief, in addition to any and all
other rights and remedies at law, from any court of competent jurisdiction
restraining any other party from committing any breach or threatened breach of,
or otherwise specifically to enforce, any provision of this Agreement and all
such rights will be cumulative. The parties further agree that any defense in
any action for specific performance that a remedy at law would be adequate is
waived.
(Signatures continued on the next page)
39
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Warrant Agreement as of
the date first written above.
CONVERGENT COMMUNICATIONS, INC.
By: /s/ John R. Evans
___________________________
Name: John R. Evans
Title: Chief Executive Officer
SANDLER CAPITAL PARTNERS IV, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
----------------------------------
Name: Edward Grinacoff
Title: President
SANDLER CAPITAL PARTNERS IV, FTE, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
__________________________________
Name: Edward Grinacoff
Title: President
APPLEWOOD ASSOCIATES, L.P.
By: /s/ Irwin Lieber
_________________________________
Name: Irwin Lieber
Title: General Partner
MICHAEL PRICE, individually
<PAGE>
/s/ Michael Price
---------------------------
STEVE RATTNER, individually
/s/ Steve Rattner
---------------------------
HARVEY SANDLER, individually
/s/ Harvey Sandler
---------------------------
JOHN KORNREICH, individually
/s/ John Kornreich
---------------------------
MJM ASSOCIATES L.P.
By: /s/ Michael Marocco
--------------------------
Name: Michael J. Marocco
Title: General Partner
ANDREW SANDLER, individually
/s/ Andrew Sandler
---------------------------
DAVID LEE, individually
/s/ David Lee
---------------------------
DOUGLAS SCHIMMEL, individually
<PAGE>
/s/ Douglas Schimmel
--------------------------
HANNAH STONE, individually
/s/ Hannah Stone
--------------------------
<PAGE>
EXHIBIT 10.21
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of this 1st day of
February, 1999, by and between CONVERGENT COMMUNICATIONS SERVICES, INC., a
Colorado corporation ("Purchaser"), whose address is 400 Inverness Drive South,
Fourth Floor, Englewood, Colorado 80112, and KANSAS COMMUNICATIONS, INC., a
Kansas corporation ("Seller"), whose address is 8206 Marshall Drive, Lenexa,
Kansas.
WHEREAS, Seller is engaged in the business of providing telephone service,
equipment and installation, and maintenance throughout Missouri, Kansas and
Wisconsin (the "Business").
WHEREAS, Seller uses the trade names "BT Services" in Missouri, "Kansas
Communications" in Kansas and "SoftNet Business Solutions" in Wisconsin.
Purchaser wishes to acquire the rights Seller has to the trade names "BT
Services" and "Kansas Communications," but not to the trade name "SoftNet
Business Solutions."
WHEREAS, Purchaser intends to buy, and Seller intends to sell,
substantially all of the assets of Seller that relate directly or indirectly to
Seller's Business, upon the terms and conditions set forth in this Agreement.
In addition, Purchaser desires to assume certain specific liabilities of Seller
as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, both parties agree as follows:
1. TRANSFER OF ASSETS. SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT,
------------------
SELLER AGREES TO SELL AND DELIVER TO PURCHASER, AND PURCHASER AGREES TO PURCHASE
FROM SELLER, AS OF THE CLOSING BALANCE SHEET DATE (AS DEFINED HEREIN), ALL OF
SELLER'S RIGHT, TITLE AND INTEREST TO AND IN ALL ASSETS, PROPERTIES AND RIGHTS
(OF ANY KIND, NATURE, CHARACTER AND DESCRIPTION, WHETHER TANGIBLE OR INTANGIBLE,
WHETHER ACCRUED, CONTINGENT OR OTHERWISE, WHEREVER LOCATED) OWNED BY SELLER AS
OF THE CLOSING BALANCE SHEET DATE THAT RELATE TO OR ARE USED IN, OR OTHERWISE
ASSOCIATED WITH, THE BUSINESS (THE "PURCHASED ASSETS"); PROVIDED, HOWEVER,
SELLER WILL RETAIN AND NOT TRANSFER TO PURCHASER THE ASSETS DESCRIBED IN SECTION
2 OF THIS AGREEMENT (THE "EXCLUDED ASSETS"). THE PURCHASED ASSETS SHALL
INCLUDE, WITHOUT LIMITATION, THE FOLLOWING:
<PAGE>
1.1. Personal Property. All equipment, fixtures, furniture, supplies and other
-----------------
personal property owned, utilized or held for use by Seller in the Business,
including, without limitation, the equipment and other assets described on
Schedule 1. 1 (the "Personal Property").
- -------------
1.2. Leases. All rights of Seller under the leases of real property and
------
Personal Property used in connection with Seller's Business which are listed on
Schedule 1.2 under the heading "Assumed Leases." The leases referred to in this
- ------------
Section 1.2 are referred to herein as the "Assumed Leases." The Assumed Leases
shall not include, however, and Purchaser shall not assume, any other lease that
is not an Assumed Lease (collectively, the "Excluded Leases").
1.3. Contracts. All rights of Seller (including, without limitation, all of
---------
Seller's right to receive goods and services and to assert claims and to take
other action with respect to breaches, defaults and other violations pursuant to
such contracts) under all contracts, agreements and commitments which are
identified on Schedule 1.3.A; provided that the assumption of such contracts,
---------------
agreements and commitments by Purchaser shall not constitute a waiver of any
rights of indemnification or other rights under this Agreement which Purchaser
may have by virtue of such contract, or any of its provisions, constituting a
breach of any representation or warranty made by Seller herein. The contracts
referred to in this Section 1.3 are referred to herein as the "Assumed
Contracts." The Assumed Contracts shall not include, however, and Purchaser
shall not assume, any other contract which is not an Assumed Contract,
including, without limitation, those contracts set forth under the heading
"Excluded Contracts" on Schedule 1.3.B (collectively, the "Excluded Contracts").
--------------
1.4. Intangible Assets. All of Seller's right, title and interest in and to all
-----------------
goodwill, licenses, trade names (including, without limitation, the names
"Kansas Communications" and "BT Services," together with all derivations and
variations of such names, but specifically excluding the name "SoftNet Business
Solutions," together with all derivations and variations of such name), assumed
names, trade dress, business identifiers, trademarks, service marks, copyrights,
applications and registrations for any of the foregoing, trade secrets,
confidential information, know-how, causes of action (including all claims for
infringement), claims (including contractual claims), contractual rights or
agreements granting any right, title, license or privilege with respect to
intellectual property and all other intangible assets relating to, used in or
held for use in the operation of the Business (the "Intangible Assets"),
including, without limitation, the Intangible Assets listed on Schedule 1.4.
------------
2
<PAGE>
1.5. Intentionally Omitted.
----------------------
1.6. Records and Documents. All records, computer software and documents,
---------------------
computer source codes and programs, books, supplier, dealer and customer lists,
catalogs and technical data, work orders, credit information and correspondence,
operating data, drawings, blueprints, specifications, designs, financial
information, product data and records, account information, sales leads, sales
representative information, and all other records and documents used in
connection with the operation of the Purchased Assets, but specifically
excluding Seller's Articles of Incorporation (with all amendments thereto),
Bylaws (with all amendments thereto), corporate minutes and documents relating
to the qualification of Seller as a domestic or foreign corporation in Kansas,
Missouri and Wisconsin.
1.7. Prepaid Assets. All of Seller's rights to prepaid deposits, lease
--------------
payments, insurance and other prepaid items, including, without limitation,
those prepaid items listed on Schedule 1.7 (the "Prepaid Assets").
------------
1.8. Literature. All sales literature, promotional literature,
----------
catalogs, sales and marketing materials and similar materials relating to the
Business, but excluding any literature containing the named "SoftNet" and any
literature that is the basis for any pending or threatened litigation.
Purchaser shall be entitled to use all such materials in the operation of the
Purchased Assets.
1.9. Vehicles. All automobiles, trucks, trailers, automotive equipment and
--------
other vehicles owned, leased or used in connection with the operation of the
Business, including, without limitation, those listed on Schedule 1.9 (the
------------
"Vehicles").
1.10. Accounts Receivable. All of Seller's accounts receivable and all
-------------------
evidences of indebtedness and rights, including contingent rights, to receive
payment from any other person or entity, including, without limitation, those
items listed on Schedule 1.10.A (the "Accounts Receivable"), but excluding the
---------------
receivables listed on Schedule 1.10.B due from the Shareholder of Seller under
---------------
the heading "Excluded Receivables." The term "Shareholder" shall mean SoftNet
Systems, Inc., the sole shareholder of Seller.
1.11. Inventory. All of Seller's inventory used in connection with the
---------
Business, including, but not limited to, the inventory items listed on Schedule
--------
1.11 (the "Inventory").
3
<PAGE>
1.12. No Encumbrances. Except as specifically assumed by Purchaser in
---------------
Section 3 of this Agreement, Seller shall transfer the Purchased Assets free and
clear of all liabilities, obligations, liens, security interests and
encumbrances.
2. ASSETS EXCLUDED FROM SALE. THERE SHALL BE
-------------------------
EXCLUDED FROM SALE UNDER THIS AGREEMENT THOSE ASSETS
SPECIFICALLY IDENTIFIED ON SCHEDULE 2 (THE "EXCLUDED
ASSETS").
3. LIABILITIES.
-----------
3.1. Excluded Liabilities. Except as specifically provided in Section 3.2,
--------------------
Purchaser shall not assume, and shall not be obligated to pay, perform or
discharge any debts, liabilities or obligations of Seller, whether actual,
contingent or accrued, known or unknown, including, but not limited to, any
Employee Payments (as defined in Section 8.19 of this Agreement), which
liabilities shall be retained by Seller and shall hereafter be referred to as
the "Excluded Liabilities." Seller shall indemnify and hold Purchaser harmless
(which indemnity and hold harmless shall be indefinite and not subject to the
duration or other limitations in Section 15) against any Excluded Liabilities.
3.2. Assumed Liabilities. Subject to the terms and conditions of this
-------------------
Agreement, Purchaser shall assume and pay, perform and discharge in accordance
with their terms only the following obligations and liabilities of Seller as of
the Closing Balance Sheet Date (the "Assumed Liabilities"):
(a) liabilities identified on Schedule 3.2 which arise under the
------------
Assumed Leases and Assumed Contracts; and
(b) those liabilities which Purchaser specifically agrees to assume
and are specifically identified on Schedule 3.2.
------------
4
<PAGE>
4. PURCHASE PRICE.
---------------
4.1. Amount. In consideration of Seller's sale, assignment and transfer of
------
the Purchased Assets and the performance by Seller of all the terms, covenants
and provisions of this Agreement on its part to be kept and performed, Purchaser
shall (subject to adjustment as set forth in Section 4.3) assume the Assumed
Liabilities set forth on Schedule 3.2 and pay to Seller a purchase price of
approximately $6,200,000 (the "Purchase Price").
4.2. Manner of Payment of the Purchase Price. The Purchase Price shall be
---------------------------------------
paid to Seller in the following manner:
(a) $100,000 has previously been paid by Purchaser to Seller
as an earnest money deposit on November 11, 1998, and shall be applied towards
the Purchase Price on the Closing Date (as defined herein).
(b) $1,400,000 shall be paid in immediately available funds
to Seller, in accordance with Seller's written payment instructions, on the
Closing Date.
(c) $2,000,000 shall be paid pursuant to a secured
promissory note in favor of Seller in the form attached hereto as Exhibit A (the
---------
"Secured July Note"), which shall be secured by a security agreement in the form
attached hereto as Exhibit B, on the Closing Date.
---------
(d) 30,000 shares of common stock, no par value, (the
"Convergent Stock", and together with the Additional Shares (as defined herein),
referred to herein as the "Convergent Stock") of Purchaser's parent company,
Convergent Communications, Inc., a Colorado corporation ("Convergent"), which
Seller and Purchaser have agreed is valued at $10.00 per share for a total of
$300,000 shall be issued as follows: Purchaser shall cause Convergent to deliver
a treasury request to Convergent's transfer agent directing the issuance to
Seller of 30,000 shares of Convergent Stock. In order to evidence such transfer
and issuance of the Convergent Stock, Purchaser shall cause Convergent to
deliver a copy of the treasury request issued to Convergent's transfer agent to
Seller on the Closing Date. The share certificate evidencing the Convergent
Stock shall be delivered to Seller by Convergent's transfer agent within twenty
(20) days of the Closing Date.
(e) $1,000,000 shall be paid pursuant to a secured
promissory note in favor of Seller in the form attached hereto as Exhibit C
---------
("Secured Purchaser's Note"), which shall be secured by a security
agreement in the form attached hereto as Exhibit B, on the Closing Date.
(f) $1,500,000, less any adjustments made pursuant to
Section 4.3(a), shall be paid pursuant to a secured promissory note in favor of
Seller in the form attached hereto
5
<PAGE>
as Exhibit D ("Secured Contingent Note"), which shall be secured by a security
---------
agreement in the form attached hereto as Exhibit B, not later than twenty (20)
---------
days of the Closing Date.
4.3. Adjustments to the Purchase Price.
---------------------------------
(a) Within fifteen (15) days of the Closing Date (the
"Adjustment Date"), Seller shall deliver to Purchaser the Seller's balance sheet
prepared by Seller for the period ended January 31, 1999 (the balance sheet is
referred to herein as the "Closing Balance Sheet," and the date of such Closing
Balance Sheet is referred to herein as the "Closing Balance Sheet Date"). If the
Closing Balance Sheet indicates net working capital and assets of less than
$2,200,000 (such amount being referred to herein as the "Deficiency Amount"),
the Purchase Price, and thereby the Secured Contingent Note, shall each be
reduced dollar for dollar by the Deficiency Amount. If the Closing Balance Sheet
indicates net working capital and assets greater than $2,200,000 (such amount
being referred to herein as the "Share Increase"), the Purchase Price shall be
increased dollar for dollar by the Share Increase and shall be paid to Seller in
additional shares of Convergent Stock, rounded to the nearest $10.00 (the
"Additional Shares"). "Net working capital" shall be calculated for illustration
purposes as set forth in the second column of Seller's Balance Sheet (as defined
herein) set forth on Schedule 4.3. Cash as of the Closing Balance Sheet Date
------------
shall remain with Seller, and the Purchaser shall pay this amount to Seller on
the Adjustment Date.
(b) Seller shall reimburse Purchaser on a dollar for dollar
basis for any accounts receivable reflected on the Seller's Balance Sheet that
remain uncollected after April 30, 1999 (the "Uncollected Accounts Receivable")
in the manner described in this Section 4.3(a). Prior to April 30, 1999,
Purchaser shall make reasonable efforts to collect such receivables in the
ordinary course of its business. Within thirty (30) days of April 30, 1999,
Purchaser shall have the right to: (i) reduce the Allowance for Doubtful
Accounts reflected on the Seller's Balance Sheet on a dollar for dollar basis to
the extent of the Uncollected Accounts Receivable, and (ii) to the extent that
the amount of the Uncollected Accounts Receivable is greater than the Allowance
for Doubtful Accounts reflected on the Seller's Balance Sheet, offset any such
Uncollected Accounts Receivable from the amounts owing to Seller under the
Secured Contingent Note and then the Secured Purchaser's Note, in that order.
Purchaser shall notify Seller of the Uncollected Accounts Receivable and assign
to Seller the right to pursue any claims arising out of such Uncollected
Accounts Receivable for Seller's benefit in connection therewith.
(c) In the event that the Fujitsu Consent (as defined in
Section 11.3(a)) has not been delivered to Purchaser in accordance with Section
11.3(a) within forty-five (45) days of the Closing Date, the Purchase Price and
the Secured Contingent Note shall each be reduced in the amount of $600,000;
provide, however, if the Fujitsu Consent is delivered to Purchaser prior to the
maturity date of the Secured Contingent Note, the $600,000 will be reinstated in
the Secured Contingent Note and shall be due and payable in accordance with the
terms of such Note. In the event that the three (3) Executone Assignments and
Amendments (as defined in Section 11.3(b)) and the consents to the transfer or
assignment of the Assumed Contracts identified as Items 1 through 9 on Schedule
--------
1.3.A, have not been delivered to
- -----
6
<PAGE>
Purchaser in accordance with Section 11.3(b) within forty-five (45) days of the
Closing Date, the Purchase Price, and thereby the Secured Contingent Note, shall
each be reduced in the amount of $10,000 for each such consent or Executone
Assignment and Amendment that has not been delivered; provided, however, that
-------- -------
the adjustment shall not exceed $90,000.
(d) Within 45 days of the Closing Date, Purchaser shall have
completed a written inventory of all of the fixed assets that comprise the fixed
assets being purchased hereunder (the "Fixed Asset Inventory List"), which is
identified on the Closing Balance Sheet as "net fixed assets" (the "Fixed Asset
Value"). If the Fixed Asset Value is $50,000 or greater than the value reflected
on the Fixed Asset Inventory List, then the Purchase Price and the Secured
Contingent Note shall each be reduced dollar for dollar as of the Closing Date
to reflect the decrease in value. If the Fixed Asset Value is within $50,000 of
the value reflected on the Fixed Asset Inventory List, then there shall be no
adjustment to the Purchase Price pursuant to this Section 4.3(d).
(e) In the event that the outstanding principal amount of
the Secured Contingent Note or the Secured Purchaser's Note is required to be
adjusted in accordance with this Section 4.3, Purchaser shall execute and
deliver to Seller an Allonge Endorsement in the form attached hereto as Exhibit
-------
H-1 or Exhibit H-2, whichever the case may be (the "Allonge Endorsement"), and
- --- -----------
Seller shall attach such Allonge Endorsement to the Secured Contingent Note or
the Secured Purchaser's Note, as the case may be. Upon execution and delivery of
any Allonge Endorsement by Purchaser to Seller, the respective Secured
Contingent Note or Secured Purchaser's Note, as the case may be, shall
automatically be deemed to be amended to reflect any adjustment to the
outstanding principal and interest amounts of such Note in accordance with the
terms of this Agreement with no further action required by Purchaser.
4.4. Allocation of Purchase Price. The Purchase Price shall be assigned
----------------------------
and allocated to the Purchased Assets in the manner mutually agreed upon by the
parties within 20 days of the Closing Date and in accordance with the allocation
to be described in Schedule 4.4 attached hereto.
-------------
4.5. Payments of Transfer Tax. All taxes imposed in connection with the
------------------------
sale and transfer of the Purchased Assets to Purchaser shall be borne by Seller
and Seller shall indemnify and hold Purchaser harmless with respect to any such
tax which might be levied on or collected from Purchaser.
5. INTENTIONALLY OMITTED.
---------------------
7
<PAGE>
6. CLOSING. THE CLOSING OF THIS TRANSACTION, INCLUDING THE TRANSFER OF ALL
-------
OF THE PURCHASED ASSETS AND THE ASSUMPTION OF THE ASSUMED lIABILITIES), SHALL
TAKE PLACE AT THE OFFICES OF FREEBORN & PETERS, 950 SEVENTEENTH STREET, SUITE
2600, DENVER, COLORADO AT 10:00 A.M. ON THE 12TH DAY OF fEBRUARY, 1999 (THE
"CLOSING DATE").
7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. AS MATERIAL REPRESENTATIONS
-------------------------------------------
TO INDUCE SELLER TO ENTER INTO THIS TRANSACTION, PURCHASER MAKES THE FOLLOWING
REPRESENTATIONS AND WARRANTIES TO SELLER, EACH OF WHICH IS TRUE AND CORRECT AS
OF THE CLOSING DATE:
7.1. Corporate Organization. Purchaser is a corporation duly organized and
----------------------
existing in good standing under the laws of the State of Colorado and has filed
all reports required to be filed with the Secretary of State of the State of
Colorado and has all corporate power and authority to own, operate and lease its
properties and carry on its businesses as now conducted. Purchaser is duly
licensed and qualified to transact business as a foreign corporation and is in
good standing in each of the jurisdictions in which such qualification is
necessary whether by reason of the ownership or leasing of its properties or the
conduct or nature of its business.
7.2. Authorization of Agreement. Purchaser has all corporate power and
--------------------------
authority to execute and deliver this Agreement and to consummate the
transactions provided for herein and the execution and delivery of this
Agreement by Purchaser and the performance of its obligations to be performed
hereunder have been duly authorized by all necessary and appropriate action by
Purchaser's Board of Directors. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach of, or constitute a default under, the terms
or conditions of Purchaser's Articles of Incorporation or Bylaws, or any order,
judgment or decree or any agreement or instrument to which Purchaser is a party
or by which Purchaser or its assets are bound or affected. This Agreement is,
and each other agreement and document to be executed by Purchaser will be when
so executed, a valid and binding obligation of Purchaser enforceable in
accordance with its terms.
8
<PAGE>
7.3. Disclosure. No representation or warranty by Purchaser contained in this
----------
Agreement or in any writing to be furnished pursuant hereto or previously
furnished to Seller contains or will contain any untrue statement of fact or
omits or will omit to state any fact required to make the statements therein
contained not misleading. All statements and information contained in any
certificate, instrument, disclosure schedule or document delivered by or on
behalf of Purchaser shall be deemed representations and warranties by Purchaser.
7.4. Consents. Purchaser shall have delivered to Seller copies of all
--------
consents from any person or entity not a party to this Agreement whose consent
is necessary or desirable for the execution and performance of this Agreement by
Purchaser, on or prior to the Closing Date.
7.5. Purchase Price Allocation. Purchaser represents, warrants and covenants
-------------------------
to Seller to report the transaction contemplated by this Agreement as a sale and
purchase of the Purchased Assets in the specific amounts to be described on
Schedule 4.4 for purposes of federal, state and local taxes or filings required
- ------------
to be made under the Securities Exchange Act of 1934, as amended, after the
Closing Date and shall not take any position to the contrary in any tax return
or proceeding before any taxing authority. Purchaser shall cooperate fully with
Seller, shall execute any documents reasonably requested by Seller, and shall
furnish appropriate information and testimony, upon request, with respect to any
liability asserted by taxing authorities, all without payment of further
consideration; provided such tax liability relates to the Purchased Assets or
Assumed Liabilities after the Closing Date.
7.6. Brokers and Finders. Neither Purchaser nor any affiliate nor any officer
-------------------
or director thereof has engaged any finder or broker in connection with the
transactions contemplated hereunder.
7.7. Convergent Stock. The Convergent Stock will, upon issuance, be duly
----------------
authorized, fully paid and non-assessable.
