<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1999
Registration No. 333-78483
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
CONVERGENT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Colorado 4813 84-1337265
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification No.)
jurisdiction of
incorporation or
organization)
----------------
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
(303) 749-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Martin E. Freidel, Esq.
Executive Vice President and General Counsel
Convergent Communications, Inc.
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
303-749-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
With copies to:
Richard M. Russo, Esq. James S. Scott, Sr., Esq.
Gibson, Dunn & Crutcher LLP Shearman & Sterling
1801 California Street, Suite 4100 599 Lexington Ave.
Denver, Colorado 80202 New York, New York 10022
303-298-5700 212-848-4000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated June 28, 1999.
8,400,000 Shares
[LOGO] CONVERGENT
COMMUNICATIONS/TM/
Common Stock
------------
This is an initial public offering of shares of common stock of Convergent
Communications, Inc. Convergent Communications is offering 6,738,264 of the
shares to be sold in this offering. The selling shareholders identified in this
prospectus are offering an additional 1,661,736 shares. Convergent
Communications will not receive any proceeds from the sale of shares sold by
the selling shareholders.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $11.00 and $13.00. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "CONV".
See "Risk Factors" beginning on page 8 to read about certain factors you
should consider before buying shares of the common stock.
------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to Convergent Communications...... $ $
Proceeds, before expenses, to the selling shareholders....... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 1,260,000 shares from Convergent Communications at the initial
public offering price less the underwriting discount.
------------
The underwriters expect to deliver the shares against payment in New York, New
York on , 1999.
Goldman, Sachs & Co.
J.P. Morgan & Co.
Warburg Dillon Read LLC
William Blair & Company
------------
Prospectus dated , 1999.
<PAGE>
[OUTSIDE FRONT GATE ART]
[Cover page contains copy and photographs. Convergent Communications logo in
top left hand corner of the page. In the center of the page is a depiction of a
Cisco Systems, Inc. MGX-8850 switch containing caption with text in bullet
format: "Cisco Systems", "MGX-8850", "IP + ATM Network"; "ePOP(TM)' . The
switch is connected by a diagonal line to a picture of the world, showing North
and South America, in the top right hand corner of the page. Title caption
inside the picture with text "Outside Network". Under the caption is text in
bullet format:," "Internet Access"; "Frame Relay"; "ATM + IP"; "Intranet";
"Extranet"; "Public Switched Telephone Network"; "Long Distance"; "Local
Service"; "Enterprise Network Services"; "Managed Services"; "Professional
Services". Next to the picture of the switch is title caption with text "Inside
Network". The switch is connected by a diagonal line to a sphere. The diagonal
line has a caption above the line with text "e-link(TM) " and a caption below
the line with text "(DSL or T1)". The sphere is captioned with text "Integrated
Access Device". The sphere is connected to four pictures of products that
connect our network: (i) picture of video system with caption "IP Video"; (ii)
picture of switching device with caption "IP PBX"; (iii) picture of telephone
with caption "IP Telephony"; (iv) picture of computer on a desk with caption
"Data & Internet". Between the sphere captioned "Integrated Access Device" and
the picture of the computer on a desk are two additional spheres: the first
captioned with text "Routers"; the second captioned with text "Catalyst LAN
Switches & Hubs". In the bottom right hand corner of the page is the Cisco
Powered Network logo.]
<PAGE>
[INSIDE FRONT COVER SPREAD ART]
[Title caption with text "Convergent Communications' National IP/ATM Network
Deployment" and Convergent Communications(TM) logo at the top of the page.
Under the caption a map of the United States showing the following locations
Seattle; Portland; Boise; Salt Lake City; Santa Clara; Sacramento; Denver; Las
Vegas; Los Angeles; Irvine; San Diego; Phoenix; Alburquerque; Colorado Springs;
San Antonio; Houston; Dallas; Tulsa; Little Rock; New Orleans; Tampa; Miami;
Jacksonville; Birmingham; Atlanta; Nashville; Charlotte; Raleigh; Richmond;
Herndon; Baltimore; Newark; New York; Boston; Syracuse; Detroit; Chicago; St.
Louis; Milwaukee; Green Bay; Minneapolis; Des Moines; Omaha; Kansas City;
Indianapolis; Cincinnati; Louisville; Cleveland; Philadelphia; Pittsburgh.
Locations are connected by a network of lines showing current and planned
network connections. Key explains the diagram. Block graph with title caption
with text "ePOP(TM) 50-City Deployment" shows that in 1999, 16 cities will be
connected to our network and in 2000 and 2001 an additional 34 cities will be
connected to the network.]