8. REPRESENTATIONS AND WARRANTIES OF SELLER. AS MATERIAL REPRESENTATIONS TO
----------------------------------------
INDUCE PURCHASER TO ENTER INTO THIS TRANSACTION, SELLER MAKES THE FOLLOWING
REPRESENTATIONS AND WARRANTIES TO PURCHASER, EACH OF WHICH IS TRUE AND CORRECT
AS OF THE CLOSING DATE:
9
<PAGE>
8.1. Corporate Organization. Seller is a corporation duly organized and
----------------------
existing in good standing under the laws of the State of Kansas and has filed
all reports required to be filed with the Secretary of State of the State of
Kansas and has all corporate power and authority to own, operate and lease its
properties and carry on its businesses as now conducted. Seller is duly
licensed and qualified to transact business as a foreign corporation and is in
good standing in each of the jurisdictions in which such qualification is
necessary whether by reason of the ownership or leasing of its properties or the
conduct or nature of its business. Seller is a wholly-owned subsidiary of
Shareholder.
8.2. Authorization of Agreement. Seller has all corporate power and
--------------------------
authority to execute and deliver this Agreement and to consummate the
transactions provided for herein and the execution and delivery of this
Agreement by Seller and the performance of its obligations to be performed
hereunder have been duly authorized by all necessary and appropriate action by
Seller's Board of Directors. Subject to the provisions of Section 8.30, the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby do not and will not conflict with or result in
a breach of, or constitute a default under, the terms or conditions of Seller's
Articles of Incorporation or Bylaws, or any order, judgment or decree or any
agreement or instrument to which Seller is a party or by which Seller or its
assets are bound or affected. This Agreement is, and each other agreement and
document to be executed by Seller will be when so executed, a valid and binding
obligation of Seller enforceable in accordance with their terms.
8.3. Financial Statements. Seller has delivered to Purchaser copies of the
--------------------
balance sheets of Seller as of September 30, 1997, September 30, 1998, and
December 31, 1998 (the later balance sheet is referred to herein as "Seller's
Balance Sheet," and the date of such Seller's Balance Sheet being referred to
herein as the "Seller's Balance Sheet Date") and the related unaudited statement
of income and cash flows of Seller for the period then ended, all of which are
complete and correct, have been prepared from the books and records of Seller
consistently maintained throughout the periods indicated and fairly present the
financial condition of Seller as of their respective dates and the results of
its operations for the periods covered thereby. Seller's books of account are
complete and correct and have been maintained in accordance with sound business
practices, including the maintenance of an adequate system of internal controls.
10
<PAGE>
8.4. Absence of Undisclosed Liabilities. To the best knowledge of Seller, and
----------------------------------
except as set forth on Schedule 8.4, there are no liabilities or obligations,
------------
direct or indirect, absolute or contingent, or any outstanding evidence of
indebtedness, including any open purchase orders, arising out of or relating to
the Business or the Purchased Assets, except (i) as fully reflected or as
specifically reserved against on the Seller's Balance Sheet, and (ii)
liabilities incurred in the ordinary course of business after the Seller's
Balance Sheet Date, consistent with Seller's prior practice, which, in the
aggregate, do not result in any adverse change in the financial condition of the
Business or the Purchased Assets from that set forth in Seller's Balance Sheet.
8.5. Business Changes. Except as set forth on Schedule 8.5, since the Seller's
---------------- ------------
Balance Sheet Date, there has not been:
(a) with respect to the Business, Seller or the Purchased
Assets, any material adverse change in condition or prospects (financial or
other); (ii) material damage, destruction or loss (whether or not covered by
insurance); or (iii) material transaction outside the ordinary course of
business;
(b) any sale, lease, transfer, assignment, abandonment or
other disposition of any asset that if owned by Seller on the Closing Date would
have been a Purchased Asset (other than in the ordinary course of business);
(c) any notice or indication of termination or potential
termination of any other material contract, lease or relationship, which, in any
case or in the aggregate, has or may have an adverse effect upon the Business or
the Purchased Assets;
(d) any change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable or to be paid, or any
agreement or promise to pay, conditionally or otherwise, any extra compensation
to any officer, director or employee of Seller, other than in the ordinary
course of business consistent with past practice ;
(e) any other change in the selling, pricing, advertising or
personnel practices of Seller inconsistent with Seller's prior practice and
prudent business practices prevailing in the industry;
(f) any payment of any liability other than those then
required to be discharged or satisfied or current liabilities shown on the
Seller's Balance Sheet and current liabilities incurred since the Seller's
Balance Sheet in the ordinary course of business and consistent with past
practices;
(g) any intercompany loans or payments, dividends or
transfers of cash or other assets by Seller out of the ordinary course of
business other than the payments to the
11
<PAGE>
Shareholder of the cash reflected on the Closing Balance Sheet in accordance
with Section 4.3(a);
(h) any material deviation from the ordinary and usual
course of conducting the operation of the Business;
(i) any mortgage, pledge or creation of any lien, charge,
security interest or other encumbrance on any of the Purchased Assets;
(j) any change or modification of Seller's accounting
methods or practices;
(k) any indebtedness incurred by Seller for money borrowed;
(1) any capital expenditures in excess of $50,000;
(m) any negotiations or contract for the sale of the
Business, or any part thereof or for the purchase of another business, whether
by merger, consolidation, exchange of capital stock or otherwise (other than
negotiations with respect to this Agreement);
(n) any declaration of payment of dividends upon or in
respect of any of its shares of capital stock, or redemption or obligation to
redeem any of its shares of capital stock or other securities, other than the
payments to the Shareholder of the cash reflected on the Closing Balance Sheet
in accordance with Section 4.3(a); or
(o) any encounter with any labor union organizing activity,
any actual or threatened employee strikes, works stoppages, slowdowns or
lockouts or any material change in its relations with its employees, agents,
customers and suppliers.
8.6. Title to Purchased Assets. Except as set forth on Schedule 8.6, Seller has
------------------------- ------------
good, indefeasible and marketable title to all Purchased Assets, free and clear
of all mortgages, security interests, title retention agreements, options to
purchase, rights of first refusal, liens, easements, encumbrances, restrictions
and other burdens of any nature whatsoever ("Liens"). Except for the Liens set
forth on Schedule 8.6, and subject to the provisions of Section
------------
8.30, none of the Purchased Assets are subject to any restrictions with respect
to the transferability thereof and Seller has complete and non-restricted power
and right to sell, assign, convey and deliver the Purchased Assets to Purchaser
as contemplated hereby. On the Closing Date, Purchaser will receive good and
marketable title to all the Purchased Assets, free and clear of all Liens, but
subject to any Liens disclosed on Schedule 8.6 and the provisions of Section
------------
8.30.
12
<PAGE>
8.7. Condition of Purchased Assets. To the best knowledge of Seller, (i) no
-----------------------------
maintenance outside the ordinary course of business is needed with respect to
the Purchased Assets, and (ii) the Purchased Assets are in all respects in good
condition and working order (reasonable wear and tear excepted).
8.8. Inventory. The inventory reflected on the Seller's Balance Sheet, or
---------
thereafter acquired and as set forth on Schedule 1.11, is, after the reserve for
-------------
obsolete inventory, merchantable, or suitable and usable for the production or
completion of merchantable products, for sale in the ordinary course of business
as first quality goods at normal mark-ups, none of such item is obsolete or
below standard quality, and each item of such inventory reflected in the Balance
Sheet and the books and records of Seller and set forth on Schedule 1.11 is
-------------
valued at the lower of cost (on a last-in, first-out basis) or market. The
Purchased Assets include the quantity of each type of such inventory to meet the
normal requirements of Seller's business and operations.
8.9. Personal Property. The Personal Property reflected on the Closing
-----------------
Balance Sheet or otherwise set forth on Schedule 1.1 or delivered by Seller
------------
pursuant to Section 11.3(j), contains a true and complete list of all equipment,
fixtures, furniture, supplies and other personal property owned, utilized or
held for use by Seller in the Business.
8.10. Contracts and Leases. To the best knowledge of Seller, except as set
--------------------
forth on Schedule 8.10, and subject to the provisions of Section 8.30: (i)
-------------
Seller does not have any oral or written rights, obligations, powers of
attorney, contracts, agreements, instruments, or leases with respect to the
Business or the Purchased Assets other than the Assumed Leases and Assumed
Contracts and the Excluded Leases and Excluded Contracts listed on Schedule 1.2
------------
and Schedule 1.3, respectively; (ii) all Assumed Leases and Assumed Contracts
------------
are legally valid and binding and in full force and effect with respect to the
parties thereto; and (iii) neither Seller nor any of the other parties to any of
the Assumed Leases and Assumed Contracts are in default or breach thereof, and
Seller has no notice or knowledge of any claimed breach, or of the occurrence of
any event which after the passage of time or the giving of notice or both would
constitute a breach by any party to any Assumed Lease and Assumed Contract.
Subject to the provisions of Section 8.30, (i) none of the rights of Seller
under the Assumed Leases and the Assumed Contracts will be impaired in any
respect by the consummation of the transactions contemplated by this Agreement,
and (ii) the Assumed Leases and Assumed Contracts are validly assignable and all
of the rights of Seller thereunder will be enforceable by Purchaser after the
Closing Date without the consent or agreement of any other party.
13
<PAGE>
8.11. Litigation and Proceedings; Product Liability; Liquidation.
----------------------------------------------------------
(a) Except as set forth on Schedule 8.11, there is no suit,
-------------
action or legal, administrative, arbitrative or other proceeding pending or
threatened against Seller affecting the Purchased Assets, and, to the best
knowledge of Seller, Seller is not under investigation, nor has Seller received
any written notice of any proceeding which is with respect to any charge
concerning violation of any law or administrative regulation, federal, local or
state, in respect to the operation of the Purchased Assets.
(b) There have been no product liability claims and similar
claims, actions, litigation or other proceedings relating to products, or
services rendered by Seller which are presently pending or, to the best
knowledge of Seller, which are threatened, or which have been asserted or
commenced against Seller within the past two (2) years, in which a party thereto
either requested injunctive relief (whether temporary or permanent) or alleged
damages in excess of $5,000 (whether or not covered by insurance), in respect to
the operation of the Purchased Assets.
(c) Seller has not adopted any plan of liquidation or
dissolution affecting the Purchased Assets.
8.12. Government Licenses and Permits. To the best knowledge of Seller: (i)
-------------------------------
Seller has all state, county and city governmental licenses and permits
necessary to operate the Business and own and use the Purchased Assets as
conducted, owned and used prior to the Closing Date and such licenses and
permits are in full force and effect; (ii) Seller is not aware of any rights of
Seller under such licenses and permits which are not transferable to Purchaser
under applicable law solely upon the assignment of such licenses and permits by
Seller to Purchaser hereunder or which will not be exercisable by Purchaser
after the consummation of the transactions contemplated by this Agreement; and
(iii) Seller is not aware of and has not received any written notice of any
proceeding which is pending or threatened regarding the revocation or limitation
of any such governmental license or permit and, to the best knowledge of Seller,
there is no such basis or grounds for any revocation or limitation of any such
governmental license or permit.
14
<PAGE>
8.13. Taxes. Except as set forth on Schedule 8.13, all federal, state, county
----- -------------
and local property, income, excise, sales, transfer, use, gross receipts, ad
valorem, payroll and other taxes, fees and assessments imposed on the Business
of Seller as of the Closing Balance Sheet Date and payable by Seller and all
federal and state payroll taxes required to be withheld by Seller as of the
Closing Balance Sheet Date have been or will be on the Closing Date duly, timely
and fully reported, paid and discharged except where extensions have been
applied for and granted and where such extensions have not expired. Except as
set forth on Schedule 8.13, all federal, state, county, local and other tax
-------------
returns required to be filed by or on behalf of Seller have been timely filed
and, when filed, were true and correct in all respects. From the Seller's
Balance Sheet Date until the Closing Balance Sheet Date, Seller shall pay all
taxes as and when the same become due and payable.
8.14. Intangible Assets. Schedule 1.4 contains a true and complete list of
----------------- ------------
all trademarks, trade names, trade dress, service marks, copyrights and licenses
thereof relating to the Business and all pending applications and applications
to be filed therefor used or to be used in the operation of the Business, all of
which are fully assignable and are being transferred hereunder to Purchaser free
and clear of any adverse interests. Except as set forth on Schedule 1.4, all
------------
other trade secrets, confidential information, and know-how used in the
operation of the Business are fully assignable and are being transferred
hereunder free and clear of any adverse claims or interests, and no licenses,
sublicenses, covenants or agreements have been granted or entered into by Seller
relating to any such trademarks, trade names, service marks, licenses,
applications trade secrets, know-how, and other confidential information and
intangible assets. To the best knowledge of Seller, the Business and the use of
its products by customers have not involved any infringement, and there exists
no basis for any claim of infringement, of any trademarks, trade names, service
marks, copyrights, licenses, or intangible assets of others. Seller does not
require any of such rights or intangible assets that it does not already have
(and which are being transferred to Purchaser) in order to conduct its business
as currently being conducted or proposed to be conducted. There are no
inquiries, investigations or claims or litigation challenging or threatening to
challenge Seller's right, title and interest with respect to its continued use
and right to preclude others from using any such trade rights or intangible
assets. To the best knowledge of Seller, all such trade rights or intangible
assets of Seller are valid and enforceable and there are no equitable defenses
to enforcement based on any act or omission of Seller, and no other person is
infringing on the trade rights and intangible assets of Seller.
15
<PAGE>
8.15. Compliance with Law. To the best knowledge of Seller, Seller and the
-------------------
operations of the Business and the use of the Purchased Assets are in compliance
with all applicable federal, state, local and international laws or ordinances
and any other rule or regulation of any international, federal, state or local
agency or body, including, without limitation, all energy, safety,
environmental, zoning, health, trade practice, anti-discrimination, antitrust,
wage, hour and price control laws, orders, rules or regulations. Schedule 8.15
-------------
lists all citations issued to Seller in the past two (2) years from any city,
state or federal agency, and except as set forth on Schedule 8.15, all citations
-------------
that have been issued have been properly remedied. Seller has not received any
written notice of any proceeding which is from any governmental body claiming
any violation or alleged violation of any law, ordinance, code, rule or
regulation or requiring, or calling attention to the need for, any work,
repairs, construction, alterations or installation on or in connection with the
Purchased Assets or the Business with which Seller has not complied. To the
best knowledge of Seller, Seller has no liability (whether accrued, absolute,
contingent, direct or indirect) for past or continuing violations of any law,
ordinance, code, rule or regulation. Except as set forth on Schedule 8.13, all
-------------
reports and returns required to be filed by Seller with any governmental
authority have been filed and were accurate and complete when filed.
To the best of Seller's knowledge, no payments of cash or other
consideration have been made to any person, entity or government by Seller or by
any agent, employee, officer, director, Shareholder or other person or entity on
behalf of Seller which were unlawful under the laws of the United States or any
state or other governmental authority.
8.16. Accounts Receivable. Set forth on Schedule 1.10 is a complete and
------------------- -------------
accurate list of all Accounts Receivable of Seller as of the Seller's Balance
Sheet Date. All of the Accounts Receivable reflected on the Seller's Balance
Sheet arose in the ordinary course of business and represent amounts payable by
a buyer for goods actually sold or services actually performed and are currently
collectible at the aggregate recorded amounts thereof, less the reserve for bad
debts reflected on the Seller's Balance Sheet, and are not subject to any
counterclaims or setoffs (other than Purchaser's right to setoff under the terms
of this Agreement). Accounts Receivable arising after the Seller's Balance
Sheet Date through the Closing Date, have arisen in the ordinary course of
business and represent amounts payable by a buyer for goods actually sold or
services actually performed and are current and collectible at the aggregate
recorded amounts thereof, less a reserve for bad debts consistent with the
reserve stated on the Seller's Balance Sheet.
16
<PAGE>
8.17. Environmental Matters. To the best knowledge of Seller: (i) Seller
---------------------
has duly complied with, and the operation of the Business, equipment and other
assets in the facilities owned or leased by Seller are in compliance with the
provisions of all applicable federal, state and local environmental, health and
safety laws, statutes, ordinances, rules and regulations of any governmental or
quasi governmental authority relating to (a) error omissions, (b) discharges to
surface water or ground water, (c) solid or liquid waste disposal, (d) the use,
storage, generation, handling, transport, discharge, release or disposals of
toxic or hazardous substances or waste, (e) the emission of non-ionizing
electromagnetic radiation, or (f) other environmental, health or safety matters,
including, without limitation, the Comprehensive Environmental Response
Compensation Liability Act of 1980, as amended by the Superfund Amendments and
Authorization Act of 1986, the Occupational Safety and Health Act, the Resource
Conservation and Recovery Act of 1976, as amended, the Federal Water Pollution
Control Act of 1970, the Safe Drinking Water Act of 1974, the Toxic Substances
Control Act of 1976, the Emergency Planning and Community Right to Know Act of
1986, as amended, and the Clean Air Act, as amended (collectively "Environmental
and Health Laws") or the Federal Communications Act, as amended ("FCC Laws");
(ii) there are no investigations, administrative proceedings, judicial actions,
orders, claims or notices which are pending, anticipated or threatened against
Seller relating to violations of the Environmental and Health Laws or FCC Laws,
and (iii) Seller has not received notice of, and does not know or have any
reason to suspect, any facts which might constitute a violation of any
Environmental and Health Laws or FCC Laws which relate to the use, ownership or
occupancy of any property or facilities used by Seller in connection with the
operation of Seller's Business or any activity of Seller's Business which would
result in a violation or threatened violation of any Environmental and Health
Laws or FCC Laws.
8.18. Labor Matters.
-------------
(a) Seller is not a party to or bound by any union
collective bargaining agreements or other labor contracts. Seller is not, with
respect to the operation of the Business, a party to any pending arbitration or
grievance proceeding or other claim relating to any labor contract. Seller has
no knowledge of any such action in respect to the operation of the Purchased
Assets.
(b) Seller is not bound by any court, administrative agency,
tribunal, commission or board decree, judgment, decision, arbitration agreement
or settlement relating to collective bargaining agreements, conditions of
employment, employment discrimination or attempts to organize a collective
bargaining unit which in any case may materially and adversely affect Seller,
the Business or the Purchased Assets, and Seller has no notice or knowledge of
any employment discrimination, safety or unfair labor practice or other
employment-related investigation, claim or allegation against or in respect of
the operation of the Purchased Assets.
17
<PAGE>
(c) Seller has made all required payments to the appropriate
governmental authorities with respect to applicable unemployment compensation
reserve accounts for Seller's employees. Seller has no regular full-time
employees except in Kansas, Missouri and Wisconsin.
8.19. Employment Contracts. Except as set forth on Schedule 8.19,
-------------------- -------------
Seller has no employment contract with any person, nor any contract with any
employee, involving termination, retirement or severance pay, deferred
compensation, profit sharing or pension plans, employee benefit plans or other
employee benefits or post-employment benefits of any kind. Except as
specifically set forth on Schedule 3.2 and identified as account numbers 2301,
------------
2302 and 2303, Purchaser shall not assume any liabilities of Seller to any
former or current employee of Seller for compensation, bonus, severance,
vacation, employee benefits or any other fee or wage payment of any kind or
nature, including, but not limited to, any payments under COBRA or any
disability or unemployment insurance policies (collectively, "Employee
Payments").
8.20. Insurance. Seller is insured by reputable
---------
insurers and through the Closing Date will be adequately insured against all
liabilities and risks and in at least such amounts as are usually carried by
prudent business persons engaged in the same or similar lines of business (and
in the case of property casualty insurance, at least at replacement cost). All
premiums on policies due to the Closing Date have been paid, and no notice has
been received nor does Seller have any reason to believe, that any such
insurance is in default, will be canceled or not renewed, or will be renewed at
premium rates materially in excess of the premiums used in preparing the
financial statements of the Business.
8.21. Disabled Employees. No employee of Seller is eligible for long-term
------------------
disability but has not yet been certified as such, and (ii) no employee of
Seller is on medical leave. Seller shall remain solely liable and responsible
for, and Purchaser shall have no liability or responsibility whatsoever for, any
Employee Payments.
8.22. Subsidiaries. Seller has no subsidiaries. The Business has not been
------------
operated through any other direct or indirect subsidiary or affiliate of
Seller's Shareholder.
18
<PAGE>
8.23. Year 2000 Compliance.
--------------------
(a) Except as set forth on Schedule 8.23, (i) the Purchased
-------------
Assets, including, but not limited to, all of the computer hardware, software,
and embedded microcontrollers in noncomputer equipment ("the Computer Systems"),
which are used by Seller in the Business, are or can be made Year 2000 Compliant
(as defined below) and (ii) Seller has received certifications from the critical
service providers it relies upon that all such providers, including, but not
limited to, Fujitsu Business Communication Systems, Inc. and Executone
Information Systems, Inc., concerning their stated compliance with Year 2000
issues.
(b) For purposes of this Section 8.23, "Year 2000 Compliant"
shall mean that the Computer Systems meet each of the following criteria
(1) the functions, calculations, and other computing processes of
the Computer Systems (collectively, "Processes") perform in a consistent manner
regardless of the date in time on which the Processes are actually performed and
regardless of the date data input into the Computer Systems, whether before, on
or after January 1, 2000 and whether or not the data is affected by leap years;
(2) the Computer Systems accept, calculate, compare, sort, extract,
sequence, return and display and otherwise process date data in a consistent
manner regardless of the dates used in such date data, whether before, on or
after January 1, 2000;
(3) the Computer Systems will function without interruptions caused
by the date in time on which the Processes are actually performed or by the date
data input to the Computer Systems, whether before, on, or after January 1,
2000;
(4) the Computer Systems accept and respond to two-digit year-date
input in a manner that resolves any ambiguities as to the century in a defined,
predetermined, and appropriate manner;
(5) the Computer Systems store and display date data in ways that
are unambiguous as to the determination of the century; and
(6) no date data will cause the Computer Systems to perform an
abnormally ending routine or function within the Processes or generate incorrect
values or invalid results.
19
<PAGE>
8.24. Disclosure. To the best of Seller's knowledge, there exists no fact,
----------
condition or threatened development of any nature not otherwise disclosed in
this Agreement, or the Exhibits, Schedules and attachments hereto, that would be
materially adverse to the Purchased Assets or the operation of the Business. No
warranty or representation by Seller contained in this Agreement, including any
exhibit, schedule (including any attachment to any schedule), financial
statement or certificate prepared or furnished in connection hereto, or in any
writing to be furnished pursuant hereto or previously furnished to Purchaser,
contains or will contain any untrue statement of fact or omits or will omit to
state any fact required to make the statements therein contained not misleading.
All statements and information contained in any certificate, instrument,
disclosure schedule or documents delivered by or on behalf of Seller shall be
deemed representations and warranties by Seller.
8.25. Accuracy of Documents and Information. The copies of all instruments,
-------------------------------------
agreements, other documents and written information set forth as, or referenced
in, Exhibits, Schedules and attachments to this Agreement or specifically
required to be furnished pursuant to this Agreement to Purchaser by Seller are
complete and correct in all material respects.
8.26. Purchase Price Allocation. Seller represents, warrants and covenants
-------------------------
to Purchaser to report the transaction contemplated by this Agreement as a sale
and purchase of the Purchased Assets in the specific amounts to be described on
Schedule 4.4 for purposes of federal, state and local taxes or filings required
- ------------
to be made under the Securities Exchange Act of 1934, as amended, after the
Closing Date, and shall not take any position to the contrary in any tax return
or proceeding before any taxing authority. Seller shall cooperate fully with
Purchaser, shall execute any documents reasonably requested by Purchaser and
shall furnish appropriate information and testimony, upon request, with respect
to any liability asserted by taxing authorities, all without payment of further
consideration; provided such tax liability relates to the Purchased Assets or
Assumed Liabilities as conducted by Seller prior to the Closing Date.
8.27. Brokers and Finders. Except for Shoreline Pacific Institutional
----------- -------
Finance, which has been engaged solely by Seller, neither Seller nor any
affiliate nor any officer or director thereof has engaged any finder or broker
in connection with the transactions contemplated hereunder.
20
<PAGE>
8.28. Records and Documents. To Seller's knowledge, the records and
--------------------
documents required to be provided pursuant to Section 1.6 constitute all of the
records and documents used in connection with, or which are necessary or
desirable to operate, the Purchased Assets.
8.29. Stock Representations. Seller: (i) intends to acquire the shares of
---------------------
the Convergent Stock solely for the purpose of investment and not for the resale
and distribution thereof, and has no present intention to offer, sell, pledge,
hypothecate, assign or otherwise dispose of the same except in accordance with
this Section 8.29; (ii) understands and acknowledges that the sale of such
shares of Convergent Stock will not be registered under the Securities Act of
1933, as amended (the "Securities Act"), and that the Convergent Stock and the
Additional Shares being acquired pursuant to this Agreement constitute
"restricted securities" as that term is defined under Rule 144 promulgated under
the Securities Act and may not be sold except pursuant to a registration
statement under the Securities Act or pursuant to an exemption available under
federal and applicable state Securities laws, and such shares of Convergent
Stock may be required to be held indefinitely unless the shares of Convergent
Stock are subsequently registered under the Securities Act or an exemption from
such registration is available, (iii) agrees that it will not offer, sell,
pledge, hypothecate, transfer, assign or otherwise dispose of any such shares of
Convergent Stock unless such shares of Convergent Stock and such offer, pledge,
hypothecation, transfer, assignment or other disposition shall be registered or
exempt from registration under the Securities Act and shall comply with all
applicable federal and state securities laws, and (iv) agrees and acknowledges
that the stock certificates representing the shares of Convergent Stock will
contain a legend restricting the transferability of the shares as provided
herein and that stop order instructions may be imposed by Convergent's transfer
agent restricting the transferability of the Convergent Stock.
8.30. Accuracy of Representations. In the event that any of the foregoing
---------------------------
representations or warranties should be inaccurate as of the Closing Date,
Seller shall have forty-five (45) days from the Closing Date by which to cure
such inaccuracy (the "Cure Period"). Seller shall have delivered to Purchaser
all consents to the transfer or assignment of the Assumed Contracts and the
Assumed Leases on or prior to the expiration of the Cure Period. In the event
that Seller fails to deliver the consents to the transfer or assignment of the
Assumed Contracts identified as Items 1 through 10 on Schedule 1.3.A on or prior
--------------
to the expiration of the Cure Period, the Purchase Price, and thereby the
Secured Contingent Note, shall automatically be adjusted in accordance with
Section 4.3(c).
21
<PAGE>
9. SELLER'S EMPLOYEES AND CUSTOMERS. PURCHASER IS NOT A SUCCESSOR
--------------------------------
BUSINESS TO SELLER NOR ANY OPERATION OF SELLER. PURCHASER SHALL NOT BE LIABLE
FOR ANY OBLIGATIONS WHICH SELLER HAS ON ANY CONTRACTS, INCLUDING EMPLOYMENT
CONTRACTS, EXISTING OR FUTURE WORKERS COMPENSATION CLAIMS, EMPLOYMENT
DISCRIMINATION CLAIMS, UNFAIR LABOR PRACTICE CLAIMS, COMPENSATION OR EMPLOYEE
PAYMENTS, EXCEPT THOSE OBLIGATIONS, IF ANY, SPECIFICALLY IDENTIFIED IN SECTION 1
---------
AND ON SCHEDULE 3.2, AND ANY OTHER OBLIGATIONS WHICH pURCHASER SPECIFICALLY
------------
ASSUMES IN WRITING. PURCHASER IS PURCHASING THE PURCHASED ASSETS ONLY, AND IS
NOT ASSUMING ANY EMPLOYMENT CONTRACTS FOR ANY EMPLOYEES OR ANY OBLIGATIONS UNDER
AGREEMENTS ENTERED INTO BY SELLER IN ITS OWN RIGHT AND PURCHASER SHALL NOT BE
LIABLE FOR ANY SUMS OWED TO CUSTOMERS BY SELLER, EXCEPT THOSE OBLIGATIONS, IF
ANY, SPECIFICALLY IDENTIFIED IN SECTION 1 AND ON SCHEDULE 3.2, AND ANY OTHER
--------- ------------
OBLIGATIONS WHICH PURCHASER SPECIFICALLY ASSUMES IN WRITING.
10. REPRESENTATIONS, COVENANTS AND AGREEMENTS OF PURCHASER. PURCHASER HEREBY
------------------------------------------------------
REPRESENTS, COVENANTS AND AGREES THAT:
10.1. Accuracy of Representations and Warranties. Each of the representations
------------------------------------------
and warranties of Purchaser contained in this Agreement or in any schedule,
certificate or other document delivered by Purchaser is true and correct in all
respects, and Purchaser has performed and satisfied all of its covenants,
conditions and agreements and shall have delivered to Seller all documents and
agreements required by this Agreement to be performed, satisfied or delivered by
Purchaser on or prior to the Closing Date.
10.2. Deliveries on the Closing Date. Purchaser shall have delivered or cause
------------------------------
to be delivered to Seller the following documents on or prior to the
Closing Date:
(a) An executed original of this Agreement, the Secured July
Note, the Secured Purchaser's Note, the Security Agreement and UCC-1 financing
statements to be filed in the States of Colorado, Kansas, Wisconsin and Missouri
in connection with the Security Agreement, which have been executed by
Purchaser; provided, however, that Seller shall be
-------- -------
22
<PAGE>
responsible for preparing and delivering the UCC-1 financing statements to
Purchaser on or prior to the Closing Date.
(b) A copy of the treasury request issued to Convergent's
transfer agent pursuant to Section 4.2(d).
(c) Certified copies of resolutions adopted by the Board of
Directors of Purchaser authorizing the execution of this Agreement and the
purchase of the Purchased Assets and the assumption of the Assumed Liabilities
in accordance with the terms hereof.
(d) Certified copies of resolutions adopted by the Board of
Directors of Convergent authorizing the issuance of the Convergent Stock.
(e) An opinion of Purchaser's counsel substantially in the
form of Exhibit F.
---------
(f) An Officer's Certificate executed by an authorized
officer of Purchaser certifying that all of Purchaser's representations and
warranties contained in Section 7 are true and correct on the Closing Date.
(g) A copy of Convergent's Form 10-Q for the quarterly
period ended September 30, 1998, previously provided to the holders of the
senior notes of Convergent.
10.3. Deliveries During the Cure Period. Purchaser shall have delivered, or
---------------------------------
caused to be delivered, to Seller the following documents on or prior to the
expiration of the Cure Period:
(a) A stock certificate representing 30,000 shares of
Convergent Stock.
(b) A stock certificate representing the Additional Shares,
if any.
(c) An executed original of the Secured Contingent Note.
10.4. Cooperation in Obtaining Consents. Purchaser shall use commercially
---------------------------------
reasonable efforts in response to any reasonable request of Seller to assist
Seller in obtaining any consent of third parties necessary for the consummation
of the transactions contemplated by this Agreement during the Cure Period.
23
<PAGE>
10.5. Waiver of Compliance with Bulk Sales Laws. Purchaser hereby waives
-----------------------------------------
compliance by Seller with the requirements of any so called bulk sales or
transfers laws of any jurisdiction in connection with the sale of the Purchased
Assets to Purchaser; but such waiver shall not affect the obligation of Seller
under Section 15 to indemnify Purchaser and hold Purchaser harmless from and
against any loss, liability, damage or expense which Purchaser may suffer or
sustain or to which Purchaser may become subject as a result of or in connection
with the failure by Seller to so comply.
10.6. Access to Books and Records After the Closing Date. For a period of
--------------------------------------------------
three (3) years following the Closing Date, Purchaser agrees to maintain in a
reasonably accessible place any books and records delivered to Purchaser
pursuant to Section 1.6, to provide Seller and its representatives reasonable
access to such books and records during normal business hours and to provide
copies of such books and records to Seller or its representatives, at Seller's
expense. Purchaser agrees to notify Seller prior to disposing of any such books
and records and, upon request made within sixty (60) days after receipt of such
notice, to deliver such books and records to Seller at Seller's expense.
10.7. Change of Name. As of the Closing Date, Purchaser shall refrain from
--------- ----
using the name "SoftNet Business Solutions."
11. REPRESENTATIONS, COVENANTS AND AGREEMENTS OF SELLER. SELLER HEREBY
---------------------------------------------------
REPRESENTS, COVENANTS AND AGREES THAT:
11.1. Accuracy of Representations and Warranties. Each of the representations
------------------------------------------
and warranties of Seller contained in this Agreement or in any schedule,
certificate or other document delivered by Seller is true and correct in all
respects, and Seller has performed and satisfied all of its covenants,
conditions and agreements and shall have delivered to Purchaser all documents
and agreements required by this Agreement to be performed, satisfied or
delivered by Seller on or prior to the Closing Date.
11.2. Deliveries on the Closing Date. Seller shall have delivered or
------------------------------
caused to be delivered to Purchaser the following documents at or prior to the
Closing Date, unless otherwise specified herein:
(a) An executed original of this Agreement and the Bill of
Sale, Assumption of Liabilities and Assignment of Contracts in the form attached
hereto as Exhibit D.
----------
24
<PAGE>
(b) Certified copies of resolutions adopted by the Board of
Directors and Shareholder of Seller authorizing the execution of this Agreement
and the sale of the Purchased Assets to Purchaser in accordance with the terms
hereof.
(c) Certificate of status or good standing of Seller issued
by the Secretaries of States of the States of Kansas, Missouri and Wisconsin,
dated within two weeks of the Closing Date.
(d) An opinion of Seller's Counsel substantially in the form
of Exhibit G.
(e) Executed UCC-2 Termination Statements for each of the
Liens identified as UCC-1 file numbers 2177983, 2177984, 2177985, 2587559.
(f) Written payment instructions with respect to the payment
of the cash portion of the Purchase Price to be paid on the Closing Date.
(g) An Officer's Certificate executed by an authorized
officer of Seller certifying that all of Seller's representations and warranties
contained in Section 8 are true and correct on the Closing Date.
(h) All necessary governmental approvals, permits and
licenses required for the performance by Seller for the closing of the
transactions contemplated by this Agreement.
(i) Copies of the balance sheets of Shareholder as of
September 30, 1997 and September 30, 1998 and statements of income and cash
flows of Shareholder for the 12-month period then ended, all of which have been
reviewed by Shareholder's independent certified public accountants.
(j) Copies of all invoices not otherwise attached to
Schedule 1.1 reflecting personal property that Purchaser has acquired hereunder.
(k) Such other documents as Purchaser reasonably deems
necessary or appropriate to vest in it good and marketable title to all or any
part of the Purchased Assets, free and clear of all liens, encumbrances and
other rights as provided in this Agreement
11.3. Deliveries During the Cure Period. Seller shall have delivered,
---------------------------------
or caused to be delivered, to Purchaser the following documents on or prior to
the expiration of the Cure Period:
(a) Written consents to the transfer or assignment to
Purchaser of the Purchased Assets, including the Assumed Contracts and Assumed
Leases, in a form and substance reasonably satisfactory to Purchaser; including
but not limited to, consent to the
25
<PAGE>
transfer or assignment of the contract between Seller and Fujitsu Business
Communication Systems, Inc., dated March 4, 1994 (the "Fujitsu Consent").
(b) Evidence satisfactory to Purchaser that the three (3)
contracts between Seller and Executone Information Systems, Inc., each dated
October 1, 1996 (collectively, the "Executone Contracts") have been assigned to
Purchaser and amended (the "Executone Assignments and Amendments"), which
Assignment and Amendment shall delete Section 1 regarding "Competing Products"
(as such term is defined therein), or, in the alternative, Seller shall deliver
to Purchaser a written waiver of Section 1 of the Executone Contracts executed
by Executone or a written consent executed by Executone providing for the
ability of Purchaser to sell such "Competing Products."
(c) Executed UCC-2 Amendments for each of the Liens
identified on Schedule 8.6, naming Purchaser as the debtor.
(d) A general ledger account reconciliation of Seller as of
January 31, 1999.
(e) Evidence satisfactory to Purchaser that Nations Bank is
the successor-in-interest to the Bank IV, N.A. Equipment Lease Agreement No. 01-
1130-001, dated July 22, 1996 and the Boatmen's National Bank Equipment Lease
Agreement No. 01-1130-02, dated January 17, 1997.
11.4. Access to Books and Records After the Closing Date. For a period of
--------------------------------------------------
three (3) years following the Closing Date, Seller agrees to maintain in a
reasonably accessible place any books and records not delivered to Purchaser
hereunder relating to the Business, to provide Purchaser and its representatives
reasonable access to such books and records during normal business hours and to
provide copies of such books and records to Purchaser or its representatives, at
their expense. Seller agrees to notify Purchaser prior to disposing of any such
books and records and, upon request made within sixty (60) days after receipt of
such notice, to deliver such books and records to Purchaser at Purchaser's
expense.
26
<PAGE>
11.5. Continued Assistance. Seller shall refer to Purchaser in writing, as
--------------------
promptly as practicable, any letters, orders, notices, requests, inquiries and
other communications relating to the Business, together with notice of any
telephone calls received with respect to the Business. Seller shall use its
reasonable efforts to refer any such contacts or inquiries to Purchaser by
instructing the inquiring party to contact Purchaser at the address and phone
number listed in Section 17.5. Seller shall use its reasonable best efforts to
cooperate in an orderly transfer of the Business and to assist Purchaser in the
successful continuation of the operation of the Business. After the Closing
Date, Seller shall promptly transfer and deliver to Purchaser upon Seller's
receipt any cash or other property that Seller may receive in respect of any
Assumed Contract or Assumed Lease. From time to time, Seller shall execute,
acknowledge and deliver such documents, instruments or assurances and take such
other actions as Purchaser may reasonably request to more effectively assign,
convey and transfer the Purchased Assets.
11.6. Change of Name. As of the Closing Date, Seller shall immediately
--------- ----
cease to use, and thereafter refrain from using, the trade names "BT Services"
and "Kansas Communications," and shall file any and all documents required to
allow Purchaser to use such name or any variation thereof, if any.
11.7. Limitations on Certain Corporate Actions. Seller agrees that from and
----------------------------------------
after the Closing Date and for a period of two (2) years, Seller will not (a)
dissolve or otherwise terminate its legal existence, or (b) merge or consolidate
with any other corporation in a merger consolidation in which it is not the
surviving or resulting corporation.
12. INTENTIONALLY OMITTED.
---------------------
13. INTENTIONALLY OMITTED.
---------------------
27
<PAGE>
14. INDEMNIFICATION BY PURCHASER.
----------------------------
14.1. Indemnification. Purchaser and its successors shall indemnify, defend and
---------------
hold Seller, each of Seller's subsidiaries, Shareholder, affiliates, officers,
directors, employees, agents, successors and assigns (Seller and such persons,
collectively, "Seller's Indemnified Persons") harmless from and against any
demand, claim, damage, liability, loss (which shall include any diminution in
value), cost, deficiency or expense (including, but not limited to, interest,
penalties, costs of preparation and investigation, and the reasonable fees,
disbursements and expenses of attorneys, accountants and other professional
advisors (collectively, the "Seller's Losses") imposed or incurred by Seller's
Indemnified Persons, directly or indirectly, arising out of, resulting from or
relating to:
(a) any inaccuracy in or breach of any representation or
warranty of Purchaser pursuant to this Agreement in any respect, whether or not
Seller's Indemnified Persons relied thereon or had knowledge thereof, including
schedules and documents delivered pursuant hereto;
(b) any failure of Purchaser to duly perform or observe any
term, provision, expectation, covenant or agreement to be performed or observed
by Purchaser pursuant to this Agreement or any of the documents contemplated by
this Agreement;
(c) the operation of the Purchased Assets after the Closing
Date;
(d) any action, suit, investigation, proceeding, demand,
assessment, audit, judgment and claim resulting from the operation of the
Purchased Assets and discharge of the Assumed Liabilities by Purchaser after the
Closing Date; or
(e) acts or omissions in connection with business activities
conducted or to be conducted by Purchaser, including, without limitation, the
sale of goods or provision of services after the Closing Date.
14.2. Procedures. The procedural rules set forth in Section 15.2
----------
shall apply with respect to indemnification by Purchaser except that the
parties' respective obligations under Section 15.2 shall be reversed as
appropriate.
14.3. Survival of Indemnification. The obligations of Purchaser to
----------- ---------------
indemnify and hold Seller's Indemnified Persons harmless shall survive for the
applicable statute of limitations.
28
<PAGE>
14.4. Remedies Cumulative. The remedies provided by this Section 14 shall
-------------------
be cumulative and shall not preclude the assertion by Seller's Indemnified
Persons of any other rights or the seeking of any other remedies against
Purchaser.
15. INDEMNIFICATION BY SELLER.
-------------------------
15.1. Indemnification. Seller and its successors shall indemnify, defend and
---------------
hold Purchaser, each of Purchaser's subsidiaries, shareholders, affiliates,
officers, directors, employees, agents, successors and assigns (Purchaser and
such persons, collectively, "Purchaser's Indemnified Persons") harmless from and
against any demand, claim, damage, liability, loss (which shall include any
diminution in value), cost, deficiency or expense (including, but not limited
to, interest, penalties, costs of preparation and investigation, and the
reasonable fees, disbursements and expenses of attorneys, accountants and other
professional advisors) (collectively, the "Purchaser's Losses") imposed or
incurred by Purchaser's Indemnified Persons, directly or indirectly, arising out
of, resulting from or relating to:
(a) any inaccuracy in or breach of any representation or
warranty of Seller pursuant to this Agreement in any respect, whether or not
Purchaser's Indemnified Persons relied thereon or had knowledge thereof,
including schedules and documents delivered pursuant hereto;
(b) any failure of Seller to duly perform or observe any
term, provision, expectation, covenant or agreement to be performed or observed
by Seller pursuant to this Agreement or any of the documents contemplated by
this Agreement;
(c) any and all liabilities or obligations of Seller other
than the Assumed Liabilities, including, but not limited to, any fines,
penalties, interest or other changes that may be imposed as a result of any tax
returns of Seller that have been or were required to be, filed on or prior to
the Closing Date, including, without limitation, tax returns for which
extensions have been granted and tax returns for liabilities accruing prior to
the Closing Balance Sheet Date;
(d) any material misrepresentations in or omissions from any
Exhibit, Schedule or other attachment to this Agreement;
(e) any action, suit, investigation, proceeding, demand,
assessment, audit judgment, claim, including any employment-related claim
relating to the time period on or prior to the Closing Date (collectively
"Claims"), even though such claims may not be filed or come to light until after
the Closing Date;
29
<PAGE>
(f) acts or omissions in connection with business activities
conducted or to be conducted by Seller, including, without limitation, the sale
of goods or provision of services prior to the Closing Date;
(g) any fees or expenses owed or owing to Shoreline Pacific
Institutional Finance;
(h) any failure to comply with the laws of any jurisdiction
relating to bulk transfers which may be applicable in connection with the
transfer of the Purchased Assets to Purchaser other than nonpayment of the
Assumed Liabilities; or
(i) Schedules 8.4, 8.9, 8.11, 8.13, 8.15,8.16 and 8.19.
The obligations of Seller to indemnify and hold Purchaser's Indemnified
Persons harmless as described herein shall survive after the Closing Date and
the consummation of the transactions contemplated by this Agreement.
15.2. Procedures. Purchaser's Indemnified Persons shall give Seller prompt
----------
written notice of any written claim, demand, assessment, action, suit or
proceeding to which the indemnity set forth in this Section 15 applies (the
"Indemnification Notice"). If the document evidencing such claim or demand is a
court pleading, Purchaser shall give such notice within ten (10) days of receipt
of such pleading, otherwise, Purchaser shall give such notice within thirty (30)
days of the date it receives written notice of such claim. Failure to give
timely notice, including the Indemnification Notice, of a matter which may give
rise to an indemnification claim shall not affect the rights of Purchaser's
Indemnified Persons to collect such Loss from Seller so long as such failure to
so notify does not materially adversely affect Seller's ability to defend such
Loss against a third party.
If Purchaser's Indemnified Persons' request for indemnification arises
from the claim of a third party, the written notice, including the
Indemnification Notice, shall permit Seller to assume control of the defense of
any such claim, or any litigation resulting from such claim. Failure by Seller
to notify Purchaser's Indemnified Persons of its election to defend a complaint
by a third party within ten (10) days shall be a waiver by Seller of its right
to respond to such complaint and within thirty (30) days after notice thereof
shall be a waiver by Seller of its right to assume control of the defense of
such claim or action. If Seller assumes control of the defense of such claim or
litigation resulting therefrom, Seller shall take all reasonable steps necessary
in the defense or settlement of such claim or litigation resulting therefrom and
Seller hold Purchaser's Indemnified Persons, to the extent provided in this
Section 14, harmless from and against all Seller's Losses arising out of or
resulting from any settlement approved by Seller or any judgment in connection
with such claim or litigation. Notwithstanding Seller's assumption of the
defense of such third-party claim or demand, Purchaser's Indemnified Persons
shall have the right to participate in the defense of such third-party claim or
demand at its own expense. Seller shall not, in the defense of such claim or
litigation, consent to entry of any judgment or enter into
30
<PAGE>
any settlement, except in either case with written consent of Purchaser's
Indemnified Persons, which consent shall not be unreasonably withheld.
Purchaser's Indemnified Persons shall furnish Seller in reasonable detail all
information Purchaser's Indemnified Persons may have with respect to any such
third-party claim and shall make available to Seller and its representatives all
records and other similar materials which are reasonably required in the defense
of such third-party claim and shall otherwise cooperate with and assist Seller
in the defense of such third-party claim.
If Seller does not assume control of the defense of any such third-party
claim or litigation resulting therefrom, Purchaser's Indemnified Persons may
defend against such claim or litigation in such manner as it may reasonably deem
appropriate, and Seller shall indemnify Purchaser's Indemnified Persons from any
Purchaser's Loss indemnifiable under Section 14.1 incurred in connection
therewith.
All statements of fact contained in any written statement, certificate,
schedule, exhibit, or other document delivered to Purchaser by or on behalf of
Seller pursuant to Section 7 of this Agreement shall be deemed representations
and warranties of Seller hereunder.