<PAGE>
Internet Protocol
Internet Protocol or IP is a standard industry method of identifying,
tracking and reassembling packets of information transferred over multiple
communications networks, including the Internet.
PROSPECTUS SUMMARY
This summary highlights information contained later in this prospectus. You
should read the entire prospectus carefully, especially "Risk Factors"
beginning on page 8. All share and per share numbers reflect a reverse stock
split of one-for-two to be effected immediately prior to the closing of this
offering.
Overview of Our Company
We are a rapidly growing national provider of single-source data and voice
communications systems, services and solutions primarily to businesses with 25
to 500 employees. Inside our customers' premises we own communications networks
and provide professional services, such as the design, installation, management
and monitoring of those networks. Outside our customers' premises, we provide a
broad range of data and voice transport services. By operating networks both
inside and outside our customers' premises, and by offering a broad range of
data and voice products and services, we enable small and medium sized
businesses to use state-of-the-art communications solutions, including data and
voice networks based on Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based data and voice systems and services to small and medium
sized businesses.
We offer each of our products and services on
a stand-alone basis and are now also offering a
bundled communications solution under long-term
service agreements in which we own all or a
portion of the inside network and provide
professional services inside our customers'
premises and supply transport services outside
their premises. This comprehensive solution,
which we call Enterprise Network Services,
reduces our customers' capital needs, technical
staffing requirements and risks associated with
evolving communications technologies.
We are deploying Cisco Systems, Inc.'s multi-service data and voice switch in
each of the 35 metropolitan areas in which we currently operate and will also
deploy them in the 15 additional markets we expect to enter. We believe that
these next-generation switches will enable us to route our customers' external
communications traffic more efficiently and with lower capital outlay than with
traditional switches.
Our company was founded in 1995 by three experienced data and telephony
executives. Since our founding, we have raised more than $200 million of
capital and have acquired 14 businesses. Through a combination of these
acquisitions and internal growth, we have provided products or services to more
than 33,000 customers since January 1, 1998. Our staff of more than 1,000
employees includes approximately 425 data and voice technicians and
approximately 200 experienced sales professionals. We have grown our revenue to
an annualized run rate of more than $120 million based on our results for the
quarter ended March 31, 1999.
Our Market Opportunity
Spending on data products and services in the United States reached
approximately $98 billion in 1998 after several years of substantial growth
because of the growing importance of electronic communication and commerce.
Voice products such as corporate phone networks are becoming increasingly
complex as computer functionality is designed into telephones and as IP-based
products
3
<PAGE>
become more commonplace. We believe that sophisticated data and voice systems
such as IP-based integrated networks, wide area networks, intranets, extranets,
dedicated internet access and virtual private networks are becoming
increasingly critical to the success of small and medium sized businesses.
These businesses typically rely on their internal staff or on small, usually
local or regional, providers for data and voice system design, installation,
management and monitoring. Most of these businesses have limited capital which
they would prefer to deploy in their core operations rather than on
communication systems and networks, and most do not have the human resources to
effectively manage multiple suppliers who offer a wide range of systems and
solutions.
Our Solutions
Our solutions provide small and medium sized businesses an economical way to
manage their communications infrastructures and transport needs while providing
sophisticated capabilities more typically found in larger companies. The
combination of our focus on this market and our national scale enables us to be
a single-source provider of these advanced and integrated data and voice
solutions.
Our Business and Growth Strategies
Our business strategy is to:
.Target small and medium sized businesses
. Provide sophisticated, one-stop, integrated communications solutions
. Own the communications network inside our customers' enterprises
. Focus on solutions-based selling
. Provide preeminent, local customer care
. Capitalize on our operational support system
Our growth strategy is to:
. Leverage our existing customer base
. Deploy our Cisco powered multi-service switching architecture
. Increase higher-margin service revenue
. Sell IP-based integrated network solutions
. Pursue selected strategic acquisitions
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Convergent Communications...... 6,738,264 shares
Common stock offered by the selling shareholders....... 1,661,736 shares
Common stock to be outstanding after the offering...... 23,771,838 shares
Use of proceeds........................................ For general corporate purposes, including working
capital, capital expenditures, business acquisitions,
repayment of certain debt and to fund continued
operating losses. See "Use of Proceeds."