15.3. Survival of Indemnification. The obligations of Seller to indemnify
---------------------------
and hold Purchaser's Indemnified Persons harmless shall survive for three years
from the Closing Date.
15.4. Remedies Cumulative. The remedies provided by this Section 15
-------------------
shall be cumulative and shall not preclude the assertion by Purchaser's
Indemnified Persons of any other rights or the seeking of any other remedies
against Seller.
15.5. Right to Set-Off. Purchaser shall have the right to set off
----------------
any amounts, including amounts owed under the Secured Contingent Note and the
Secured Purchaser's Note, in that order, owed by Purchaser to Seller for any of
Purchaser's Losses that may arise hereunder. In the event that the outstanding
principal amount of the Secured Contingent Note or the Secured Purchaser's Note
is required to be adjusted in accordance with this Section 15.5, Purchaser shall
execute and deliver to Seller an Allonge Endorsement in the form attached hereto
as Exhibit H-1 or Exhibit H-2, whichever the case may be (the "Allonge
----------- -----------
Endorsement"), and Seller shall attach such Allonge Endorsement to the Secured
Contingent Note or the Secured Purchaser's Note, as the case may be. Upon
execution and delivery of any Allonge Endorsement by Purchaser to Seller, the
respective Secured Contingent Note or Secured Purchaser's Note, as the case may
be, shall automatically be deemed to be amended to reflect any adjustment to the
outstanding principal amount of such Note in accordance with the terms of this
Agreement with no further action required by Purchaser.
31
<PAGE>
16. COVENANTS NOT TO COMPETE; NON-SOLICITATION.
------------------------------------------
16.1. Seller's Non-Compete. Seller agrees that for a period of one (1) year
--------------------
from the Closing Date (the "Non-Compete Period"), Seller and its affiliates
shall not, directly or indirectly, own, manage, operate, control or participate
in the ownership, management, operation or control of a business that provides
telephone service, equipment and installation and maintenance within any area or
at any location constituting a Relevant Area. For the purposes of this Section
16, the "Relevant Area" shall be defined for the purposes of this Agreement as
any area located within, or within fifty (50) miles of, the legal boundaries or
limits of, any city within which the Purchaser or any parent, subsidiary or
affiliate thereof is providing telephone service, equipment and installation and
maintenance, has commenced the acquisition of any authorizations, rights of way
or facilities or has commenced the construction of facilities for the purposes
of providing telephone service, equipment and installation or maintenance or has
announced the intention to provide telephone service, equipment and installation
and maintenance.
17. MISCELLANEOUS.
-------------
17.1. Amendment and Severability. This Agreement may be amended, modified or
--------------------------
altered only by the express written agreement executed by Purchaser and Seller.
If any provision of this Agreement or the application thereof to any party or
circumstances shall for any reason be held invalid, illegal, or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provisions of this Agreement and this Agreement shall be construed as
if such invalid, illegal, or unenforceable provision had never been part of this
Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
17.2. Definition of Knowledge. In this Agreement, any reference to the
-----------------------
knowledge or awareness of Seller shall mean the knowledge of Garrett Girvan,
Mark Phillips, James Walker, Tom Zalewski, Rick Prosser and Keri Lambertz after
each of them individually shall have made the inquiry that a reasonably prudent
business person would have made with respect to such matters.
32
<PAGE>
17.3. Definition of Material Adverse Effect. In this Agreement, any
-------------------------------------
reference to a material adverse effect shall mean any event, change or effect
that is materially adverse to the condition (financial or otherwise),
properties, assets, liabilities, business, operations or results of operations,
taken as a whole, and is specific to the Seller and not an effect arising from
or in connection with changes in Seller's industry.
17.4. Waiver. The failure of Seller or Purchaser to insist, in any or more
------
instances, upon performance of any of the terms or conditions of this Agreement,
shall not be construed as a waiver or relinquishment of any rights granted
hereunder or the future performance of any such term, covenant or condition.
Moreover, Purchaser's or Seller's decision to close this transaction
notwithstanding its constructive or actual knowledge of the breach by Seller or
Purchaser of one or more of their representations, warranties or obligations
hereunder shall not relieve such parties of their indemnification obligations
hereunder with respect to such breach; in such case, Purchaser and Seller
specifically are relying upon each other's indemnification obligation, as well
as the underlying representation, warranty or contractual obligation. All
rights and remedies granted in this Agreement to Purchaser and Seller shall be
cumulative and nonexclusive of all other rights and remedies that Purchaser and
Seller may have.
17.5. Notices. Any notice to be given hereunder shall be given in writing
-------
and (a) personally delivered; (b) sent by telecopier, facsimile transmission or
other electronic means of transmitting written communications; or (c) sent to
the parties at their respective addresses indicated herein by registered or
certified U.S. mail, return receipt requested and postage prepaid; or (d) by
private overnight mail courier service. The respective addresses to be used for
all such notices, demands or requests are as follows:
in the case of Purchaser, to:
Convergent Communications Services, Inc.
400 Inverness Drive South
Fourth Floor
Englewood, CO 80112
Attn: Legal Department
Telephone:(303) 749-3000
Facsimile: (303) 749-3113
with a copy to:
Freeborn & Peters
950 Seventeenth Street
33
<PAGE>
Suite 2600
Denver, CO 80202
Attn: Robin Bambach, Esq.
Telephone: (303) 628-4200
Facsimile: (303) 628-4240
and in the case of Seller, to
Kansas Communications, Inc.
650 Townsend, Suite 225
San Francisco, CA 94103-4908
Attn: Steven M. Harris, Esq.
Telephone: (415) 365-2500
Facsimile: (415) 365-2555
with a copy to:
Jeffer, Mangels, Butler & Marmaro, LLP
One Sansome Street, Twelfth Floor
San Francisco, CA 94104
Attn: William S. Solari, III, Esq.
Telephone: (415) 398-8080
Facsimile: (415) 398-5584
or to such other address as Seller or Purchaser may designate by notice in
writing to the other. If personally delivered, such communication shall be
deemed delivered upon actual receipt; if electronically transmitted pursuant to
this Section 17.5, such communications shall be deemed delivered the next
business day after transmission (and the sender shall bear the burden of proof
of delivery); if sent by overnight courier pursuant to this Section 17.5, such
communication shall be deemed delivered upon receipt; and if sent by U.S. mail
pursuant to this Section 17.5, such communication shall be deemed delivered as
of the date of delivery indicated on the receipt issued by the relevant postal
service, or, if the addressee fails or refuses to accept delivery as of the date
of such failure or refusal.
17.6. Benefit. This Agreement shall be binding upon and inure to the benefit
-------
and burden of the parties hereto, their successors and assigns. This Agreement
may not be assigned by any party without the express written consent of the
other party, which consent may be withheld in the sole discretion of the party
requiring such consent.
34
<PAGE>
17.7. No Third Party Beneficiaries. This Agreement shall be for and inure
----------------------------
to the benefit of Purchaser and Seller and there shall be no third party
beneficiaries thereto. Specially excluded from any beneficial status hereunder
are Seller's creditors, employees, customers and suppliers.
17.8. Expenses; Taxes. All expenses incurred by Seller or Purchaser in
---------------
connection with the transactions contemplated hereby, including, without
limitation, legal and accounting fees, shall be the responsibility of and for
the account of the party who ordered the particular service or incurred the
particular expense, except (a) as otherwise provided herein, and (b) any and all
federal, state or local income, sales, use or other taxes or charges arising out
of, resulting from or relating to Seller's sale of the Purchased Assets, and any
and all real or personal property taxes or assessments applicable to the period
before the Closing Date, shall be paid by Seller.
17.9. Governing Law and Forum. This Agreement shall be construed under the
-----------------------
laws of the state of Colorado and any action to enforce, construe or modify this
Agreement shall be brought in an appropriate court of competent jurisdiction in
Colorado.
17.10. Entire Agreement. This Agreement, together with the Exhibits, the
----------------
Schedules and other documents to be delivered pursuant hereto, including that
certain side letter agreement dated February 12, 199b between Purchaser and
Seller, constitute the entire agreement among the parties hereto and there are
no agreements, representations or warranties which are not set forth herein.
All prior negotiations, agreements and understandings are superseded hereby.
All parties being represented by counsel, no one party shall be deemed the
drafter of this Agreement with respect to its interpretation.
17.11. Paragraph Headings. The Section and paragraph headings contained in
------------------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
17.12. Time of the Essence. Time is of the essence of this Agreement and
----------- -------
the obligations of the parties hereunder.
17.13. Survival of Representations and Warranties. The representations and
------------------------------- ----------
warranties of Purchaser and Seller provided herein shall survive after the
Closing Date for a period of three (3) years following the Closing Date.
35
<PAGE>
17.14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
17.15. Confidentiality. Seller and Purchaser agree to not disclose the
---------------
terms and conditions of this Agreement except (i) as may be required to fulfill
obligations hereunder; (ii) as may be required by law, regulation, custom or
judicial or administrative proceeding; or, (iii) as and to the extent such
information becomes known to the general public through no fault of either party
in tangible, demonstrable form. Both parties shall take reasonable precautions
to insure that their respective employers, employees and agents also treat such
information in a confidential manner. The obligations of confidentiality shall
survive the consummation of the transactions herein set forth.
17.16. Public Announcement. Each party acknowledges and agrees that either
-------------------
party may make a public announcement of the transactions contemplated by this
Agreement any time after the Closing Date provided that the other party approves
the form and substance of any such public announcement prior to its release,
which approval shall not be unreasonably withheld.
17.17. Attachments. All Exhibits, Schedules and attachments to this
-----------
Agreement are made a part of this Agreement by this reference. Any information
disclosed in an Exhibit, Schedule or attachment shall be deemed to be disclosed
and incorporated into any other Exhibit, Schedule or attachment where such
disclosure would be appropriate.
17.18. Additional Documentation. Seller shall from time to time, subsequent
------------------------
to the Closing Date, at Purchaser's request and without further consideration,
execute and deliver such other instruments of conveyance, assignment and
transfer and take such other action as Purchaser reasonably may require in order
more effectively to effectuate the transfer of the Purchased Assets.
36
<PAGE>
17.19. Arbitration. Notwithstanding anything to the contrary herein, in the
-----------
event that there is any dispute arising pursuant to or in any way related to
this Agreement or the transactions contemplated hereby, the parties shall first
attempt to resolve the dispute between each other. The party claiming the
dispute shall provide written notification to the other party detailing the
nature and facts of the dispute. The parties shall attempt to resolve the
dispute within thirty (30) days, or such other longer period of time as the
parties may mutually agree. In the event that the parties fail to resolve the
dispute within the thirty (30) day period, or such other longer period as shall
have been agreed upon by the parties, the dispute shall be settled by
arbitration at a mutually agreed upon location in Denver, Colorado; provided,
however, that nothing in this Section 17.19 shall restrict the right of any
party to apply to a court of competent jurisdiction for emergency relief pending
final determination of a claim by arbitration in accordance with this Section
17,19; and further provided, that in the event the dispute involves an amount of
money to be paid to a party, the arbitration shall only be commenced to the
extent of the disputed amount. All arbitration shall be conducted in accordance
with the rules and regulations of the American Arbitration Association, in force
at the time of any such dispute. Each party shall pay its own expenses
associated with such arbitration, provided that the prevailing party in any
arbitration shall be entitled to reimbursement of reasonable attorneys' fees and
expenses (including, without limitation, arbitration expenses) relating to such
arbitration. The decision of the arbitrators, based upon written findings of
fact and conclusions of law, shall be binding upon the parties; and judgment in
accordance with that decision may be entered in any court having jurisdiction
thereof. In no event shall the arbitrators be authorized to grant any punitive,
incidental or consequential damages of any nature or kind whatsoever.
17.20. Force Majeure. This Agreement and the obligations of the parties
-------------
hereunder shall not be impaired or invalidated and a party shall not be in
breach hereof if such party is unable to fulfill any of its obligations
hereunder or is delayed in doing so by reason of strike, labor troubles, acts of
God or any cause beyond the reasonable control of such party.
[The remainder of this page intentionally left blank.]
37
<PAGE>
17.21. Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will construed against the party drafting such agreement or document.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.
CONVERGENT COMMUNICATIONS
SERVICES, INC., a Colorado corporation
By: /s/ John R. Evans
________________________________
Name: John R. Evans
Title: Chief Executive Officer
KANSAS COMMUNICATIONS, INC., a Kansas corporation
By: /s/ Garrett J. Girvan
_______________________________
Name: Garrett J. Girvan
Title: Vice President
38
<PAGE>
SCHEDULES
Schedule 1.1 Personal Property
Schedule 1.2 Assumed Leases
Schedule 1.3.A. Assumed Contracts
Schedule 1.3.B Excluded Contracts
Schedule 1.4 Intangible Assets
Schedule 1.7 Prepaid Assets
Schedule 1.9 Vehicles
Schedule 1.10.A Accounts Receivable
Schedule 1.10.B Excluded Receivables
Schedule 1. 11 Inventory
Schedule 2 Excluded Assets
Schedule 3.2 Assumed Liabilities
Schedule 4.3 Closing Statement
Schedule 4.4 Allocation of Purchase Price
Schedule 8.4 Disclosed Liabilities
Schedule 8.6 Title to Purchased Assets
Schedule 8.10 Impairment of Contracts and Leases
Schedule 8.11 Litigation and Proceedings
Schedule 8.13 Taxes
Schedule 8.15 Compliance with Law
Schedule 8.19 Employee Contracts
Schedule 8.23 Year 2000 Compliance
39
<PAGE>
EXHIBITS
--------
Exhibit A Secured July Note
Exhibit B Security Agreement
Exhibit C Secured Purchaser Note
Exhibit D Secured Contingent Note
Exhibit E Bill of Sale, Assumption of Liabilities
and Assignment of Contracts
Exhibit F Form of Purchaser's Counsel Opinion
Exhibit G Form of Seller's Counsel Opinion
Exhibit H-1 Allonge Endorsement to the Secured Contingent Note
Exhibit H-2 Allonge Endorsement to the Secured Purchaser's Note
40
<PAGE>
EXHIBIT 10.23
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT, dated March 17, 1999, between
Convergent Communications, Inc., a Colorado corporation (the "Company"), and
each of the entities named on Exhibit A hereto (each an "Initial Purchaser"
---------
and, collectively, the "Initial Purchasers").
In consideration of the representations, warranties, and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows.
ARTICLE I
DEFINITIONS
-----------
1.0 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following meanings:
"Accredited Investor" has the meaning set forth in Regulation D promulgated
-------------------
under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
--------------------
investigations, charges, complaints, claims, demands, injunctions, Judgments,
rulings, damages, dues, penalties, fines, costs, amounts paid in settlement,
Liabilities, obligations, Taxes, Liens, losses, expenses, and fees, including
court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
---------
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of Code
----------------
Section 1504(a).
"Agreement" means this Stock Purchase Agreement, including all exhibits and
---------
schedules thereto, between the Parties, as the same may be amended from time to
time in accordance with the provisions hereof.
"Assets" means all properties and assets, real and personal, tangible and
------
intangible, of every type and description, whether owned or leased or otherwise
possessed, used, held for use or usable in the Company's or any of its
Subsidiaries' businesses, including the Licenses, the Intangible Property and
the Company Contracts.
<PAGE>
"Balance Sheet" means the most recently dated consolidated balance sheet of
-------------
the Company and its Subsidiaries included in the Financial Statements.
"Basis" means any past or present fact, situation, circumstance, status,
-----
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction that reasonably could form the basis for any
specified consequence.
"Business Day" has the meaning set forth in Exhibit B.
------------ ---------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Commission" means the Securities and Exchange Commission or any successor
----------
Governmental Authority.
"Common Stock" has the meaning set forth in Exhibit B.
------------ ---------
"Company" has the meaning set forth in the preface above.
-------
"Company Contracts" has the meaning set forth in Section 3.20.
----------------- ------------
"Company Parties" means the Company and its Subsidiaries.
---------------
"Company's Knowledge" means the present conscious knowledge of the
-------------------
Company's officers, without any duty of inquiry.
"Contract" means any agreement, contract, commitment, indenture, lease,
--------
license, instrument, note, bond, security, agreement in principle, letter of
intent, undertaking, promise, covenant, arrangement or understanding, whether
written or oral.
"Disclosure Schedule" has the meaning set forth in the preface of Article
------------------- -------
III.
- ---
"Employee Benefit Plan" means any (i) nonqualified deferred compensation or
---------------------
retirement plan or arrangement which is an Employee Pension Benefit Plan, (ii)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (iii) qualified defined benefit retirement plan
or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (iv) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
-----------------------------
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
-----------------------------
3(1).
-2-
<PAGE>
"Entity" means a partnership, limited liability partnership, corporation,
------
limited liability company, association, joint stock company, trust, estate,
joint venture, or unincorporated organization.
"Environmental, Health, and Safety Laws" means federal, state, local, and
--------------------------------------
foreign statutes, regulations and ordinances concerning pollution or protection
of the environment, public health and safety, or employee health and safety,
including laws relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.
"Environmental Studies" has the meaning set forth in Section 3.14(d).
--------------------- ---------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"ERISA Affiliate" means each entity which is treated as a single employer
---------------
with the Company for purposes of Code Section 414.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
---------
"Financial Statements" has the meaning set forth in Section 3.09.
-------------------- ------------
"First Closing" has the meaning set forth in Section 2.02(b).
------------- ---------------
"GAAP" means United States generally accepted accounting principles as in
----
effect from time to time.
"Governmental Authority" means any nation or government, any state or other
----------------------
political subdivision thereof, and any Person exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Hazardous Materials" shall mean any substance which is or contains: (i)
-------------------
any "hazardous substance" as now defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section
9601 et seq.) or any regulations promulgated thereunder; (ii) any "hazardous
waste" as now defined in the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.) or regulations promulgated thereunder; (iii) any substance
regulated by the Toxic Substances Control Act (15 U.S.C. Section 2601 et. seq.);
(iv) gasoline, diesel fuel or other petroleum hydrocarbons; (v) asbestos and
asbestos containing materials, in any form, whether friable or nonfriable; (vi)
polychlorinated biphenyls; (vii) radon gas; and (viii) any additional substances
or materials which are now classified or considered to be hazardous or toxic
under any laws, ordinances, statutes, codes, rules, regulations, agreements, and
Judgments, now or hereafter enacted, promulgated, or amended, of the United
States, the states, the counties, the cities
-3-
<PAGE>
or any other political subdivisions in which any real property owned, leased or
occupied by the Company or any of its Subsidiaries is located and any other
political subdivision, agency or instrumentality exercising jurisdiction over
the owner of such real property, such real property or the use of such real
property relating to Environmental, Health and Safety Laws.
"Indemnified Party" has the meaning set forth in Section 5.04.
----------------- ------------
"Indemnifying Party" has the meaning set forth in Section 5.04.
------------------ ------------
"Indenture" means the Indenture dated April 2, 1998 between Convergent
---------
Communications, Inc. as Issuer and Norwest Bank Colorado, N.A., as Trustee.
"Initial Purchased Securities" means the collective reference to the
----------------------------
Initial Purchased Shares and the Initial Warrants.
"Initial Purchased Shares" has the meaning set forth in Section 2.02(a).
------------------------ ---------------
"Initial Purchasers" has the meaning set forth in the preface above.
------------------
"Initial Warrants" has the meaning set forth in Section 2.02(a).
---------------- ---------------
"Intangible Property" means all certificates of deposit, bank accounts,
-------------------
securities, partnership or other ownership interests, rights to receive money or
property by assignment, future interests, claims and rights against third
parties, accounts and notes receivables owned or held directly or beneficially
by or on behalf of the account of the Company or any of its Subsidiaries, the
Licenses, the Intellectual Property and any other intangible property of any
nature of the Company or any of its Subsidiaries.
"Intellectual Property" means (i) all inventions (whether patentable or
---------------------
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, (ii) all
trademarks, service marks, trade dress, logos, trade names, and corporate names,
including all goodwill associated therewith, and all applications,
registrations, and renewals in connection therewith, (iii) all copyrightable
works, all copyrights, and all applications, registrations, and renewals in
connection therewith, (iv) all trade secrets and confidential business
information (including ideas, research and development, know-how, formulas,
compositions, manufacturing and production processes and techniques, technical
data, designs, drawings, specifications, customer and supplier lists, pricing
and cost information, and business and marketing plans and proposals), (v) all
computer software (including data and related documentation), (vi) all other
proprietary rights, and (vii) all copies and tangible embodiments thereof (in
whatever form or medium).
-4-
<PAGE>
"Investor Rights Agreement" means the Investor Rights Agreement, dated as
-------------------------
of the date of this Agreement, between the Company and each of the Purchasers,
as it may be amended from time to time in accordance with its terms.
"Joinder Agreement" has the meaning set forth in Section 2.03(b).
----------------- ---------------
"Judgment" means any judgment, writ, order or decree of or by any
--------
arbitrator, court, judge, justice or magistrate, including any bankruptcy court
or judge, and any order of or by any other Governmental Authority.
"Liability" means any liability (whether known or unknown, whether asserted
---------
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
any such liability for Taxes and any such liability with respect to any
Redeemable Equity.
"Licenses" has the meaning set forth in Section 3.16.
-------- ------------
"Lien" means any mortgage, pledge, lien (statutory or other), encumbrance,
----
hypothecation, charge, security interest, claim, option, right to acquire,
adverse interest, assignment, deposit arrangement, restriction, or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including any conditional sale or other title retention
agreement, any financing lease involving substantially the same economic effect
as any of the foregoing and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction).
"Material Adverse Effect" means any event, fact, circumstance or occurrence
-----------------------
which results or would result in a material adverse change in or a material
adverse effect on any of (i) the financial condition, business, or operations of
the Company and its Subsidiaries taken as one enterprise, or (ii) the legality
or validity as to the Company or enforceability as against the Company of any
Transaction Document or (iii) the ability of the Company or any of its
Subsidiaries to perform its material obligations hereunder or under any other
Transaction Document.
"MJM Associates" has the meaning set forth in Section 4.10.
-------------- ------------
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
------------------
"Ordinary Course of Business" means the ordinary course of business of the
---------------------------
Company and its Subsidiaries consistent with past custom and practice (including
with respect to quantity and frequency) taking into consideration increases in
quantity and frequency resulting from the recent growth of the Company.
"Parties" means the Company, the Initial Purchasers and, from and after the
-------
Second Closing, each Second Purchaser that is not an Initial Purchaser.