Proposed Nasdaq National Market symbol................. "CONV"
</TABLE>
In the above table and throughout this prospectus, unless otherwise
indicated, the number of shares of common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding as
of May 31, 1999, plus:
. the number of shares of common stock to be sold by Convergent
Communications in this offering; and
. a maximum of 2,857,143 shares of common stock to be issued at the
completion of this offering upon the automatic conversion of all of our
convertible preferred stock sold in March 1999.
However, the number of shares of common stock outstanding as of May 31, 1999
excludes:
. 3,559,300 shares of common stock issuable upon exercise of stock
options. These options have a weighted average exercise price of $7.18
per share and individual exercise prices ranging from $2.00 to $20.00
per share;
. 6,545,648 shares of common stock issuable upon exercise of warrants with
a weighted average exercise price of $6.28 per share and individual
exercise prices ranging from $0.02 to $15.00 per share, see Description
of Capital Stock--Warrants; and
. 375,000 shares of common stock issuable upon exercise of warrants issued
in connection with the borrowing under the senior secured credit
facility with Goldman Sachs Credit Partners L.P. on June 4, 1999 with an
exercise price of $15.00 per share.
. shares of common stock having a value of approximately $900,000 (valued
at the initial offering price) as part of the total purchase price of
$1,925,000, in connection with a proposed acquisition of assets of a
data network integration company which is scheduled to close in the
third quarter of 1999.
Unless we indicate otherwise, the information in this prospectus assumes that
the underwriters will not exercise their overallotment option. The number of
shares sold by Convergent Communications may increase to the extent the selling
shareholders do not sell shares in this offering.
--------------------
Our principal executive offices are located at 400 Inverness Drive South,
Suite 400, Englewood, Colorado 80112. Our telephone number is (303) 749-3000.
We maintain a website at http://www.converg.com. Information contained in that
website is not part of this prospectus.
5
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data along with our
consolidated financial statements and accompanying notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
of which appear later in this prospectus. The increase in revenue between the
second and third quarters of 1998 reflected in our Quarterly Operating Data is
largely due to the acquisition of Tie Communications, Inc.
As used in the tables below, and throughout this prospectus, EBITDA consists
of earnings before interest (net), income taxes, depreciation and amortization
and other income (expense). EBITDA is a measure commonly used to analyze
companies on the basis of operating performance. It is not a measure of
financial performance under generally accepted accounting principles ("GAAP")
and should not be considered as an alternative to net income (loss) 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 used by other companies.
<TABLE>
<CAPTION>
For the Three
For the Year Ended Months Ended
December 31, March 31,
------------------- -----------------
1997 1998 1998 1999
--------- --------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Operating Statement Data:
Revenue................................ $ 10,210 $ 61,600 $ 6,523 $ 30,481
Cost of sales excluding depreciation... 7,368 43,703 4,798 20,073
Selling, general and administrative.... 10,983 47,862 6,062 23,338
Depreciation and amortization.......... 1,453 7,493 762 2,863
-------- --------- ------- --------
Operating loss....................... (9,594) (37,458) (5,099) (15,793)
Net loss............................... (9,655) (50,576) (5,111) (20,687)
Other Operating Data:
EBITDA................................. $ (8,141) $(29,965) $(4,337) $(12,930)
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------ --------------------------------- -------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st
------ ------ ------ ------ ------ ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Operating
Data:
Revenue................. $ 598 $2,020 $3,144 $4,448 $6,523 $ 7,982 $22,316 $24,779 $30,481
Operating loss.......... (1,191) (1,546) (2,413) (4,445) (5,099) (6,691) (10,554) (15,114) (15,793)
Net loss................ (1,086) (1,586) (2,817) (4,166) (5,111) (11,169) (15,355) (18,941) (20,687)
EBITDA.................. (968) (1,313) (2,117) (3,744) (4,337) (5,500) (7,908) (12,220) (12,930)
</TABLE>
6
<PAGE>
The pro forma balance sheet information below reflects borrowings of $10.0
million under a senior secured credit facility with Goldman Sachs Credit
Partners L.P. which we entered into in June 1999.
The pro forma as adjusted balance sheet information below reflects this
adjustment and:
.the automatic conversion of our convertible preferred stock into shares of
common stock upon completion of this offering; and
.our receipt of estimated net proceeds of $72.9 million from this offering,
based upon an assumed initial public offering price of $12.00 per share,
after deducting the estimated underwriting discount and offering expenses
payable by us.
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................... $26,277 $35,807 $106,731
Restricted cash (1)............................ 52,825 52,825 52,825
Working capital................................ 22,366 31,896 104,766
Goodwill, net.................................. 49,035 49,035 49,035
Total assets................................... 199,325 209,325 280,249
Total debt..................................... 174,937 184,937 182,991
Total liabilities.............................. 221,264 231,264 229,318
Convertible preferred stock.................... 19,300 19,300 --
Shareholders' equity (deficit)................. (41,239) (41,239) 50,931
</TABLE>
- --------
(1) Approximately $48.6 million of this amount represents a portion of the
proceeds from the sale of our 13% Senior Notes which was deposited in an
escrow account to fund the first six interest payments on our 13% Senior
Notes, the first of which was paid in October 1998 and the second of which
was paid in April 1999.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before you
invest in our common stock, you should consider carefully the risks described
below, together with all of the other information included in this prospectus.
Some of the information in this prospectus 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 our future operating results, our ability to implement our business
plan, our efforts to address Year 2000 issues and potential competition, among
other things. The risk factors listed in this section, as well as any
cautionary language in this prospectus, provide 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. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus could
have a material adverse effect on our business, financial condition and results
of operations and on the price of our common stock.
We Have a Limited Operating History
We have only been operating since March 1996. Accordingly, we have a limited
operating history upon which an evaluation of our performance and prospects can
be based. We face all of the risks common to companies in their early stage of
development in an emerging industry, including:
.undercapitalization;
.cash shortages;
.high capital expenditures;
.an unproven business model;
.difficulties in managing rapid growth; and
.lack of sufficient customers, revenue, cash flow or EBITDA to be self-
sustaining.
In addition, since we are a new company, we have limited experience in
providing some of the products and services we currently offer, including
Internet access, web development and hosting services, electronic commerce
solutions, virtual private networks, frame relay and transport services. Our
failure to address any of the risks described above could have a material
adverse effect on our business, financial condition and results of operations
and on the price of our common stock.
We Have Experienced Increasing Negative EBITDA, Operating Losses and Net Losses
Since our formation we have generated larger negative EBITDA, operating
losses and net losses each quarter. For 1998, we had negative EBITDA of $30.0
million, an operating loss of $37.5 million and a net loss of $50.6 million.
For the first quarter of 1999, we had negative EBITDA of $12.9 million, an
operating loss of $15.8 million and a net loss of $20.7 million. These trends
will need to be reversed or our common stock will lose its value. We cannot
assure you that we will achieve or sustain positive EBITDA, operating income or
net income in the future. If we cannot, we may not be able to meet our working
capital requirements or pay interest on our debt, which would have a material
adverse effect on our business, financial condition and results of operations
and on the price of our common stock. See "--We May Require Significant Amounts
of Additional Capital" below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
8
<PAGE>
We Have an Unproven Business Model
Our business strategy is unproven. To be successful, we must convince
prospective customers to entrust their data and voice operations to a company
without a long and proven track record. We are not aware of any companies that
have a directly comparable business. We cannot assure you that our services
will be widely accepted. The prices we charge for services and products may be
higher than those charged by our competitors. In addition, the prices of
communications services and products have fallen historically, and we expect
them to continue to fall. We may be required to reduce prices periodically to
respond to competition and to generate adequate sales volume. The failure to
achieve or sustain adequate pricing levels or to achieve or sustain a
profitable business would have a material adverse effect on our business,
financial condition and results of operations and on the price of our common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Enterprise Network Services is a New Business Area
Currently there is no significant established market for Enterprise Network
Services. We have derived virtually all of our revenue from the sale of data
and voice products and services, not Enterprise Network Services. Our revenue
from the sale of Enterprise Network Services has been limited and we did not
have any revenue from these services until late 1997 and had only $2.0 million
of such revenue in 1998. We have now entered into long-term Enterprise Network
Services contracts with 23 customers, representing approximately $16.2 million
in contract value. We generated approximately $733,000 in revenue from
Enterprise Network Services contracts for the first quarter of 1999. We may not
be able to foresee future difficulties in providing these services. Although we
intend to substantially increase our revenue from our Enterprise Network
Services, there is limited historical information about our ability to enter
into and service these contracts. As a result, we have a limited basis upon
which you can evaluate our past or future performance. If we fail to develop a
market for our Enterprise Network Services, there will be a material adverse
effect on our business, financial condition and results of operations and on
the price of our common stock.
We Have Substantial Leverage and Debt Service Obligations
We have a significant amount of debt in relation to our equity. At March 31,
1999, we had $174.9 million in debt and a $41.2 million shareholders' deficit.