-5-
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Permitted Liens" means (i) mechanic's, materialmen's, and similar Liens
---------------
for construction in progress or evidencing indebtedness for related services
that are not more than sixty days past due, (ii) Liens for Taxes not yet due and
payable or for Taxes that the taxpayer is contesting in good faith through
appropriate proceedings, (iii) purchase money Liens and Liens securing rental
payments under capital lease arrangements, (iv) Liens incurred pursuant to the
transactions entered into in connection with, or permitted by, the Indenture;
(v) Liens existing as of the date hereof and disclosed in the Disclosure
Schedule or disclosed to Purchasers pursuant to Section 3.25; and (vi) other
Liens arising in the Ordinary Course of Business and not incurred in connection
with the borrowing of money which do not materially impair the current use,
occupancy or value or the marketability of title of the Asset subject thereto.
"Person" means an individual Entity, or Governmental Authority.
------
"Prohibited Transaction" has the meaning set forth in ERISA Section 406 and
----------------------
Code Section 4975.
"Purchased Securities" means the collective reference to the Initial
--------------------
Purchased Securities and the Second Closing Securities.
"Purchasers" means (i) as of any time prior to the Second Closing, the
----------
Initial Purchasers and (ii) from and after the Second Closing, the Initial
Purchasers and the Second Purchasers.
"Purchased Share" means any share of the Series A Preferred Stock purchased
---------------
pursuant to this Agreement.
"Purchaser Indemnified Parties" means (i) each Purchaser and its Affiliates
-----------------------------
and (ii) the respective successors, heirs and legal representatives of the
foregoing.
"Qualified Assignee" has the meaning set forth in Section 2.03(b).
------------------ ---------------
"Redeemable Equity" of any Person means any equity interest of such Person
-----------------
that by its terms or otherwise, absolutely, contingently or otherwise, is or may
be required to be redeemed or repurchased by such Person or is or may become
redeemable or repurchasable at the option of the holder thereof at any time.
"Registrable Shares" has the meaning set forth in the Investor Rights
------------------
Agreement.
"Related Persons" means, as to any Person, (i) any Affiliate of such Person
---------------
(other than a Company Party), (ii) any Entity (other than a Company Party) of
which such Person or any of its Related Persons is a director, officer, partner,
manager or other member of management with the power to direct the management
and policies of such Entity, (ii) any Entity (other than a Company
-6-
<PAGE>
Party) that is the issuer of any equity interests of any class or series
beneficially owned by such Person or any of its Related Persons which represent
10% or more of all outstanding equity interests of that class or series, or
(iii) any trust or estate in which such Person has a substantial beneficial
interest or as to which such Person serves as trustee or in a similar capacity.
If such Person is a natural person, such Person's "Related Persons" shall also
include such Person's parents, children, siblings and spouse, the parents and
siblings of such Person's spouse and the spouses of such Person's children and
any Entity (other than a Company Party), trust or estate with which any such
relative of such Person has any relationship specified in clause (i), (ii) or
(iii) of the first sentence of this definition.
"Remedies Exception" means (i) applicable bankruptcy, insolvency,
------------------
reorganization, moratorium, and other laws of general application, heretofore or
hereafter enacted or in effect, affecting the rights and remedies of creditors
generally, and (ii) the exercise, whether in an action or proceeding at law or
in equity, of judicial or administrative discretion in accordance with general
equitable principles, particularly as to the availability of the remedy of
specific performance or other injunctive relief.
"Reportable Event" has the meaning set forth in ERISA Section 4043.
----------------
"Requirement of Law" means, as to any Person, the charter and bylaws or
------------------
other organizational or governing documents of such Person, and all federal,
state and local laws, rules, regulations, Judgments or other determinations of
an arbitrator, court or other Governmental Authority, applicable to or binding
upon such Person or any of its property or to which such Person or any of its
property is subject.
"Rights" means, with respect to any Person, any subscription, option,
------
warrant, convertible or exchangeable security or other right, however
denominated, to subscribe for, purchase or otherwise acquire any capital stock,
other equity interest or other security of any class or series and of any
issuer, with or without payment of additional consideration in cash or property,
either immediately or upon the occurrence of a specified date or a specified
event or the satisfaction or happening of any other condition or contingency.
"SCP Partnerships" means Sandler Capital Partners IV, L.P., a Delaware
----------------
limited partnership, and Sandler Capital FTE Partners, L.P., a Delaware limited
partnership, or their respective successors.
"Second Closing" has the meaning set forth in Section 2.03(c).
-------------- ---------------
"Second Closing Date" has the meaning set forth in Section 2.03(c).
------------------- ---------------
"Second Closing Shares" has the meaning assigned to it in Section 2.03(a).
--------------------- ---------------
"Second Closing Warrants" has the meaning set forth in Section 2.03(a).
----------------------- ---------------
-7-
<PAGE>
"Second Closing Securities" means the collective reference to the Second
-------------------------
Closing Shares and the Second Closing Warrants.
"Second Purchasers" has the meaning set forth in Section 2.03(b).
----------------- ---------------
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
-----------------------
amended.
"Series A Articles of Amendment" means the Articles of Amendment to the
------------------------------
Amended and Restated Articles of Incorporation of the Company setting forth a
copy of the resolution adopted by the Board of Directors of the Company creating
and authorizing the Series A Preferred Stock, as filed with the Secretary of
State of the State of Colorado on or prior to the date hereof, in the form
attached hereto as Exhibit B, or any successor provisions of the Corporation's
---------
Articles of Incorporation.
"Series A Preferred Stock" means the Series A Senior Convertible Preferred
------------------------
Stock, no par value, of the Company.
"Subsidiary" means, when used with respect to any Person as of any time,
----------
any other Person as to which any of the following statements is true as of such
time:
(i) such second Person is an Affiliate of such first Person which is,
directly or indirectly through one or more intermediaries, controlled by such
first Person, or
(ii) such first Person owns or controls, directly or indirectly
through one or more intermediaries, 50% or more of the outstanding equity
interests in such second Person having ordinary voting power to elect a majority
of the members of the board of directors or joint venture, partnership or other
management committee, trustees, managers or other Persons ordinarily having the
power, authority or responsibility for managing or directing the management of
such second Person, or
(iii) such first Person, directly or indirectly through one or
more intermediaries, is entitled under ordinary circumstances to 50% or more of
the profits or losses of such second Person or to receive upon dissolution and
liquidation of such second Person 50% or more of the assets available for
distribution to the holders of equity interests in such second Person,
and in the case of any of clauses (i), (ii) and (iii), disregarding any voting
power, equity interests or other rights or interests which any Person other than
the first Person or another Subsidiary of the first Person would or might have
upon the happening of any contingency, the satisfaction of any condition or the
occurrence of any event which has not happened, been satisfied or occurred as of
such time.
-8-
<PAGE>
"Tax" means any federal, state, local, or foreign income, gross receipts,
---
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
----------
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof, required to be filed
under any statute, rule or regulation.
"Third Party Claim" has the meaning set forth in Section 5.04 below.
----------------- ------------
"Transaction Documents" means this Agreement, each Joinder Agreement, the
---------------------
Investor Rights Agreement, the Series A Articles of Amendment, the Warrant
Agreement, the Warrants and each other certificate, instrument or agreement
executed and delivered by the Company or any of its Subsidiaries pursuant to or
in connection with the transactions contemplated by any of the foregoing.
"Transactions" means any and all of the transactions contemplated by this
------------
Agreement or any of the other Transaction Documents, including the issuance,
sale and purchase of the Purchased Shares and the Warrants on the date hereof or
at the Second Closing, the issuance and sale of Warrant Securities upon the
exercise of any Warrants and the issuance and delivery of Conversion Securities
upon the conversion of any Series A Preferred Stock.
"Unaudited Financial Statements" has the meaning set forth in Section 3.09.
------------------------------ ------------
"Underlying Shares" means the collective reference to the Shares of Common
-----------------
Stock issuable upon conversion of the Series A Preferred Stock in accordance
with the Series A Articles of Amendment or upon exercise of the Warrants in
accordance with the Warrant Agreement.
"Warrant Agreement" means the Warrant Agreement, dated the date hereof,
-----------------
between the Company and the several Purchasers, as it may be amended from time
to time in accordance with its terms.
"Warrant Certificate" means any certificate evidencing one or more Warrants
-------------------
which may at any time or from time to time be outstanding in accordance with the
terms of the Warrant Agreement.
"Warrants" means the Warrants to purchase shares of Common Stock issued and
--------
sold by the Company to, and purchased by, the several Purchasers pursuant to
this Agreement and the Warrant Agreement.
-9-
<PAGE>
"Warrant Securities" has the meaning set forth in the Warrant Agreement.
------------------
1.02 Certain Rules of Construction. This Agreement is to be
-----------------------------
interpreted in accordance with the following rules of construction:
(i) Number and Gender. All definitions of terms apply equally to both the
-----------------
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms.
(ii) "Including," "Herein," Etc. The words "include," "includes" and
-------------------------
"including" are deemed to be followed by the phrase "without limitation". The
words "herein", "hereof", and "hereunder" and words of similar import refer to
this Agreement (including all Exhibits and Schedules) in its entirety and are
not limited to any part hereof unless the context shall otherwise require. The
word "or" is not exclusive and means "and/or."
(iii) Subdivisions and Attachments. All references in this Agreement
----------------------------
to Articles, Sections, subsections, Exhibits and Schedules are, respectively,
references to Articles, Sections and subsections of, and Exhibits and Schedules
attached to, this Agreement, unless otherwise specified.
(iv) References to Documents and Laws. All references to any Transaction
--------------------------------
Document are to it as amended, modified and supplemented from time to time in
accordance with its terms. All references to (x) any other agreement or
instrument or (y) any Requirement of Law, License or similar item are to it as
amended and supplemented from time to time (and, in the case of a statute, law
or regulation, to any corresponding provisions of successor statutes, laws or
regulations), unless otherwise specified.
(v) References to Days. Any reference in this Agreement or a Transaction
------------------
Document to a "day" or number of "days" (without the explicit qualification
"Business") is a reference to a calendar day or number of calendar days. If any
action or notice is to be taken or given on or by a particular calendar day, and
such calendar day is not a Business Day, then such action or notice may be taken
or given on the next Business Day.
(vi) Examples. If, in any provision of any Transaction Document, any
--------
example is given (through the use of the words "such as," "for example," "e.g."
---
or otherwise) of the meaning, intent or operation of any provision, such example
is intended to be illustrative only and not exclusive.
-10-
<PAGE>
(vii) Participation in Drafting. The Parties and their respective
-------------------------
legal counsel have participated in the drafting of this Agreement, and this
Agreement will be construed simply and according to its fair meaning and not
strictly for or against any Party.
(viii) Headings. The table of contents and section headings contained in
--------
this Agreement are inserted for convenience only and shall not affect
in any way the meaning or interpretation of this Agreement.
ARTICLE II
PURCHASE AND SALE
-----------------
2.01 Authorization of Securities. Prior to the execution and delivery
---------------------------
of this Agreement, (i) the Company has duly (A) designated, created and
authorized the Series A Preferred Stock and the issuance and sale of shares
thereof pursuant to this Agreement and (B) authorized the Warrants and the
issuance and sale thereof pursuant to this Agreement; and (ii) the Company and
the Initial Purchasers have executed and delivered the Warrant Agreement.
2.02 Initial Purchase.
----------------
(a) Sale and Purchase. Simultaneously with the execution and delivery of
-----------------
this Agreement, the Company has issued and sold to the Initial Purchasers,
severally and not jointly, and the Initial Purchasers have purchased from the
Company, severally and not jointly, for an aggregate purchase price of
$16,000,000, (i) a total of 640,000 shares of Series A Preferred Stock (the
"Initial Purchased Shares") and (ii) Warrants each representing the right to
acquire, initially, one share of Common Stock and representing, in the
aggregate, the right to acquire, initially, 800,000 shares of Common Stock, in
each case subject to adjustment in accordance with the Warrant Agreement (the
"Initial Warrants"). The number of Initial Purchased Shares and the number of
Initial Warrants purchased by each Initial Purchaser, and the aggregate purchase
price paid by such Initial Purchaser therefor, are set forth on Exhibit A.
---------
(b) Delivery of Securities; Payment of Purchase Price. The closing of the
-------------------------------------------------
purchase and sale of the Initial Purchased Securities (the "First Closing") is
taking place simultaneously with the execution and delivery of this Agreement at
the offices of Gibson, Dunn & Crutcher LLP, 1801 California Street, Suite 4100,
Denver, Colorado (the date on which the First Closing occurs is referred to as
the "First Closing Date"). Delivery of the Initial Purchased Securities
purchased by each Initial Purchaser pursuant to this Agreement is being made at
the First Closing by the Company delivering to such Initial Purchaser, against
payment of the purchase price therefor, (i) a stock certificate or certificates,
dated the date hereof, representing the number of Initial Purchased Shares
purchased by such Initial Purchaser, with each such certificate being registered
in the name of such Initial Purchaser and (ii) a Warrant Certificate or Warrant
Certificates, dated the date hereof, representing the number of Initial Warrants
purchased by such Initial Purchaser, with each such certificate being registered
in the name of such Initial Purchaser. Payment by each Initial Purchaser of the
agreed purchase price for the Initial Purchased Shares and Initial Warrants
purchased by such
-11-
<PAGE>
Initial Purchaser has been made by wire transfer (to the account of the Company
previously designated by it in writing) and the Company hereby acknowledges
receipt from each Initial Purchaser of payment in full.
2.03 Second Purchase.
---------------
(a) Sale and Purchase. Subject to the terms and conditions contained in
-----------------
this Agreement, on the Second Closing Date, the Second Purchasers shall purchase
from the Company, and the Company shall issue and sell to the Second Purchasers,
severally and not jointly, for an aggregate purchase price of $4,000,000, (i) a
total of 160,000 shares of Series A Preferred Stock (the "Second Closing
Shares") and (ii) Warrants, each representing the right to acquire, initially,
one share of Common Stock, and representing, in the aggregate, the right to
acquire, initially, 200,000 shares of Common Stock, subject to adjustment in
accordance with the Warrant Agreement (the "Second Closing Warrants").
(b) Assignment of Second Purchase Right and Obligation. The SCP
---------------------------------------------------
Partnerships, in their discretion, may assign to one or more other Persons, the
right and obligation to purchase all or such portion of the Second Closing
Securities as the Initial Purchasers may determine in their discretion, subject
to the following:
(i) if any such Person to whom any such assignment is made is not an
Initial Purchaser, such Person (a "Qualified Assignee") (A) shall be an
Accredited Investor, (B) shall be an Affiliate of the SCP Partnerships, a
general or limited partner of an SCP Partnership, an Affiliate of a general
or limited partner of an SCP Partnership, a Person or an Affiliate of a
Person that has previously made at least two prior co-investments with an
SCP Partnership or one or more Affiliates of an SCP Partnership or some
other institutional or private investor reasonably satisfactory to the
Company, and (C) shall execute and deliver to the Company and the other
Second Purchasers, at or prior to the Second Closing, a Joinder Agreement
substantially in the form of Exhibit C hereto (a "Joinder Agreement");
---------
(ii) each Second Securities Purchaser shall purchase Second Closing
Securities having an aggregate purchase price of at least $1,000,000;
(iii) the Second Closing Securities purchased by and sold to each
Second Purchaser shall be in the proportion of one and one-quarter Warrants
(initially representing the right to acquire one and one-quarter shares of
Common Stock) for each share of Series A Preferred Stock purchased by and
sold to such Second Purchaser, with the purchase price payable for any such
combination of one share of Series A Preferred Stock and one and one-
quarter Warrants being equal to Twenty-Five Dollars.
Not later than the second Business Day before the Second Closing Date, the SCP
Partnerships shall deliver to the Company a written notice that (i) identifies
each Second Purchaser and (ii) states the number of Second Closing Shares and
Second Closing Warrants to be purchased by each Second
-12-
<PAGE>
Purchaser and the purchase price payable therefor. If no such notice is given by
such second Business Day, then the Second Purchasers shall be the SCP
Partnerships, and the number of Second Closing Shares and Second Closing
Warrants to be purchased by and sold to each shall be in the same proportions as
the Initial Shares and Initial Warrants purchased by and sold to them pursuant
to Section 2.02. If any Person named in such notice, other than an SCP
------------
Partnership, shall fail to deliver its Joinder Agreement prior to the Second
Closing or, having done so shall default in its obligation to purchase Second
Closing Securities, or if the condition stated in clause (ii) of Section 2.03(d)
---------------
or in clause (i) of Section 2.03(f) is not satisfied with respect to any such
---------------
Second Purchaser, then the SCP Partnerships shall (on the terms and subject to
the conditions contained in this Section 2.03) purchase, and the Company shall
------------
issue and sell to the SCP Partnership's (in the same proportions as the Initial
Shares and Initial Warrants purchased by and sold to them pursuant to Section
-------
2.02), the Second Closing Securities allocated to such Person. As used in this
- ----
Agreement, the term "Second Purchaser" shall mean each purchaser of Second
Closing Securities determined in accordance with the foregoing provisions of
this Section 2.03(b).
---------------
(c) Second Closing. The closing of the purchase and sale of the Second
--------------
Closing Securities (the "Second Closing") shall take place at the offices of
Gibson, Dunn & Crutcher LLP, 1801 California Street, Suite 4100, Denver,
Colorado, at 10:00 A.M., Denver time, on March 31, 1999, or such later time or
date upon which all conditions to the Second Closing have been satisfied (or
waived by the appropriate party). (The date on which the Second Closing occurs
is referred to as the "Second Closing Date.") Delivery of the Second Closing
Securities purchased by each Second Purchaser pursuant to this Agreement shall
be made at the Second Closing by the Company delivering to such Second
Purchaser, against payment of the purchase price therefor, (i) a stock
certificate or certificates, dated the Second Closing Date, representing the
number of Second Closing Shares purchased by such Second Purchaser, with each
such certificate being registered in the name of such Second Purchaser and (ii)
a Warrant Certificate or Warrant Certificates, dated the Second Closing Date,
representing the number of Second Closing Warrants purchased by such Second
Purchaser, with each such certificate being registered in the name of such
Second Purchaser, against payment by such Second Purchaser of the purchase price
for such Second Closing Shares and Second Closing Warrants (determined
consistently with Section 2.03(b) above) purchased by such Second Purchaser by
---------------
wire transfer to the account of the Company designated by it in a written notice
given at least two Business Days prior to the Second Closing Date.
(d) Conditions of Each Party. The obligation of the Company and each
------------------------
Second Purchaser to consummate the sale and purchase of the Second Closing
Securities as contemplated by this Agreement is subject to the satisfaction of
the following conditions, any of which may be waived in writing by the Company
and the Second Purchasers:
(i) Proceedings Not Restrained. No order or injunction shall have
--------------------------
been issued by a court of competent jurisdiction preventing the consummation of
the transactions contemplated hereby, and no action, suit, proceeding or
investigation shall have been instituted or threatened that seeks to restrain,
restrict or prohibit or impose substantial penalties or damages with respect to
(or any other materially adverse relief or remedy in connection with) such
transactions.
-13-
<PAGE>
(ii Purchase Permitted By Applicable Laws. The purchase and
-------------------------------------
sale of the Second Closing Securities to be purchased at the Second Closing by
the Second Purchasers on the terms and conditions herein provided (including the
application of the proceeds therefrom by the Company) shall not violate any
applicable Requirement of Law.
(e) Conditions of Each Second Purchaser. The obligation to purchase
-----------------------------------
and pay for the Second Closing Securities to be purchased by the Second
Purchasers at the Second Closing Date as contemplated by this Agreement is
several and not joint and is subject to the satisfaction, on or before the
Second Closing Date, of the following conditions, any of which may be waived in
writing by the Second Purchasers:
(i) Certain Documents. In addition to the stock certificates and
-----------------
Warrant Certificates required by Section 2.03(c), the Second Purchasers
---------------
shall have received the following, each dated the Second Closing Date
(except as otherwise specified below):
(A) a certificate of the Secretary or an Assistant Secretary
of the Company certifying (x) the names and signatures of the officers
of the Company authorized to sign the certificates and other documents
to be delivered by the Company on the Second Closing Date and (y) that
the conditions contained in subdivisions (ii), (iii) and (iv) of this
Section 2.03(e) and, to the knowledge of the Company, subdivision (i)
---------------
of Section 2.03(d), have been satisfied ;
---------------
(B) a certificate of the chief executive officer of the
Company and the Secretary of the Company (x) attaching copies,
certified by such officers as true and complete, of the
resolutions of the Board of Directors of the Company in
connection with the authorization and approval of the execution,
delivery and performance of the Transaction Documents and
consummation of the Transactions and of all other documents
evidencing all necessary corporate action taken in connection
therewith, (y) attaching copies, certified by such officers as
true and complete, of the Amended and Restated Articles of
Incorporation and By-laws of the Company and of the Series A
Articles of Amendment, each as amended through the Second Closing
Date, and (z) which includes a representation by such officers
that the copies of the Articles or Certificate of Incorporation
and By-Laws or other organizational documents of each Subsidiary
of the Company, as previously provided to the Initial Purchasers,
are true and complete in all respects;
(C) A favorable opinion of Gibson, Dunn & Crutcher LLP,
counsel to the Company, substantially in the form and to the effect of
the opinion of such firm rendered to the Initial Purchasers at the
First Closing.
(ii) Representations and Warranties; No Default. The
------------------------------------------
representations and warranties of the Company contained in this Agreement
shall have been true and correct on the date of this Agreement and shall be
true and correct on and as of the Second Closing Date
-14-
<PAGE>
with the same force and effect as if they had been made on and as of the
Second Closing Date (and as if each reference to the First Closing Date in
the introductory paragraph of Article III was a reference to the Second
-----------
Closing Date), except to the extent of changes caused by the consummation
of the transactions contemplated hereby; each of the Series A Articles of
Amendment, the Investor Rights Agreement and the Warrant Agreement shall be
in full force and effect; and the Company shall have performed and complied
with all agreements, covenants and obligations contained in this Agreement,
the Series A Articles of Amendment, the Investor Rights Agreement and the
Warrant Agreement that are required to be performed or complied with by it
on or before the Second Closing.
(iii) No Material Adverse Change. During the period from the
--------------------------
date of this Agreement through the Second Closing Date, the Company shall
have operated its business only in the Ordinary Course of Business and
there shall not exist or have occurred any condition, event or state of
facts that has had or is reasonably likely to have a Material Adverse
Effect, whether or not arising in the Ordinary Course of Business.
(iv) Absence of Certain Events. No Sale of the Company (as
-------------------------
defined in Exhibit B), no Reorganization Event (as defined in Exhibit B)
--------- ---------
and no action or event shall have been taken or shall have occurred which
has or would result in any adjustment under Section 10 of the Series A
Articles of Amendment or Article III of the Warrant Agreement. Since the
time immediately after the First Closing, there shall have been no change
in the capitalization of the Company other than changes resulting from any
exercises of Existing Rights (as defined in Exhibit B).