After this offering, we expect to have $183.0 million in debt and $50.9 million
in shareholders' equity. We expect to incur substantial additional debt. Our
relatively high leverage could negatively affect our company in a number of
ways, including:
. making it more difficult to obtain additional financing when needed for
our operations, acquisitions, expansions or financing our Enterprise
Network Services (a service offering in which we own communications
assets inside our customers' premises);
. limiting our flexibility in responding to downturns in the economy or in
our business;
. reducing funds available for other corporate purposes;
. placing us at a disadvantage compared to our competitors who have less
debt; and
. making it more difficult for us to pay our debts.
For example, our 13% Senior Notes require interest payments of $20.8 million
each year. Our operating loss in 1998 was $37.5 million and for the first
quarter of 1999 was $15.8 million. Due to our operating losses we placed
approximately $56.8 million of the proceeds from the sale of our 13% Senior
Notes into an escrow account to provide for the payment of interest on our 13%
Senior Notes through April 1, 2001. Thereafter, a significant portion of our
cash flow from operations, if any, will be dedicated to interest payments on
our debt, thereby reducing funds available for other corporate purposes.
9
<PAGE>
Any of the above described factors could have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock.
We May Require Significant Amounts of Additional Capital
If we are not successful in implementing our business plan in a relatively
short period of time, we will need to raise additional funds from other
sources. In addition, we could require additional capital due to material
shortfalls in our operating and financial performance or if we are more
aggressive in our expansion than currently contemplated. We cannot assure you
that we will be successful in raising sufficient debt or equity capital on a
timely basis, on acceptable terms, or at all. If we fail to obtain any
necessary financing, we could be compelled to alter our business strategy,
delay or abandon some of our future plans or expenditures, sell assets or
default on interest payments on our debt. Any of these events would have a
material adverse effect on our business, financial condition and results of
operations and on the price of our common stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
We Face Risks Involving Acquired Businesses
We have grown rapidly over the past two years by acquiring other businesses.
We expect that a portion of our future growth will result from selective
strategic acquisitions. Growth through acquisitions entails numerous risks,
including:
. difficulties in assimilating the operations, personnel, products,
technologies and financial, computer, payroll and other systems of the
acquired businesses;
. diversion of resources from our existing businesses, including potential
distraction of our management team;
. entering geographic and business markets in which we have little or no
prior experience;
. unanticipated liabilities or contingencies of acquired businesses;
. dilution to existing shareholders if we use stock to acquire businesses;
. amortization of goodwill from acquired businesses, which will reduce our
earnings per share; and
. the potential loss of key employees or customers of the acquired
businesses.
We have encountered most of these issues in the past. For example, as a
result of our acquisitions, we currently have three different operational
support systems which we have not fully integrated, have issued approximately
2,500,000 shares of common stock and, at March 31, 1999, had $49.0 million of
goodwill, net of amortization, which is being amortized over 10 years. We may
encounter any of these issues in the future. In particular, we may issue common
stock to pay for acquisitions.
In August, 1998, we acquired substantially all the assets of Tie
Communications, Inc. which was a substantially larger business than we were.
Tie had 452 employees at June 30, 1998 and had 1997 revenue of $95.4 million
derived primarily from the sale of voice services and products. We had 274
employees at June 30, 1998, and had 1997 revenue of $10.2 million derived
primarily from the sale of data services and products. The Tie acquisition
brought us into 24 additional geographic markets. We have not completed the
integration of the Tie business. In addition, part of Tie's operating system is
not Year 2000 compliant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000 Issue." As a
result, the risks discussed above still apply to the Tie acquisition,
particularly the risks of assimilating operational support systems and the
risks associated with entering geographic markets in which we have little or no
prior experience.
10
<PAGE>
We cannot assure you that we will be able to integrate successfully any
businesses that we might acquire in the future or that we will be able to
complete the integration of Tie's business successfully. Our failure to do so
could have a material adverse effect on our business, financial condition and
results of operations and on the price of our common stock.
Our Switching Platform Has a Very Limited Performance History
Our multi-service data and voice switching platforms incorporate a number of
independent components manufactured by other companies. While all of the
components of our switching platforms have established histories of successful
performance as individual products, our unique integrated architecture has a
very limited operating history. We have deployed our switching platforms in
only three of our markets.
During the next 36 months, we intend to install 50 switching platforms that
will utilize a new switch being manufactured by Cisco Systems, Inc. Currently,
Cisco is the only manufacturer of this switch and we believe we will be the
first company to deploy this switch nationwide. Any failure by Cisco to provide
these switches to us on a timely basis would delay the roll-out of our data
service capabilities and our business plan.
If any of our switching platforms contain undetected design faults or "bugs,"
interruption of service to our customers or delay in our deployment could
negatively affect our financial performance. We cannot assure you that our
switching platforms will perform as expected or that we will be successful in
deploying them in all of our markets in a timely manner. These factors could
have a material adverse effect on our business, financial condition and results
of operations and on the price of our common stock.
We Face Risks Associated with Implementing Our Business and Growth Strategies
We are highly leveraged. Our high leverage makes our success, and the return
to our shareholders, extremely dependent on our ability to successfully
implement our business and growth strategies. We are expanding rapidly. This
expansion has increased our operating complexity and strains our management
resources. The successful expansion and development of our operations
(including the acquisition of additional businesses) depends on a number of
factors including our ability to:
. design, market and sell new products and services;
. maintain a high level of quality for our services and products while
controlling costs;
. develop new customer relationships and achieve a sufficient customer
base;
. increase brand recognition;
. access potential markets;
. identify, complete and integrate suitable acquisitions;
. obtain any required government authorizations, franchises and permits;
. hire and retain qualified personnel;
. obtain financing; and
. install and operate our multi-service switching platform.
Our failure to accomplish any of the foregoing could have a material adverse
effect on our business, financial condition and results of operations and on
the price of our common stock.
11
<PAGE>
We Are Still Developing Our Operational Support System
We are in the process of developing an advanced operational support system
which is designed to integrate all of our internal support systems and include
a full array of order management, customer service, billing and financial
applications. Our operational support system is designed to permit customer
care, sales engineering, service management, service delivery, accounting and
inventory sales management personnel to access a single customer record. We
believe that our operational support system is a critical element in providing
customer care. However, we have not completed the integration of all
applications that will be part of our operational support system. We also have
not completed the integration of some of our more recently acquired businesses,
including Tie Communications, with our operational support system. Our failure
to successfully and timely:
. implement all applications of our operational support system,
. integrate all the customer records and the billing, ordering, inventory,
management, accounting and other financial information systems of the
businesses we have acquired or will acquire onto our operational support
system,
. identify all of our information and processing needs,
. repair "bugs" and design defects that may exist in our operational
support system, and
. maintain and upgrade our operational support system as necessary,
could have a material adverse effect on our business, financial condition and
results of operations and on the price of our common stock.
Voice Over Internet Protocol is New Technology
We face risks in deploying voice over Internet Protocol technologies, which
are new, developing and unproven. We currently carry voice calls on some local
area networks, wide area networks, virtual private networks and the networks
inside the premises of our Enterprise Network Services customers through the
use of Internet Protocol. We plan to use Internet Protocol to carry all our
customers' voice calls on our network in the future. Traditionally, voice calls
have been transmitted by keeping a circuit or line between the people on the
call constantly open. This method of transmitting voice calls is inefficient
because during conversations there are pauses and periods of silence when the
capacity of the circuit is not being used. Voice over Internet Protocol
transmission is designed to eliminate this inefficiency. This technology breaks
the voice conversation into "packets" of information and sends those packets
over transmission lines individually. The packets are then re-assembled at or
near their destination so the parties are able to have a conversation. When the
parties on the call pause or are silent, there are no packets transmitted and
the transmission lines can be used for other purposes. This technology promises
to substantially reduce the cost of carrying voice conversations.
Voice over Internet Protocol transmission is under development, is extremely
complex and we are currently using it only to carry voice transmissions on the
local area networks, wide area networks, virtual private networks and the
networks inside the premises of our Enterprise Network Services customers. Some
telecommunications companies (including ICG Communications, Inc., IDT
Corporation and RSL Communications Ltd.) are carrying calls over similar
technologies today and many others are developing this technology (including
Sprint Corporation). However, we believe that their transmission quality for
external calls over IP networks is not yet as good as the quality of
traditional voice transmission methods. Accordingly, there is a risk that we
will not be able to develop this technology well enough to be able to use it
for all of our customers' voice traffic and, therefore, will not be able to
enjoy the cost reductions it promises.
12
<PAGE>
However, we are making a large capital investment in this new technology. The
50 switches we expect to buy from Cisco Systems, Inc. are designed to be able
to provide voice transmission over Internet Protocol. If we are not eventually
able to provide voice over IP transmission with these switches for all of our
customers' voice traffic, some of the value of our investment in these switches
may be lost. Furthermore, it is not clear today which of the emerging versions
of this technology will prevail. Many telecommunications companies have far
more experience with these types of issues than we do. Our failure to
successfully offer Internet Protocol transmission on our network for all our
customers' voice traffic could have a material adverse effect on our business,
financial condition and results of operations and on the price of our common
stock.