---------
(f) Company's Conditions. The Company's obligation to issue and sell
--------------------
the Second Closing Securities to be sold to and purchased by the Second
Purchasers at the Second Closing Date as contemplated by this Agreement is
subject to the satisfaction of the conditions, which may be waived in writing by
the Company, that (i) the representations and warranties contained in Article IV
of this Agreement (except Section 4.10, unless such Second Purchaser is MJM
------------
Associates) shall be true and correct in all material respects on and as of the
Second Closing Date with respect to each Second Purchaser as if each reference
therein to "such Initial Purchaser" were to such Second Purchaser, each
reference to the "Initial Securities" were to the Purchased Securities being
acquired by such Second Purchaser at the Second Closing and each reference to
the "Initial Closing" were a reference to the Second Closing, and the Company
shall have received a certificate to that effect signed by such Second
Purchaser; and (ii) no action shall have been taken by the Initial Purchasers
which would cause the sale to the Second Purchasers to be other than exempt
under the Securities Act.
(g) Covenant Regarding Closing Conditions; Covenant of Company
----------------------------------------------------------
Regarding Adjustment Events. Each party hereto covenants to the other parties
- ---------------------------
to exercise its reasonable efforts to perform, comply with, and otherwise
satisfy each of the conditions to the Second Closing to be satisfied by such
party hereunder. The Company covenants to and agrees with the Initial
Purchasers that, from the date hereof through the first to occur of the Second
Closing Date or the date of
-15-
<PAGE>
termination of this Section 2.03 pursuant to Section 2.03(h), the Company shall
------------ ---------------
not take, consummate, approve or authorize any action or transaction that
results or (with the passage of time or otherwise) would result in any
adjustment pursuant to Section 10 of the Series A Articles of Amendment or
Article III of the Warrant Agreement.
(h) Termination. This Section 2.03 may be terminated at any time
----------- ------------
prior to the Second Closing:
(i) by mutual consent of the Company and the Initial Purchasers;
or
(ii by the Company or the Initial Purchasers, by written notice
to the other(s), if the Second Closing shall not have occurred on or before
March 31, 1999, unless the failure of the Second Closing to occur by such date
shall be due to the failure to perform or observe the covenants and agreements
hereunder of the Company, if the Company is the party seeking to terminate this
Section 2.03, or of any Initial Purchaser, if the Initial Purchasers are the
- ------------
parties seeking to terminate this Section 2.03.
------------
In the event of termination of Section 2.03 pursuant to this Section 2.03(h),
------------ ---------------
Section 2.03 shall forthwith become void and have no effect, and no party shall
- ------------
have any liability of any nature whatsoever under such Section, or in connection
with the transactions contemplated thereby, except that a termination shall not
relieve or release any party from any liabilities or damages arising out of its
breach of any provision of this Agreement.
2.04 Use of Proceeds. The Company covenants to and agrees with the
---------------
Purchasers that it shall use all proceeds of the sale of Purchased Shares for
working capital and capital expenditures as provided in the Company's 1999
business plan heretofore approved by the Company's Board of Directors.
ARTICLE III
COMPANY REPRESENTATIONS AND WARRANTIES
---------------------------------------
The Company (i) represents and warrants to each Purchaser that each of the
statements set forth in Sections 3.01 through 3.29, inclusive, other than
------------- ----
Section 3.04(b) was true and correct in all respects immediately prior to the
- ---------------
First Closing, and (ii) represents and warrants to and covenants and agrees with
each Purchaser that each of such statements (other than that set forth in
subsection (a) of Section 3.04), and the statement set forth in Section 3.04(b),
--- ------------ ---------------
shall be, after giving effect to all of the Transactions being consummated on
the First Closing Date, true and correct in all respects immediately after the
First Closing with the same force and effect as if made at and as of such time,
in each case, except as set forth in the disclosure schedule delivered by the
Company to the Purchasers on the date hereof (the "Disclosure Schedule"). Such
representations, warranties, covenants and agreements have constituted a
material inducement to each Purchaser to enter into this Agreement, to enter
into the other Transaction Documents to which it has become a party, to purchase
the securities purchased by it pursuant hereto and to consummate the other
Transactions.
-16-
<PAGE>
The Disclosure Schedule is arranged in sections corresponding to the lettered
and numbered sections in this Agreement which require the disclosure. Any matter
disclosed in one section of the Disclosure Schedule may be cross-referenced in
other sections of the Disclosure Schedule, and upon such cross-referencing shall
be deemed disclosed for all purposes of the section of the Disclosure Schedule
in which such cross-reference is contained.
3.0 Certain Representations and Warranties Regarding the Transactions.
-----------------------------------------------------------------
(a) Authorization of Transactions. The Company has full power and
-----------------------------
authority to execute and deliver this Agreement and each other Transaction
Document and to perform its obligations hereunder and thereunder. The
execution, delivery and performance by the Company of this Agreement and each
other Transaction Document have been duly authorized by the Board of Directors
of the Company and by all other necessary corporate action on the part of the
Company. Each of this Agreement and each other Transaction Document to which the
Company is a named party has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to the Remedies
Exception. The Company is not required to give any notice, declaration, report
or statement to, make any filing with, or obtain any authorization, consent,
declaration or approval of any Governmental Authority or any other Person in
connection with the execution, delivery or performance by the Company or any of
its Subsidiaries of this Agreement or any other Transaction Document or the
consummation of the Transactions or in order to preclude any termination,
suspension, modification or impairment of any of the Company Contracts or any
legal or contractual right, privilege, license or franchise which is included in
the Assets.
(b) Filing of Series A Articles of Amendment. All actions necessary in
----------------------------------------
order to duly and validly authorize and designate the Series A Preferred Stock
and authorize and create the Warrants, including all necessary corporate action
on the part of the Company and its stockholders and the filing with the Colorado
Secretary of State of the Series A Articles of Amendment, have been taken and
the Series A Articles of Amendment in the form attached hereto as Exhibit B and
the Warrant Agreement are each in full force and effect and have not been
amended, modified or supplemented.
(c) Brokers' Fees. Neither the Company nor any of its Subsidiaries has any
-------------
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the Transactions, except for a fee of 2% of the total
proceeds due to Janco Partners, four-fifths of which will be paid on the First
Closing Date and the balance of which will be paid the Second Closing Date.
(d) Offerees. None of the Company Parties, their respective directors and
--------
officers, their respective Affiliates or any Person acting as agent for or on
behalf of any of the Company Parties has, directly or indirectly, sold, offered
for sale, or solicited offers to buy any of the Purchased Securities or other
securities of the Company so as to bring the offer, issuance or sale of the
Purchased Securities as contemplated by this Agreement within the registration
requirements of Section 5 of the Securities Act, or within the registration or
qualification requirements of any "blue
-17-
<PAGE>
sky" or securities laws of any state or other jurisdiction. Assuming the
Purchasers are Accredited Investors, the offering, issuance and sale of the
Purchased Securities are exempt from the registration provisions of the
Securities Act; provided, that no representation or warranty is made regarding
--------
the activities of Michael J. Marocco.
3.0 Organization, Qualification, and Corporate Power. The Company is a
------------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Colorado. Each of its Subsidiaries is a limited liability
company or a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Each of the Company
Parties is duly authorized, qualified and licensed and is in good standing to
conduct business under the laws of each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or license necessary, except in such jurisdictions
where the lack of such qualification or license or the failure to be in good
standing would not have a Material Adverse Effect. Each jurisdiction in which
the Company or any of its Subsidiaries is authorized to conduct business is
identified in the Disclosure Schedule. Each of the Company Parties has full
corporate power and authority to carry on the businesses in which it is engaged
as such businesses are now being conducted and to own, lease and use the
properties currently owned, leased and used by it. The Disclosure Schedule
lists the directors and officers of the Company and the managers or directors
and officers, as the case may be, of each of its Subsidiaries. The Company has
made available to the Purchasers true, correct and complete copies of the
charter and bylaws or other operational documents of each of its Subsidiaries
(in each case as amended to date).
3.0 Terms, Validity, Etc. The Company has delivered to the Purchasers
---------------------
true and complete copies of its Certificate of Incorporation and By-Laws as in
effect on the date hereof. The Purchased Shares and the Warrants, when issued
as provided herein, and the Underlying Shares, when issued upon conversion of
Series A Shares in accordance with the Series A Articles of Amendment or the
exercise, conversion or exchange of Warrants in accordance with the Warrant
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of any Lien, restriction or claim, other than any
restriction on transfer under applicable Federal and State securities laws, and
with no personal liability attaching to the ownership thereof, and the holder
thereof will have the respective rights, preferences and privileges, and will be
subject only to the applicable limitations and restrictions, provided in the
Company's Certificate of Incorporation (including the Series A Articles of
Amendment), the Warrant Agreement and the other Transaction Documents.
3.0 Capitalization.
--------------
(a) Immediately prior to the First Closing, the authorized and issued
capital stock of the Company consisted solely of (i) 100,000,000 authorized
shares of Common Stock, of which 27,920,704 shares were issued and outstanding,
all Persons owning of record greater than 5% of the outstanding shares are named
in the Disclosure Schedule and no shares were held in treasury, and (ii)
1,000,000 authorized shares of "blank-check" Preferred Stock, none of which was
designated, issued or outstanding, except for 800,000 unissued shares designated
as Series A Preferred Stock.
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<PAGE>
As of such time, except as set forth in the Disclosure Schedule, (i) no shares
of capital stock of the Company of any class or series were reserved for
issuance except for the shares of Common Stock issuable upon conversion of the
Purchased Shares or exercise of the Warrants; and (ii) other than pursuant to
certain provisions of the Transaction Documents, there were no voting trusts or
other Contracts, arrangements or understandings to which the Company was a party
or by which it was bound or of which the Company had knowledge that directly,
indirectly, absolutely or contingently, related to the issuance, ownership,
pledge, transfer, purchase, redemption or repurchase, voting or registration
under the Securities Act of, or any restrictions with respect to, any shares of
authorized, issued, or outstanding capital stock of the Company of any class or
series. No Redeemable Equity of the Company is authorized, issued or
outstanding.
(b) Immediately after the First Closing and after giving effect to the
issuance of the Preferred Shares and the Warrants, the statements in Section
-------
3.04(a) shall be true, accurate and complete, except that the Initial Purchased
- -------
Shares and the Initial Warrants will be outstanding.
(c) Except as set forth in the Disclosure Schedule there are no
outstanding or authorized Rights or other Contracts, commitments, arrangements
or understandings that could require the Company to issue, sell, or otherwise
cause to become outstanding any shares of its capital stock, or stock
appreciation, phantom stock, profit participation, or similar rights with
respect to the Company. No capital stock or other securities of the Company
have been, and the Purchased Securities are not being, and the Underlying
Shares, when issued upon conversion of the Series A Shares or exercise of the
Warrants, as the case may be, will not be, issued in violation of any preemptive
rights. The Company has duly reserved 5,000,000 shares of Common Stock for
issuance upon conversion, exercise or exchange of the Purchased Shares and the
Warrants. None of the issuance or sale of the Securities, any future
conversion, exercise or exchange of any Series A Share or Warrant, nor any
future adjustments in the number of shares of Common Stock or the kinds or
amounts of other securities or property deliverable upon exercise, conversion or
exchange of the Warrants or conversion of Series A Shares or in the amount of
consideration payable by holders upon such exercise or conversion shall (i) give
any Person any preemptive right or any similar or other right to subscribe for,
purchase or otherwise acquire any of the Purchased Securities, any Warrant
Securities, any Conversion Securities, any other shares of capital stock of the
Company of any class or series or any Rights with respect thereto or any other
securities of the Company or (ii) result in any adjustments in the number of
shares of Common Stock or the kinds or amounts of other securities or property
deliverable upon exercise of the Existing Rights or in the amount of
consideration payable by the holders thereof upon such exercise.
3.05 Indebtedness. The Disclosure Schedule contains a list of all
------------
outstanding loan or credit agreements, notes, bonds, mortgages, indentures and
other similar agreements and instruments pursuant to which the Company or any of
its Subsidiaries has borrowed money (other than purchase money indebtedness and
indebtedness for money borrowed by a Subsidiary from the Company, in each case
incurred in the Ordinary Course of Business) in excess of $250,000, and the
respective amounts of principal and accrued and unpaid interest outstanding
thereunder as of a recent date.
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<PAGE>
3.0 Noncontravention. Neither the execution, delivery or performance of
----------------
this Agreement or any other Transaction Document, nor the consummation of any of
the Transactions does or will (i) violate any Requirement of Law or Judgment to
which the Company, any of its Subsidiaries or any of the Assets is subject or
bound, or any provision of the charter or bylaws of the Company or of the
charter, bylaws, operating agreement or other organizational document of any of
its Subsidiaries, or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under, any
Company Contract or any legal or contractual right, privilege, License or
franchise which is included in the Assets, or result in the imposition of any
Lien upon any of the Assets, except where any such violation, conflict, breach,
default, right to accelerate, terminate, modify or cancel, or require a notice
or result in the imposition of a Lien would not have a Material Adverse Effect.
Assuming that the respective representations and warranties of the Purchasers
contained herein are true, neither the Company nor any of its Subsidiaries is
required to give any notice, declaration, report or statement to, make any
filing with, or obtain any authorization, consent, declaration or approval of
any Governmental Authority or other third party in connection with the execution
and delivery by the Parties of, or the consummation of the Transactions or in
order to preclude any termination, suspension, modification or impairment of any
of the Company Contracts or any material legal or contractual right, privilege,
License or franchise which is included in the Assets.
3.0 Subsidiaries. The Disclosure Schedule sets forth for each Subsidiary
------------
of the Company (i) its name and jurisdiction of organization, (ii) its form of
organization and capital structure, and (iii) the capital stock or membership or
other equity interests held by the Company in such Subsidiary. The Company
holds of record and owns beneficially all of the outstanding shares of capital
stock or other equity or ownership interests in each of its Subsidiaries, free
and clear of any restrictions on transfer (other than restrictions under the
Securities Act and state securities laws or as disclosed on the Disclosure
Schedule), Taxes, Liens, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands of any nature whatsoever. Except as
set forth on the Disclosure Schedule there are no outstanding or authorized
Rights, Contracts, arrangements or understandings that could require the Company
or any of its Subsidiaries to sell, transfer, or otherwise dispose of any equity
or ownership interest in any of its Subsidiaries or that could require any
Subsidiary of the Company to issue, sell, or otherwise cause to become
outstanding any of its own shares of capital stock or membership or other equity
or ownership interests or any shares of capital stock or membership or other
equity or ownership interests in any other Subsidiary. There are no (i)
authorized or outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to or Redeemable Equity of, any
Subsidiary of the Company or (ii) voting trusts, proxies, or other agreements
or understandings with respect to the voting of any capital stock, membership
interest or other equity or ownership interests of any such Subsidiary. Except
as set forth in the Disclosure Schedule, none of the Company Parties controls
directly or indirectly or has any direct or indirect equity participation or
other investment in any Person which is not a Subsidiary.
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<PAGE>
3.0 Corporate Records. The minute books or similar records of the Company
-----------------
and each of its Subsidiaries have been made available to the Purchasers, contain
true and complete records in all material respects of all meetings of, or
written consents in lieu of meetings executed by, the respective boards of
directors (and all committees thereof) and shareholders or other equity owners
of the Company and each such Subsidiary. All material actions and transactions
taken or entered into by the Company or any such Subsidiary and requiring action
by its Board of Directors (or Persons performing similar functions for any non-
corporate Subsidiary) or shareholders or other equity owners have been duly
authorized or ratified as necessary and are evidenced in such minute books;
except where the failure of such authorization, ratification or evidence in the
minute book would not have a Material Adverse Effect. The stock certificate
books and stock records of the Company and each such Subsidiary, as made
available to the Purchasers, are true and complete.
3.0 Financial Statements.
--------------------
(a) The Company has delivered true, accurate and complete copies of
the following financial statements (collectively the "Financial Statements"):
(i) audited consolidated balance sheets and statements of operations,
shareholders' equity and cash flows, including the notes thereto, as of and for
the year ended December 31, 1997 for the Company and its Subsidiaries; and (ii)
unaudited consolidated balance sheets and statements of operation, shareholders'
equity and cash flows as of and for the year ended December 31, 1998 for the
Company and its Subsidiaries (the "Unaudited Financial Statements"). The
Financial Statements (including the notes thereto) present fairly the financial
position of the Company and its Subsidiaries as of such dates and the results of
operations and cash flows of the Company and its Subsidiaries for such periods
in conformity with GAAP applied on a consistent basis throughout the periods
covered thereby; provided, however, that the Unaudited Financial Statements are
-------- -------
subject to normal year-end adjustments, none of which will be material in nature
or amount, and lack footnotes.
(b) There are no unfulfilled contractual obligations for capital
expenditures of any Company Party which are not reflected in the Unaudited
Financial Statements.
(c) The books of account of each Company Party are true, accurate and
complete in all material respects, have been maintained in accordance with good
business practices and fairly reflect all of the properties, Assets, liabilities
and transactions of each Company Party in accordance with GAAP consistently
applied. The Financial Statements and books and records, do not, because of the
provision of services or the bearing of costs and expenses by any Affiliate of
the Company or for any other reason, understate the true costs and expenses of
conducting the businesses of the Company Parties.
3.1 Events Subsequent to Most Recent Fiscal Period End. Except as
--------------------------------------------------
disclosed in the Disclosure Schedule, since the date of the Balance Sheet, there
has not been any Material Adverse Effect and each Company Party has conducted
its business and affairs in the Ordinary Course of Business. Without limiting
the generality of the foregoing, since the date of the Balance Sheet:
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<PAGE>
(a) none of the Company Parties has sold, leased, transferred, or
assigned any of its Assets, other than (i) immaterial Assets or (ii) Assets
sold, leased, transferred or assigned in the Ordinary Course of Business;
(b) none of the Company Parties has entered into any agreement,
Contract or license (or series of related Contracts) involving more than
$250,000 and outside the Ordinary Course of Business;
(c) none of the Company Parties has accelerated, terminated (other
than upon the expiration of its term), modified, or canceled any Contract
(or series of related Contracts) outside of the Ordinary Course of Business
and involving more than $250,000 to which the Company or any of its
Subsidiaries is or was a party or by which it is or was bound;
(d) none of the Company Parties has imposed or suffered to exist any
Lien upon any of the Assets, other than Permitted Liens;
(e) none of the Company Parties has purchased, leased or acquired any
Assets or made any capital or operating expenditure (or series of related
capital or operating expenditures), capital addition or improvement, in
either case, outside of the Ordinary Course of Business and involving more
than $250,000;
(f) none of the Company Parties has made any capital investment in,
any loan to, or any acquisition of the securities or assets of, any other
Person (or series of related capital investments, loans, and acquisitions)
involving more than $250,000 and outside the Ordinary Course of Business;
(g) none of the Company Parties has issued any note, bond or other
debt security or Redeemable Equity or created, incurred, assumed, or
guaranteed any indebtedness for borrowed money or capitalized lease
obligations involving more than $250,000 singly or $500,000 in the
aggregate (other than purchase money indebtedness and indebtedness for
money borrowed by a Subsidiary from the Company, in each case incurred in
the Ordinary Course of Business);
(h) there has been no change made or authorized in the charter or
bylaws of the Company or in the charter, bylaws, operating agreement or
other organizational documents of any of its Subsidiaries (except for the
designation of the Series A Preferred Stock);
(i) the Company has not declared, set aside, or paid any dividend or
made any distribution with respect to its capital stock (whether in cash,
securities, property or otherwise) or redeemed, purchased, or otherwise
acquired any of its capital stock, or granted any Rights to purchase or
obtain (including upon conversion, exchange, or exercise) any of its
capital stock;
-22-
<PAGE>
(j) none of the Company Parties has experienced any damage,
destruction, or loss (whether or not covered by insurance) to any material
amount of its Assets;
(k) none of the Company Parties has made any loan to, or entered into
any other transaction with or for the benefit of, any of the Company's
stockholders, directors, officers, or employees outside the Ordinary Course
of Business involving more than $25,000;
(l) none of the Company Parties has discharged or satisfied any Lien,
or paid, canceled, compromised or otherwise satisfied any obligation,
indebtedness or Liability (absolute or contingent) other than the payment
in the Ordinary Course of Business of current Liabilities shown on the
Balance Sheet or incurred since the date thereof in the Ordinary Course of
Business;
(m) none of the Company Parties has (A) increased the rate of
compensation payable or to become payable by it to any of its officers,
directors, or agents, except for increases in the Ordinary Course of
Business or required under the terms of employment agreements, or (B)
granted, made or accrued any bonus, incentive compensation, service award
or other like benefit, contingently or otherwise, to or for the credit of
any of its officers, directors, or agents, other than in the Ordinary
Course of Business, or made any employee welfare, pension, retirement,
profit sharing or similar payment except pursuant to regularly scheduled
payments required pursuant to the existing plans and arrangements described
in the Disclosure Schedule or (C) paid or granted any right to receive any
severance or termination pay to any officer, director, or agent;
(n) except as disclosed in the Financial Statements none of the
Company Parties has made any material change in any method of accounting or
any accounting practice; and
(o) none of the Company Parties has entered into any Contract to do
any of the foregoing.
3.11 Undisclosed Liabilities. To the Company's Knowledge, (i) none of the
-----------------------
Company Parties has any Liability or other obligation which, singly or in the
aggregate, would be required to be reflected or reserved against in a balance
sheet of the Company and its Subsidiaries prepared in accordance with GAAP and
(ii) there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against any of them
which if asserted could result in any such Liability or other obligation which,
singly or in the aggregate, would be required to be reflected or reserved
against in a balance sheet of the Company and its Subsidiaries prepared in
accordance with GAAP, except for (x) Liabilities set forth on the face of the
Balance Sheet (rather than in any notes thereto), (y) Liabilities which have
arisen after the date of the Balance Sheet in the Ordinary Course of Business
(none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of Contract, tort, infringement, or violation of law)
and (z) Liabilities that do not have Material Adverse Effect on the Company
Parties.
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<PAGE>
3.1 Legal Compliance. Each of the Company Parties has complied in all
----------------
respects with all applicable Requirements of Law and Judgments, and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or
notice has been filed or commenced against any of them alleging any failure so
to comply except to the extent that such failure would not have a Material
Adverse Effect.
3.1 Tax Matters.
-----------
(a) Each of the Company Parties has filed on a timely basis all Tax
Returns that it was required to file on or prior to the date hereof. All such
Tax Returns were, when filed, correct and complete in all material respects.
All Taxes owed by the Company Parties (whether or not shown on any Tax Return)
have been paid or accrued. None of the Company Parties is currently the
beneficiary of any extension of time within which to file any Tax Return. No
claim has ever been made by a Governmental Authority in a jurisdiction where any
of the Company Parties does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction. There are no Liens on any of the Assets that
arose in connection with any failure (or alleged failure) to pay any Tax.
(b) Each Company Party has withheld and paid to the proper
Governmental Authority all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
(c) There is no dispute or claim concerning any Tax Liability of the
Company or any of its Subsidiaries either (i) claimed or raised by any
Governmental Authority in writing or (ii) to the Company's knowledge, based upon
personal contact by any officer or employee of the Company or any of its
Subsidiaries with any agent of any Governmental Authority. The Disclosure
Schedule lists all federal, state, local, and foreign income Tax Returns that
have been audited, and indicates those Tax Returns that currently are the
subject of audit.