We Are Dependent Upon the Products and Services of Others
Successful operation of our business requires that we provide superior
products and services. Although we can exercise direct control over the
customer care and support services we provide, many of the products and
services we offer are provided by others. These products and services are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security (by such things as computer viruses and "hackers") and
other factors. These problems, even if not caused by us, could lead to a
decrease in our revenue and as a result could have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock.
We Have a Long Sales Cycle and Upfront Expenses for Enterprise Network Services
The Enterprise Network Services solutions we offer have not historically been
available to small and medium sized businesses. As a result, making a sale
often requires a significant amount of time and upfront expense to educate
customers regarding the benefits of Enterprise Network Services. Potential
Enterprise Network Services customers tend to engage in extensive internal
reviews before deciding to engage us. Due to the long sales cycle, our revenues
may fluctuate substantially and any given period may include substantial
selling expenses without related revenue. These risks could have a material
adverse effect on our business, financial condition and results of operations
and on the price of our common stock.
There Are Credit Risks Associated with Leasing Equipment and with Providing
Enterprise Network Services
When a company agrees to become one of our Enterprise Network Services
customers, we purchase and own all or a portion of the customer's existing
communications equipment. We may also purchase and own additional
communications equipment and install it on the customer's premise. The customer
agrees to pay us a monthly charge for a fixed term, usually three to five
years. In addition, we provide leasing options for our customers who prefer to
lease our communications equipment rather than contract for our Enterprise
Network Services. If a customer defaults on a payment under an Enterprise
Network Services contract or a lease, we will have the right to remove our
property from the customer's premises. If we are forced to remove our equipment
due to a customer's failure to pay, there are likely to be substantial delays
and expenses in removing our equipment, and the equipment may be damaged or
become obsolete in the interim, thereby making it more difficult to reuse or
resell the equipment. In addition, we may not be able to resell the equipment
at a price that allows us to recover our cost. We have limited experience
dealing with the risks posed by a payment default, and such risks could have a
material adverse effect on our business, financial condition and results of
operations and on the price of our common stock.
Tie Communications Had Financial Problems in the Past
At the time we acquired the assets of Tie Communications, Tie was in
bankruptcy. Although we believe that Tie's previous financial difficulties were
the result of problems which we did not acquire, we cannot assure you that we
will be able to remedy all of the problems which led to Tie's
13
<PAGE>
bankruptcy. Tie also had previously declared bankruptcy in 1991, primarily as a
result of an inability to service its indebtedness. If we fail to remedy Tie's
financial problems, it could have a material adverse effect on our business,
financial condition and results of operations and on the price of our common
stock.
We Are Subject to Fluctuations in Our Financial Results
Our revenue and operating results have in the past varied and in the future
may vary significantly from quarter to quarter and from year to year as a
result of a number of factors. These factors may include:
. the size and timing of contracts for Enterprise Network Services;
. customer requirements;
. the ability to retain and expand sales to existing customers;
. our ability to maintain or increase current rates of sales productivity;
. the level of price and product competition; and
. the size and timing of future acquisitions.
As a result of all of these factors, it is possible that in any future quarter
our operating results could be below the expectations of securities analysts
and investors. In this event, there could be a material adverse effect on the
price of our common stock.
We Face Risks Selling Used Equipment We Purchase
Our Enterprise Network Services strategy includes purchasing our customers'
equipment, such as private branch exchanges (PBXs), computers and other data
and voice equipment. The equipment we purchase from customers may be replaced
by more technologically advanced equipment. To maintain our margins for
Enterprise Network Services, we will need to resell the used equipment. In
addition, we lease equipment to some of our customers, and that equipment may
also need to be sold at the end of the lease term. Some of the equipment may be
damaged or obsolete when we try to resell it. The pricing of our Enterprise
Network Service contracts and our leases is based on our assumptions regarding
timing and resale prices for this used equipment. However, we might not be able
to resell this used equipment in a timely manner at acceptable prices, and any
failure to do so could have a material adverse effect on our business,
financial condition and results of operations and on the price of our common
stock.
Future Sales of Our Stock May Negatively Affect Our Stock Price
The market price of our common stock may fall as a result of sales of a large
number of shares in the market or the perception that such sales could occur.