(d) None of the Company Parties has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(e) None of the Company Parties has filed a consent under Code Section
341(f) concerning collapsible corporations. None of the Company Parties has
made any payments, is obligated to make any payments, nor is a party to any
agreement that under certain circumstances could obligate it to make any
payments, that will not be deductible under Code Section 280G. None of the
Company Parties is a party to any Tax allocation or sharing agreement which will
not be terminated effective as of the First Closing. None of the Company and
nor its Subsidiaries has been a member of an Affiliated Group filing a
consolidated federal income Tax Return other than a group the common parent of
which was the Company.
(f) None of the Company Parties has any liability for the Taxes of any
Person other than another Company Party under Reg. Section 1.1502-6 (or any
similar provisions of state, local, or foreign law, as a transferee or
successor, by contract or otherwise).
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3.1 Real Property.
-------------
(a) The Disclosure Schedule identifies all real property as to which
the Company or any of its Subsidiaries is the fee owner or the lessee under a
lease described in Section 3.14(e).
---------------
(b) To the Company's Knowledge there are no pending actions or
proceedings (including condemnation proceedings) concerning any such real
property that, if adversely determined to the Company or its Subsidiaries, can
reasonably be expected to have a Material Adverse Effect and, to the Company's
knowledge, no such action or proceeding has been threatened.
(c) None of the Company Parties has received any written notice from
any city, village or Governmental Authority requiring the correction of any
condition with respect to any Property by reason of a violation or alleged
violation of any applicable law or regulation which, if not cured, could
reasonably be expected to have a Material Adverse Effect, other than notices
with respect to violations or alleged violations that have been cured.
(d) The Company has made available to the Purchasers complete copies
of any third party reports that are in the Company's possession or control, have
been prepared within the last two years, and relate to the physical or
environmental condition of any of the real property owned, leased or occupied by
the Company or any of its Subsidiaries (the "Environmental Studies").
---------------------
(e) The Disclosure Schedule contains a list of all leases or other
Contracts or arrangements pursuant to which real property is leased to or
otherwise occupied or used by any Company Party requiring payments in excess of
$500,000 per year. With respect to each such Contract:
(i) if written, the Company has provided the Purchasers with true,
correct and complete copy thereof, as in effect and as amended or modified or
agreed to be amended or modified;
(ii) such Contract is in full force and effect and is legal,
valid, binding and enforceable against the parties thereto, subject to the
Remedies Exception; and
(iii) neither the Company nor any of its Subsidiaries is in
default in its obligations to pay rent under such Contract and to the Company's
knowledge, neither the Company nor any of its Subsidiaries nor any other party
thereto is in default in any of its other material obligations thereunder.
(f) No Company Party nor, to the Company's knowledge, any owner of any
real property owned, leased or occupied by the Company or any of its
Subsidiaries has received any outstanding written notice from any governmental
agency or official regarding any actual or alleged material violation of
Environmental, Health, and Safety Laws relating to such property or its
occupancy or use by the Company or any of its Subsidiaries and arising under
Environmental,
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<PAGE>
Health, and Safety Laws, which if adversely determined to the Company, any of
its Subsidiaries or such owner, as the case may be, and if not cured could
reasonably be expected to have a Material Adverse Effect.
(g) Except as described in the Environmental Studies, each of the
Company Parties has complied and is in compliance, in each case in all material
respects, with all Environmental, Health, and Safety Laws and has obtained, has
complied, and is in compliance with, in each case in all material respects, all
permits, Licenses and other authorizations that are required pursuant to
Environmental, Health, and Safety Laws for the occupation of its facilities and
the operation of its businesses, in each case where noncompliance could
reasonably be expected to have a Material Adverse Effect.
3.1 Intellectual Property.
---------------------
(a) The Company is the sole and exclusive owner of all Intellectual
Property listed in the Disclosure Schedule. The Company has rights to use all
Intellectual Property material to its Business or has readily available
substitutes for such Intellectual Property.
(b) Each of the Company Parties owns or has adequate rights to use (in
the manner and to the extent presently used) all of the Intellectual Property
used in the operation and conduct of its business as presently or proposed to be
conducted, without, to the Company's knowledge, any material conflict or claim
of conflict with the rights of others. None of such Intellectual Property is
subject to any outstanding Judgment restricting the use thereof by the Company
or any of its Subsidiaries.
(c) To the knowledge of the Company, (i) none of the Company Parties
has interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of third parties and (ii) no
third party has interfered with, infringed upon, misappropriated, or otherwise
come into conflict with any Intellectual Property rights of the Company Parties.
(d) No Company Party is in material default in the payment of any
royalties, license fees or other consideration to any owner or licensor of any
Intellectual Property used in or necessary for the conduct of its business as
now conducted and as proposed to be conducted or to any agent or representative
of any such owner or licensor by reason of such Company Party's use thereof nor
otherwise is in default in any material respect in the performance of any of its
obligations to any such owner or licensor, and no such owner or licensor, nor
any such agent or representative, has notified any Company Party in writing of
any claim of any such default.
(e) The Disclosure Schedule sets forth an accurate and complete list
of the material Intellectual Property owned by the Company Parties.
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<PAGE>
3.16 Licenses; Requirements of Law. Each of the Company Parties possesses
-----------------------------
all material authorizations, approvals, consents, licenses, permits, easements,
certificates and other rights and permissions necessary to conduct its
respective business and to own, lease and operate its respective properties as
currently or proposed to be conducted, owned, leased or operated (collectively
for all Company Parties, the "Licenses"). All of the Licenses are in full force
and effect. The Company has no reason to believe that any of the Licenses will
be revoked, canceled, rescinded, or not renewed in the ordinary course and on
the same or more favorable material terms, other than any such revocation,
cancellation, rescission, or non-renewal of any License which is not
individually or in the aggregate with one or more other License(s), material to
the business or operations of the Company and the Subsidiaries taken as whole.
To the knowledge of the Company, there is not now pending any material complaint
nor any basis for any such complaint, which might have any of the results
referred to in the immediately preceding sentence. Each of the Company Parties
is operating in all material respects in accordance with the terms of the
Licenses. Each of the Company Parties is, and has conducted its business and
affairs, in compliance with all applicable Requirements of Law, except where the
failure to comply has not had and, insofar as reasonably can be foreseen, will
not have a Material Adverse Effect.
3.17 Title to Personal Property; Liens; Intangible Property. Each Company
------------------------------------------------------
Party has good title to all of its properties which are not real property, free
and clear of all Liens, other than Permitted Liens.
3.18 Insurance. The properties and operations of each Company Party are
---------
insured under various policies of general liability and other forms of insurance
covering such risks as are usually insured against by reasonably prudent
companies engaged in the businesses and activities in which such Company Party
is engaged, in amounts which are customarily considered adequate in relation to
the business and properties of such Company Party, and all premiums to date have
been paid in full. No Company Party has been refused any insurance, nor has its
coverage been limited, by an insurance carrier to which it has applied for
insurance or with which it has carried insurance during the past five years.
3.19 Absence of Certain Interests of Affiliated Parties. Except as set
--------------------------------------------------
forth in the Disclosure Schedule, no present or former stockholder, partner,
director, officer or employee of any Company Party nor any of their Related
Persons owns or has any proprietary, financial or other interest, direct or
indirect, in whole or in part, in any Intellectual Property or any other
material asset or property which any Company Party owns, possesses or uses in
its business as now or proposed to be conducted, or is involved in any business
arrangement or relationship with any Company Party which is material to the
business and operations of the Company Parties. None of the present or former
stockholders, partners, joint venturers, directors or officers of any Company
Party or any Related Person of any of the foregoing is indebted to any Company
Party, and no Company Party is indebted or has any other liability to any such
Person, except (i) pursuant to the express terms of one or more Contracts
identified in the Disclosure Schedule and (ii) liabilities to directors or
officers for compensation for services in such capacity (or as employees) or to
stockholders who are employees rendered since the end of the last calendar
month.
-27-
<PAGE>
3.20 Contracts. The Disclosure Schedule lists the following contracts and
---------
other agreements to or by which the Company or any of its Subsidiaries is a
party or bound (the "Company Contracts"):
(i) Contract with any present or former stockholder, director, officer,
or consultant or any Related Person of such Person or for the employment of any
such Person involving payments in excess of $200,000 per year, including any
consultant or any oral contract with any such Person which is not terminable at
will by the Company Party which is a party thereto without any payment of any
kind and except for (x) employment contracts with stockholders who are employees
of the Company, (y) the Company Plans and (z) Contracts exclusively between and
for the benefit of and enforceable by Company Parties;
(ii) Contract outside the Ordinary Course of Business for the future
purchase of, or payment for, equipment, inventory, supplies, other goods or
products or services having a total value or involving total payments or costs
of $250,000 or more in any one case or in the aggregate for all Contracts which
are related or which are with the same Person or group of affiliated Persons;
(iii) Contract outside the Ordinary Course of Business continuing over a
period of more than six months from the date hereof having a total value or
involving total payments or costs of $250,000 or more in any one case or in the
aggregate for all Contracts which are related or which are with the same Person
or a group of affiliated Persons;
(iv) distribution, dealer, representative or agency Contract outside the
Ordinary Course of Business which, individually or together with one or more
such Contracts which are related or are with the same Person or group of
affiliated Persons, involve payments in excess of $250,000.
(v) lease outside the Ordinary Course of Business under which any Company
Party is either lessor or lessee of any real property or any material personal
property having annual lease payments in excess of $250,000;
(vi) note, debenture, bond or other security or evidence of indebtedness,
equipment trust agreement, letter of credit agreement, loan agreement, pledge or
security agreement, mortgage or other Contract pursuant to which any material
contingent obligation (or any other Liability) in excess of $250,000 and outside
the Ordinary Course of Business of any Company Party to any other Person or of
any other Person to any Company Party was incurred or may be incurred in the
future or otherwise relating to any such contingent obligation or other
Liability;
(vii) Except as provided in the Company's budget previously approved by the
Company's board of directors, Contract for any capital expenditure or leasehold
improvement outside the Ordinary Course of Business in excess of $250,000 per
year in any single case or $500,000 per year in the aggregate for all cases;
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<PAGE>
(viii) Contract, not otherwise disclosed (with sufficient specificity
regarding the following), limiting or restraining any Company Party from
engaging in any business or competing in any manner generally or in any specific
geographic area or obligating any Company Party to present any business or other
opportunity to any other Person or grant or offer to grant any other Person any
participation or other interest in any business or other opportunity;
(ix) Contract, not otherwise disclosed (with sufficient specificity
regarding the following), pursuant to which any Person has a right of first
refusal, a "tag-along" right or any similar right with respect to any proposed
disposition by any Company Party of any equity interest in another Company Party
or of any other property of such first Company Party;
(x) Contract with any labor union;
(xi) bonus, pension, profit-sharing, retirement, stock purchase, stock
option, deferred compensation, stock bonus, stock or equity appreciation plan,
phantom stock or equity interest plan, death benefit, disability, insurance,
medical reimbursement, fringe benefit plan, or similar plan, program or Contract
in effect with respect to its employees or the employees of others, except for
the Employee Benefit Plans;
(xii) Except as otherwise disclosed, any Contract which provides for
"golden parachute" or similar benefits;
(xiii) Except as otherwise disclosed, any Material Contract outside the
Ordinary Course of Business relating to the mortgaging, pledging or other
placing of a Lien on any properties of any Company Party;
(xiv) Except as otherwise disclosed, any Contract under which the
consequences of a default or termination would have a Material Adverse Effect;
The Company has made available to the Purchasers a correct and complete copy of
each written Contract (as amended to date) listed in the Disclosure Schedule.
Each Contract required to be identified in the Disclosure Schedule is in full
force and effect and, to the Company's knowledge, is the legal, valid and
binding obligation of the parties thereto other than a Company Party and
enforceable against such other parties in accordance with its terms, subject to
the Remedies Exception.
3.21 Litigation. The Disclosure Schedule sets forth each Judgment entered
against or specifically relating to any of the Company Parties or any of the
Assets. No Company Party is a party to or otherwise involved in or, to the
Company's knowledge, is threatened to be made a party to or threatened to be
involved in any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator which,
individually or in the aggregate, would, if determined adversely, have a
Material Adverse Effect.
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<PAGE>
3.22 Employees. Except as set forth in the Disclosure Schedule, none of
---------
the Company Parties is a party to or bound by any collective bargaining
agreement, nor has any Company Party experienced any strikes, grievances, claims
of unfair labor practices, or other collective bargaining disputes. None of the
Company Parties has committed any unfair labor practice proscribed by any
applicable Requirement of Law. Except as set forth in the Disclosure Schedule
to the Company's Knowledge, there is no organizational effort presently being
made or threatened by or on behalf of any labor union with respect to employees
of any Company Party.
3.23 Employee Benefits.
-----------------
(a) The Disclosure Schedule lists each Employee Benefit Plan that the
Company or any of its Subsidiaries maintains or to which the Company or any of
its Subsidiaries contributes, and in which employees or former employees of the
Company or any of its Subsidiaries participates. Each Employee Benefit Plan
required to be listed in the Disclosure Schedule (and each related trust,
insurance contract or fund) complies in form and in operation in all material
respects with the applicable requirements of ERISA, the Code, and other
applicable Requirements of Law. Except as set forth on the Disclosure Schedule,
none of the Company Parties maintains any Employee Benefit Plan which is an
Employee Pension Benefit Plan. The Company has made available to the Purchasers
correct and complete copies of the plan documents and summary plan descriptions,
the most recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement each such
Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that any of the Company
Parties or any ERISA Affiliate maintains or ever has maintained or to which any
of them contributes, ever has contributed, or ever has been required to
contribute:
(i) To the knowledge of the Company, no Such Employee Benefit Plan
which is an Employee Pension Benefit Plan has been completely or partially
terminated or been the subject to a Reportable Event as to which notice
would be required to be filed with the PBGC. No proceeding by the PBGC to
terminate any such Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been instituted or threatened.
(ii) To the knowledge of the Company, there have been no Prohibited
Transactions with respect to any such Employee Benefit Plan. No Fiduciary
has any Liability for breach of fiduciary duty or any other failure to act
or comply in connection with the administration or investment of the assets
of any such Employee Benefit Plan that would have a Material Adverse
Effect.
(iii) No action, suit, proceeding, hearing, or investigation with
respect to the administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for benefits) is pending
or, to the Company's knowledge, threatened, except where the action, suit,
proceeding, hearing or investigation would not have a Material Adverse
Effect.
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<PAGE>
(iv) None of the Company Parties nor any ERISA Affiliate has incurred
any Liability to the PBGC (other than PBGC premium payments) or otherwise
under Title IV of ERISA (including any withdrawal Liability) or under the
Code with respect to any such Employee Benefit Plan which is an Employee
Pension Benefit Plan.
(c) None of the Company Parties nor any ERISA Affiliate contributes to,
ever has contributed to, or ever has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal Liability) under
any Multiemployer Plan.
(d) None of the Company Parties maintains nor ever has maintained nor
contributes, nor ever has contributed, nor ever has been required to contribute
to any Employee Welfare Benefit Plan providing medical, health, or life
insurance or other welfare-type benefits for current or future retired or
terminated employees, their spouses, or their dependents (other than in
accordance with Part 6 of Title I of ERISA).
(e) The Company Parties have complied with the applicable requirements of
Parts 6 and 7 of Title I of ERISA with respect to any Employee Welfare Benefit
Plan providing health benefits, except where such noncompliance would not have a
Material Adverse Effect.
3.24 Guaranties. Except as set forth in the Disclosure Schedule and
----------
except for guarantees of customer obligations to equipment lessors made in the
Ordinary Course of Business, none of the Company Parties is a guarantor or co-
borrower in respect of any Liability or obligation or is otherwise liable for
any Liability or obligation (including indebtedness) of any other Person other
than another Company Party.
3.25 Availability of Documents. The Company has made available to the
-------------------------
Purchasers copies of all documents, including all Contracts, insurance polices,
leases, plans, instruments, and Licenses listed in the Disclosure Schedule or
otherwise referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder. The Company has delivered to the Purchasers, simultaneously with the
First Closing, (i) a certificate, dated the date hereof, of the chief executive
officer of the Company and the Secretary of the Company (A) attaching copies,
certified by such officers as true and complete, of the resolutions of the Board
of Directors of the Company in connection with the authorization and approval of
the execution, delivery and performance of the Transaction Documents and
consummation of the Transactions and of all other documents evidencing all
necessary corporate action taken in connection therewith, (B) attaching copies,
certified by such officers as true and complete, of the Amended and Restated
Articles of Incorporation and By-laws of the Company and of the Series A
Articles of Amendment, (C) which includes a representation by such officers that
the copies of the Articles of Incorporation and By-Laws or other organizational
documents of each Subsidiary of the Company, as previously provided to the
Purchasers, are true and complete in all respects, and (D) setting forth the
incumbency of the officer or officers of the Company who have executed and
delivered this Agreement and each other Transaction Document, including therein
a signature specimen of each such officer or officers; (ii) copies, certified by
an officer of the
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<PAGE>
Company, of each Company Party's Articles of Incorporation or other
organizational documents (including, in the case of the Company, the Series A
Articles of Amendment), in each case as of the date of this Agreement, (iii) the
results of such Lien and suits and Judgment searches previously requested by the
Purchasers and performed by a company specializing in such searches and (iv) the
opinion of counsel to the Company in the form previously agreed upon by the
Company and the Purchasers. The Company covenants and agrees with the Purchasers
that it shall deliver to the Purchasers, as promptly after the Initial Closing
as the same may be obtained from the Colorado Secretary of State, a long form
certificate of existence and good standing (including tax good standing) as to
each Company Party, dated as of a recent date, of the Secretary of State of the
State of Colorado of the jurisdiction of incorporation of such Company Party.
3.26 Restrictions. Other than the Indenture, none of the Company Parties
------------
is currently a party to or bound by any Contract, subject to any restriction of
any nature under any of its charter or other organizational or constituent
documents, subject to any Requirements of Law or subject to any Judgment which
materially adversely affects or materially restricts or, so far as the Company
can now reasonably foresee, may in the future have a Material Adverse Effect or
materially restrict, the business, operations, properties, results of
operations, prospects or condition (financial or otherwise) of such Company
Party.
3.27 Key Employees. None of the officers or key employees of any Company
-------------
Party, to the Company's knowledge, presently intends to terminate his or her
employment by such Company Party.
3.28 Other Agreements. All representations and warranties of any Company
----------------
Party contained in any of the Transaction Documents other than this Agreement
are accurate and complete in all material respects.
3.29 Disclosure. The representations and warranties contained in this
----------
Article III hereto) do not contain any untrue statement of a material fact or
- -----------
omit to state any material fact necessary in order to make the statements and
information contained in this Article III not misleading.
-----------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EACH INITIAL PURCHASER
--------------------------------------------------------
Each Initial Purchaser, severally and not jointly, agrees with, and
represents and warrants, to the Company as follows:
4.01 Purchase for Investment. The Purchased Securities being acquired on
-----------------------
the date hereof by such Initial Purchaser pursuant to this Agreement are being
acquired for its own account and with no intention of distributing or reselling
such Purchased Securities or any part thereof in any transaction which would be
in violation of the Securities Act, without prejudice, however, to any right of
such Initial Purchaser to sell or otherwise dispose of all or any part of such
Purchased Securities pursuant to a registration under the Securities Act or
under an exemption from such
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<PAGE>
registration available under the Securities Act, and subject, nevertheless, to
the disposition of such Initial Purchaser's property being at all times within
its control and discretion.
4.02 Status As Accredited Investor. Except if such Initial Purchaser is
-----------------------------
MJM Associates, L.P. ("MJM Associates"), such Initial Purchaser is an Accredited
Investor.
4.03 Power. If such Initial Purchaser is a partnership or a corporation,
-----
such Initial Purchaser has all requisite partnership power or corporate power
and authority, respectively, to execute, deliver and perform its obligations
under each of the Transaction Documents to which it is a party, and to
consummate the respective transactions contemplated hereby and thereby.
4.04 Execution and Delivery; Authorization. Each of the Transaction
-------------------------------------
Documents to which such Purchaser is a party has been duly and validly executed
and delivered by such Initial Purchaser. The execution, delivery and performance
by such Initial Purchaser of, and the consummation of the transactions
contemplated by, this Agreement and each of the other Transaction Documents to
which it is a party have been duly and validly authorized by all necessary
partnership action on the part of such Initial Purchaser which is a party hereto
or thereto. Each of the Transaction Documents to which such Initial Purchaser
is a party, when executed and delivered, will constitute a legal, valid and
binding obligation of such Initial Purchaser, enforceable in accordance with its
terms, subject to the Remedies Exception.
4.05 Broker's Fees. Such Initial Purchaser does not have any liability or
-------------
obligation to pay any fees or commissions to any broker, finder or agent with
respect to the Transactions.
4.06 Restricted Securities. Such Initial Purchaser understands that the
---------------------
Initial Securities being acquired by it at the First Closing have not been
registered under the Securities Act or the securities laws of any state, based
upon an exemption from such registration requirements for non-public offerings
pursuant to Regulation D under the Securities Act or other exemptions
thereunder, and that such Initial Securities are "restricted securities," as
said term is defined in Rule 144 of the Rules and Regulations promulgated under
the Securities Act.
4.07 Information.
-----------
(i) Such Initial Purchaser has had a reasonable opportunity to ask
questions of and receive answers and documents from the Company concerning the
Company, and such Initial Purchaser has such knowledge and expertise in
financial and business matters that such Initial Purchaser is capable of
evaluating the merits and risk involved in an investment in the Securities;
(ii) Except as set forth in this Agreement and the other Transaction
Documents, no representations or warranties have been made to such Purchaser by
the Company or any agent, employee or affiliate of the Company relying upon any
other information; and
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<PAGE>
(iii) Such Initial Purchaser understands that the Initial Securities
being acquired by it at the First Closing are being offered and sold to it in
reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying upon
the truth and accuracy of the representations and warranties of such Initial
Purchaser set forth in this Agreement in order to determine the applicability of
such exemptions and the suitability of such Initial Purchaser to acquire such
Initial Securities.
4.08 HSR Act. Immediately after the Initial Closing, such Initial
-------
Purchaser, together with all Persons which are under "common control" with such
Initial Purchaser, will not "hold", as a result of the acquisition of the
Initial Purchased Shares acquired by such Initial Purchaser at the Initial
Closing "voting securities" of which the Company is the issuer that have a
"value" in excess of $15,000,000, as such quoted terms are defined in the rules
and regulations promulgated under the HSR Act, as interpreted by the Federal
Trade Commission.
4.09 Independent Directors. The Purchasers acknowledge and agree that the
---------------------
following persons are, as of the date of this Agreement, and shall be
Independent Directors as such term is defined in the Series A Articles of
Amendment and the Investor Rights Agreement: Roland E. Casati, Richard G.
Tomlinson, and Spencer I. Browne.
4.10 Additional Representations of MJM Associates. MJM Associates
--------------------------------------------
represents and warrants to the Company as follows:
(i) It recognizes that an investment in the Initial Purchased
Securities being acquired by it may involve a number of risks, and that no
federal or state agency has passed upon such securities or made any finding or
determination as to the fairness of this investment.
(ii) Michael J. Marocco, a director of the Company, is the general
partner of MJM Associates, and has acted as advisor to MJM Associates and its
stockholders in connection with MJM Associates' purchase of such Initial
Purchased Securities. Mr. Marocco has such knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of the investment by MJM Associates contemplated by this Agreement. MJM
Associates is able to bear the economic risk of such investment.
(iii) MJM Associates is not relying on the Company with respect to the
tax and other economic considerations relating to its investment in such Initial
Purchased Securities. In regard to such considerations, MJM Associates has
relied solely on the advice of, or has consulted with, only its own advisors.
(iv) MJM Associates was not formed for the purpose of making an
investment in the Company.
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<PAGE>
ARTICLE V
INDEMNIFICATION
---------------
5.01 Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties of the Company contained in Sections 3.01, 3.02,
------------- ----
3.03 and 3.04 of this Agreement shall survive the First Closing and the Second
- ---- ----
Closing hereunder and continue in full force and effect until the Purchasers,
collectively, own fewer than 250,000 Registrable Shares. All of the other
representations and warranties of the parties contained in this Agreement or any
Joinder Agreement shall survive and continue in full force and effect, subject
to any applicable statutes of limitations, until the later of (i) receipt by the
Purchasers of audited consolidated financial statements of the Company and its
Subsidiaries for calendar year 1999 and (ii) the first anniversary of the First
Closing.
5.02 Indemnification Provisions for Benefit of the Purchasers. The
--------------------------------------------------------
Company agrees to defend, protect, indemnify and hold harmless each Purchaser
Indemnified Party against, from and for any and all Adverse Consequences of any
kind or nature (including reasonable fees and disbursements of counsel and other
costs reasonably incurred in connection with any action, suit or proceeding
initiated by such Purchaser Indemnified Party in connection with securing,
exercising, enjoying and enforcing such Purchaser Indemnified Party's rights,
benefits and privileges or enforcing any Company Party's obligations and
liabilities under any Transaction Document), whether direct, indirect or
consequential, in any manner resulting from, arising out of, based upon or
related or attributable to: (i) any breach or inaccuracy of any representation
or warranty of, or any breach or failure to perform any covenant, agreement or
obligation, of any Company Party contained in this Agreement or any other
Transaction Document; (ii) the invalidity or unenforceability, or alleged
invalidity or unenforceability, of any provision of any Transaction Document; or
(iii) any claim by any holder or former holder of capital stock, equity
interests or other securities, or any creditor, of any Company Party or any
Affiliate of any Company Party or any other Person with whom any Company Party
has contractual relationships relating to any claim against any Company Party or
by reason of consummation of any of the Transactions. For purposes of clause (i)
of the immediately preceding sentence only, no representation and warranty of
any Company Party made herein or in any other Transaction Document, other than
the representations and warranties of the Company contained in Section
-------
3.01, 3.02, 3.03 and 3.04 of this Agreement that is not already, by its terms,
- ---- ---- ---- ----
qualified by a materiality or Material Adverse Effect qualification, shall give
rise to a right of indemnification under such clause unless such breach
(individually or together with all other breaches of that or any representation
or warranty) has a Material Adverse Effect.
5.03 Indemnification Provisions for Benefit of the Company. In the event
-----------------------------------------------------
that any Purchaser breaches (or in the event any third party alleges facts that,
if true, would mean any Purchasers has breached) any of its representations,
warranties, and covenants contained herein, and, if there is an applicable
survival period pursuant to Section 5.01 above, provided that the Company makes
------------
a written claim for indemnification against such Purchaser pursuant to Section
-------
5.04 within such survival period, then such Purchaser shall protect, defend,
- ----
hold harmless and indemnify the Company against, from and for the entirety of
any Adverse Consequences the Company may suffer
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<PAGE>
through and after the date of the claim for indemnification (but excluding any
Adverse Consequences the Company may suffer after the end of any applicable
survival period) resulting from or caused by the breach (or the alleged breach),
including all Adverse Consequences arising out of the enforcement of this
Section 5.03.
- ------------
5.04 Matters Involving Third Parties.
-------------------------------
(a) If any third party shall notify any Party (the "Indemnified Party")
with respect to any matter (a "Third Party Claim") which may give rise to a
claim for indemnification against any other Party (the "Indemnifying Party")
under this Article V, then the Indemnified Party shall promptly notify each
---------
Indemnifying Party thereof in writing; provided, however, that no delay on the
-----------------
part of the Indemnified Party in notifying any Indemnifying Party shall relieve
the Indemnifying Party from any obligation hereunder unless (and then solely to
the extent) the Indemnifying Party thereby is prejudiced; it being understood
and agreed that the failure of the Indemnified Party to so notify the
Indemnifying Party prior to settling a Third Party Claim (whether by paying a
claim or executing a binding settlement agreement with respect thereto) or the
entry of a judgment or issuance of an award with respect to a Third Party Claim
shall constitute actual prejudice to the Indemnifying Party's ability to defend
against such Third Party Claim.
(b) Any Indemnifying Party will have the right to defend the Indemnified
Party against the Third Party Claim with counsel of its choice reasonably
satisfactory to the Indemnified Party so long as (i) the Indemnifying Party
notifies the Indemnified Party in writing within 30 calendar days after the
Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party or Parties will indemnify the Indemnified Party from and
against the entirety of any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to, in the nature of, or caused
by the Third Party Claim (it being understood by the Parties that the
Indemnified Party may take such actions as are reasonable in connection with its
defense until it receives such notice from the Indemnifying Party), and (ii) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 5.04(b) above, (i) the Indemnified
---------------
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim (provided that the
Indemnified Party will have the right to employ separate counsel to represent
the Indemnified Party (the fees and expenses of which will be borne by the
Indemnifying Party if, in the Indemnified Party's reasonable judgment, a
conflict of interest between the Indemnified Party and the Indemnifying Party
exists with respect to such claim), (ii) the Indemnified Party will not consent
to the entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnifying Party
(not to be withheld unreasonably), and (iii) the Indemnifying Party will not,
without the prior written consent of the Indemnified Party (not to be withheld
unreasonably), consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim in which any relief other than the payment
of money damages is sought against any Indemnified Party, unless such
settlement, compromise or consent includes as
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<PAGE>
an unconditional term thereof the giving by the claimant, petitioner or
plaintiff, as applicable, to such Indemnified Party of a release from all
liability with respect to such Third Party Claim.
(d) In the event any of the conditions in Section 5.04(b) above is or
---------------
becomes unsatisfied, however, (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it reasonably may deem appropriate (and
the Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys' fees
and expenses), and (iii) the Indemnifying Parties will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third Party
Claim to the fullest extent provided in this Article V.
---------
ARTICLE VI
MISCELLANEOUS
-------------
6.01 Obligations Several, Not Joint. Each Purchaser shall be (i)
------------------------------
obligated hereunder only with respect to the purchase of the number and kind of
Purchased Securities allocable to such Purchaser pursuant to Section 2.02 or
------------
2.03 (as applicable), and no Purchaser shall have any liability with respect to
- ----
any other Purchaser's obligations hereunder and (ii) separately and
independently entitled to rely on the representations and warranties of each
other party made to such Purchaser in this Agreement and each other Transaction
Document and to the benefit of all agreements, covenants, obligations and
commitments of each other Party made with or to such Purchaser herein or
therein.
6.02 No Third Party Beneficiaries. Except as expressly provided in
----------------------------
Article V, nothing in this Agreement, expressed or implied, is intended to
confer upon-any Person other than the Parties or their respective successors and
permitted assigns any rights, benefits, remedies, obligations or liabilities
under or by reason of this Agreement.
6.03 Entire Agreement. This Agreement and the Transaction Documents
----------------
collectively constitute the entire agreement among the Parties with reference to
the matters set forth herein and therein and supersede any prior understandings,
negotiations, agreements, or representations by or among the Parties, written or
oral, to the extent they related in any way to the subject matter hereof or
thereof.
6.04 Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns; provided, however, that, except as otherwise specifically
-------- -------
permitted or contemplated by this Agreement, neither this Agreement nor any of
the rights, interests or obligations of such Party hereunder shall be assigned
or delegated by such Party without the prior written consent of the other
Parties, which consent may be withheld in the sole discretion of such Parties.
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<PAGE>
6.05 Counterparts. This Agreement and each other Transaction Document may
------------
be executed in counterparts, each of which shall be deemed to be an original and
all of which together shall be deemed to constitute one and the same agreement.
In addition to any other lawful means of execution or delivery, this Agreement
and the other Transaction Documents may be executed by facsimile signatures and
may be delivered by the exchange of counterparts of signature pages by means of
telecopier transmission.
6.06 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two Business Days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Company: Convergent Communications, Inc.
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
Attn: General Counsel
Telephone: (303) 749-3000
Telecopy: (303) 749-3113
with a copy to: Richard M. Russo, Esq.
Gibson, Dunn & Crutcher LLP
1801 California Street, Suite 4100
Denver, Colorado 80202
Telephone: (303) 298-5715
Telecopy: (303) 296-5310
If to any Purchaser, to such Purchaser at such Purchaser's address supplied from
time to time in writing to the Company, with a copy to:
Joseph E. Young, Esq.
Baker & Botts, L.L.P.
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Telephone: (212) 705-5000
Telecopy: (212) 705-5125
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, facsimile transmission ordinary mail, or electronic mail), but
no such notice, request, demand, claim, or other communication shall be deemed
to have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other
-38-
<PAGE>
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
6.07 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado without giving effect to any
choice or conflict of law provision or rule (whether of the State of Colorado or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Colorado.
6.08 Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence. No waiver shall be effective
hereunder unless contained in a writing signed by the Party sough to be charged
with such waiver.
6.09 Severability. If any provision of this Agreement or any other
------------
Transaction Document or the application thereof to any person or circumstance is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remaining provisions hereof, or the application of such provision to Persons
or circumstances other than those as to which it has been held invalid, void or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, provided, that if any provision
--------
hereof or thereof or the application of any such provisions shall be so held to
be invalid, void or unenforceable by a court of competent jurisdiction, then
such court may substitute therefor a suitable and equitable provision in order
to carry out, so far as may be valid and enforceable, the intent and purpose of
the invalid, void or unenforceable provision and, if such court shall fail or
decline to do so, the Parties shall negotiate in good faith a suitable and
equitable substitute provision. To the extent that any such provision shall be
judicially unenforceable in any one or more states, such provision shall not be
affected with respect to any other state, each provision with respect to each
state being construed as several and independent.
6.10 Expenses. Unless otherwise provided herein, each of the Parties
--------
shall bear its own costs and expenses (including legal fees and expenses)
incurred in connection with this Agreement and the transactions contemplated
hereby. The Company covenants and agrees to pay all of the costs and expenses
and the reasonable out-of-pocket expenses incurred by the Purchasers in
connection with the negotiation, preparation, review, execution, delivery,
collection and enforcement of this Agreement, or any other Transaction Document
or supplement to or modification hereof or thereof. The Company also agrees to
pay any and all stamp, transfer and other similar taxes payable or determined to
be payable in connection with the execution and delivery of this Agreement or
any other Transaction Document, or the issuance and sale of the Securities.
6.11 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
---------------------------------------
identified in this Agreement are incorporated herein by reference and made a
part hereof.
-39-
<PAGE>
* * * * *
[END OF PAGE - SIGNATURE PAGE IMMEDIATELY FOLLOWS]
-40-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Securities Purchase
Agreement as an instrument under seal on the date first above written.
CONVERGENT COMMUNICATIONS, INC.
By: /s/ John R. Evans
_______________________________________
Name: John R. Evans
Title: Chief Executive Officer
SANDLER CAPITAL PARTNERS IV, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
_______________________________________
Name: Edward Grinacoff
Title: President
SANDLER CAPITAL PARTNERS IV, FTE, L.P.
By: SANDLER INVESTMENT PARTNERS, General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: /s/ Edward Grinacoff
_______________________________________
Name: Edward Grinacoff
Title: President
APPLEWOOD ASSOCIATES, L.P.
By: /s/ Irwin Leiber
_______________________________________
Name: Irwin Lieber
Title: General Partner
<PAGE>
MICHAEL PRICE, individually
/s/ Michael Price
-----------------------------------------------------
STEVE RATTNER, individually
/s/ Steve Rattner
-----------------------------------------------------
HARVEY SANDLER, individually
/s/ Harvey Sandler
-----------------------------------------------------
JOHN KORNREICH, individually
/s/ John Kornreich
-----------------------------------------------------
MJM ASSOCIATES L.P.
By: /s/ Michael J. Marocco
-----------------------------------------------------
Name: Michael J. Marocco
Title: General Partner
ANDREW SANDLER, individually
/s/ Andrew Sandler
-----------------------------------------------------
DAVID LEE, individually
/s/ David Lee
-----------------------------------------------------
<PAGE>
DOUGLAS SCHIMMEL, individually
/s/ Douglas Schimmel
-----------------------------------------------------
HANNAH STONE, individually
/s/ Hannah Stone
-----------------------------------------------------
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Number Number of Aggregate
Purchaser of Initial Shares Initial Warrants Purchase Price
- ------------------------------------- ----------------- ---------------- --------------
<S> <C> <C> <C>
Sandler Capital Partners IV, LP 377,400 471,750 $ 9,435,000
Sandler Capital Partners IV FTE, LP 154,600 193,250 $ 3,865,000
Applewood Associates, L.P. 60,000 75,000 $ 1,500,000
Michael Price 10,000 12,500 $ 250,000
Steve Rattner 10,000 12,500 $ 250,000
Harvey Sandler 6,800 8,500 $ 170,000
John Kornreich 6,800 8,500 $ 170,000
MJM Associates L.P. 6,800 8,500 $ 170,000
Andrew Sandler 2,800 3,500 $ 70,000
David Lee 2,400 3,000 $ 60,000
Douglas Schimmel 1200 1,500 $ 30,000
Hannah Stone 1200 1,500 $ 30,000
------- ------- -----------
Totals: 640,000 800,000 $16,000,000
</TABLE>
-44-
<PAGE>
EXHIBIT B
Series A Articles of Amendment
------------------------------
-45-
<PAGE>
EXHIBIT C
Joinder Agreement
-----------------
Reference is made to the Securities Purchase Agreement, dated March
___, 1999, amended (the "Purchase Agreement"), between Convergent
Communications, Inc., a Colorado corporation (the "Company"), and each of the
entities named on Exhibit A thereto (each an "Initial Purchaser" and,
---------
collectively, the "Initial Purchasers"). Capitalized terms used in this Joinder
have the meanings given to them in the Purchase Agreement.
The undersigned hereby agrees to be a party to the Purchase Agreement
as a Second Purchaser, with the same effect and, subject to the terms and
conditions set forth in the Purchase Agreement, to purchase at the Second
Closing the number of Second Closing Shares and the number of Second Closing
Warrants set forth adjacent to the undersigned's signature below, for the
aggregate purchase price indicated.
In addition, the undersigned hereby agrees to become, automatically
upon the Second Closing, (i) a party to the Warrant Agreement as an Investor
(as defined therein) as if an original signatory and (ii) a party to the
Investor Rights Agreement as an Investor (as defined therein) as if an original
signatory.
IN WITNESS WHEREOF, the undersigned has caused this instrument to be
duly executed on its behalf as of this ___ day of March, 1999.
Second Closing Second Closing Purchase
[NEW PURCHASER] Shares Warrants Price
-------------------- ------------------ --------
By:
----------------------------------------
Name:
Title:
Agreed and Accepted as of
the date written above:
CONVERGENT COMMUNICATIONS, INC.
By:
----------------------------------------
Name:
Title:
-46-
<PAGE>
EXHIBIT 10.24
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT ("Amendment") is made
effective this 15th day of September, 1998, by and between CONVERGENT
COMMUNICATIONS, INC., a Colorado corporation ("Employer" or the "Company") and
MARTIN E. FREIDEL ("Employee").
A. The Parties have entered into that certain Employment Agreement dated
August 7, 1997 ("Agreement");
B. The Parties desire to amend and modify certain of the terms and
conditions of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
contained herein and in the Agreement, the Parties agree as follows:
1. Compensation and Benefits.
-------------------------
1.1 Section 3.1 of the Agreement shall be amended to increase Employee's
annual base salary to One Hundred Seventy-Five Thousand Dollars ($175,000.00).
1.2 Section 3.2 of the Agreement shall be amended to change Employee's
target bonus to Seventy-Five Percent (75%), commencing with the 1999 fiscal year
and thereafter. The parties agree that Employee's target bonus shall remain One
Hundred Percent (100%) for the 1998 fiscal year and shall be computed as a
percentage of Employee's annual base salary in effect immediately prior to the
date of this Amendment.
2. Other Terms and Conditions. All other terms and conditions of the
--------------------------
Agreement shall remain in full force and effect, as if fully stated herein.
3. Capitalized Terms. Capitalized terms, and other defined terms, shall
-----------------
have the same meaning as that accorded to them in the Agreement, unless the
context requires otherwise.
4. Conflict. If there are any conflicting terms or conditions between the
--------
terms and conditions of this Amendment and the terms and conditions of the
Agreement, the terms and conditions of this Amendment shall control.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed by its duly authorized representative on the day and year first
above written.
CONVERGENT COMMUNICATIONS, INC., MARTIN E. FREIDEL
a Colorado corporation
<PAGE>
By /s/ John R. Evans /s/ Martin E. Freidel
______________________________________ ___________________________________
John R. Evans, Chief Executive Officer
2
<PAGE>
EXHIBIT 10.25
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO THE EMPLOYMENT AGREEMENT ("Amendment") is made
this 1st day of February, 1999, by and between CONVERGENT COMMUNICATIONS, INC.,
a Colorado corporation ("Employer" or the "Company") and JOHN J. PHIBBS
("Employee").
A. The Parties have entered into that certain Employment Agreement dated
March 3, 1997, as amended by that certain First Amendment to Employment
Agreement dated April 13, 1998 (collectively the "Agreement");
B. The Parties desire to amend and modify certain of the terms and
conditions of the Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
contained herein and in the Agreement, the Parties agree as follows:
1. Compensation and Benefits.
-------------------------
1.1 Section 3.1 of the Agreement shall be amended to increase
Employee's annual base salary to One Hundred Seventy-Five Thousand Dollars
($175,000.00).
1.2 Section 3.2 of the Agreement shall be amended to change Employee's
target bonus to Seventy-Five Percent (75%), commencing with the 1999 fiscal year
and thereafter.
2. Other Terms and Conditions. All other terms and conditions of the
--------------------------
Agreement shall remain in full force and effect, as if fully stated herein.
3. Capitalized Terms. Capitalized terms, and other defined terms, shall
-----------------
have the same meaning as that accorded to them in the Agreement, unless the
context requires otherwise.
4. Conflict. If there are any conflicting terms or conditions between the
--------
terms and conditions of this Amendment and the terms and conditions of the
Agreement, the terms and conditions of this Amendment shall control.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed by its duly authorized representative on the day and year first
above written.
CONVERGENT COMMUNICATIONS, INC., JOHN J. PHIBBS
a Colorado corporation
By /s/ John R. Evans /s/ John J. Phibbs
____________________________________ ___________________________________
<PAGE>
John R. Evans, Chief Executive Officer
2
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Martin E. Freidel and John J. Phibbs and each of
them, as such person's true and lawful attorney-in-fact and agent with full
power of substitution for such person and in such person's name, place and
stead, in any and all capacities, to sign and to file with the Securities and
Exchange Commission a report of Convergent Communications, Inc., a Colorado
corporation (the "Corporation"), on Form 10-K, with exhibits thereto and other
documents in connection therewith, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any
substitute therefor, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John R. Evans Chairman, Chief Executive Officer and March 17, 1999
- -----------------------------------------
John R. Evans Director (Principal Executive Officer)
/s/ John J. Phibbs Chief Financial Officer and Treasurer March 17, 1999
- -----------------------------------------
John J. Phibbs (Principal Financial and Principal
Accounting Officer)
/s/ Keith V. Burge President, Chief Operating Officer and March 17, 1999
- -----------------------------------------
Keith V. Burge Director
/s/ Philip G. Allen Executive Vice President, Secretary and March 17, 1999
- -----------------------------------------
Philip G. Allen Director
Director March __, 1999
- -----------------------------------------
Roland E. Casati
/s/ Richard G. Tomlinson Director March 17, 1999
- -----------------------------------------
Richard G. Tomlinson
Director March __, 1999
- -----------------------------------------
Spencer I. Brown
/s/ Michael J. Marocoo Director March 17, 1999
- -----------------------------------------
Michael J Marocco
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 MAR-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-16-1996 DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 0 0 667,344 25,597,461
<SECURITIES> 0 0 7,371,303 0
<RECEIVABLES> 0 0 2,096,539 19,570,031
<ALLOWANCES> 0 0 (21,389) (1,908,811)
<INVENTORY> 0 0 230,809 6,826,732
<CURRENT-ASSETS> 0 0 10,562,955 73,019,623
<PP&E> 0 0 5,448,183 28,139,460
<DEPRECIATION> 0 0 (610,386) (4,882,832)
<TOTAL-ASSETS> 0 0 24,922,169 185,655,629
<CURRENT-LIABILITIES> 0 0 5,228,728 44,519,887
<BONDS> 0 0 1,933,069 168,267,797
0 0 0 0
0 0 0 0
<COMMON> 0 0 24,044,297 27,486,554
<OTHER-SE> 0 0 (5,276,567) (48,835,439)
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 0
<SALES> 0 39,387 7,415,247 33,678,089
<TOTAL-REVENUES> 1,495,977 97,741 10,210,024 61,600,111
<CGS> 0 38,844 1,325,004 22,650,608
<TOTAL-COSTS> 1,018,494 79,459 7,368,509 43,703,183
<OTHER-EXPENSES> 678,195 592,790 12,592,134 55,355,398
<LOSS-PROVISION> 0 0 21,389 401,451
<INTEREST-EXPENSE> 20,588 884 155,450 17,501,512
<INCOME-PRETAX> (221,300) (575,392) (9,654,779) (50,575,984)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (221,300) (575,392) (9,654,779) (50,575,984)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (221,300) (575,392) (9,654,779) (50,575,984)
<EPS-PRIMARY> 0 (0.07) (0.46) (1.84)
<EPS-DILUTED> 0 (0.07) (0.46) (1.84)
</TABLE>