At the closing of this offering, there will be 23,771,838 shares of our common
stock outstanding. Of those shares, all of the shares sold in this offering
will be freely transferable without restriction under the Securities Act of
1933. Additional shares of common stock outstanding after this offering will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
Upon closing of this offering..................................... 9,532,480
180 days after the closing of this offering....................... 9,779,219
270 days after the closing of this offering....................... 4,460,139
----------
Total........................................................... 23,771,838
==========
</TABLE>
14
<PAGE>
In addition, the holders of approximately 6.8 million shares of common stock
(including shares in the preceding table) and warrants to purchase common stock
have contractual registration rights with respect to their shares. For a more
complete discussion of these matters, see "Shares Eligible for Future Sale."
We Face Competition From Many Sources
We compete for business with many companies that have much greater financial
resources, are more geographically diverse, have better name recognition and
have larger customer bases than we do. Numerous competitors with long-standing
relationships with our potential customers offer one or more of the individual
products and services we offer. We expect that we will face substantial and
growing competition from a number of providers of data and voice networking and
transport services and products.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors with
resources far greater than ours. Technological developments may allow other
companies to provide a single-source solution in competition with our product
offerings. Cisco and other hardware manufacturers have designed or are
designing multi-service data and voice switches that are or will be available
to other providers.
To the extent that competitors begin bundling components of our Enterprise
Network Services (including data networking and the provision of customer
premises equipment) into their own product offerings, we will face additional
competition.
In data services, we compete with, among others, International Network
Services, Inacom Corporation, CompuCom Systems, Inc. and Norstan Consulting,
Inc. In the frame relay services market, we compete with, among others, MCI
WorldCom, Inc., AT&T Corporation, Frontier Communications, and Qwest
Communications International, Inc. In data products, we compete with, among
others, U S WEST, Inc., CompuCom and Inacom.
In voice services, we have numerous competitors in the local and long-
distance markets. Our main competitors for local voice services include the
Regional Bell Operating Companies, as well as agents who resell Bell services,
AT&T, MCI WorldCom and ITC^Deltacom, Inc. and other competitive local exchange
carriers. In the long-distance market, our competitors include MCI WorldCom,
Qwest, Sprint Corporation and AT&T. In voice products, we compete with, among
others, Norstan, Staples, Inc. and Advanced Telecommunications, Inc.
Intensifying competition could have a material adverse effect on our
business, financial condition and results of operations and on the price of our
common stock.
We Are Subject to FCC and State Public Utility Commission Regulations
We are subject to both federal and state regulation. In rendering our
interstate and international telecommunications services, we must comply with
federal telecommunications laws and regulations prescribed by the Federal
Communications Commission. At the state level, we are subject to regulation by
the various state public utility commissions.
Among other things, the Telecommunications Act of 1996 opened the local
telecommunications marketplace to competition, allowing companies like us to
compete with incumbent local exchange companies. The implementation of the
Telecommunications Act of 1996 is ongoing and is the subject of proceedings
before the FCC, the various state public utility commissions and the courts. As
a result, the regulatory framework that we operate under is unsettled. We could
also become subject to additional regulatory requirements as a result of a
change in our product offerings. If we are required to comply with new
regulations or new interpretations of existing regulations, this compliance
could have a material adverse effect on our business, financial condition and
results of operations and on the price of our common stock. See "Business--
Regulatory Environment."
15
<PAGE>
Factors Exist Which Could Discourage an Acquisition of Our Company
There are several factors that could deter an attempt to acquire our company.
These factors reduce the chance that our shareholders will be able to sell
their shares in an acquisition. These factors include:
. the rights of the holders of our 13% Senior Notes to require us to
repurchase their Notes if anyone acquires more than 50% of our voting
stock;
. the ability of our board of directors to issue preferred stock without
any further approval being required from our shareholders;
. the concentration of ownership of our stock by our officers and directors
following the offering; and
. the "staggered" nature of our board of directors which results in
directors being elected for terms of three years.
See "Description of Indebtedness," "--Our Principal Shareholders Will Have
Significant Influence," and "Description of Capital Stock."
Our Success Depends on Our Executive Officers and Employees
Our success depends to a significant degree on the abilities and continued
efforts of our senior management. Our success also will depend on our ability
to attract, retain, and motivate qualified management, marketing, technical and
sales personnel. These people are in high demand and often have competing
employment opportunities. The labor market for engineers, technicians and sales
representatives who are skilled in both voice and data communications systems
is extremely competitive due to limited supply and we may lose key employees or
be forced to increase their compensation. Employee turnover could significantly
increase our training and other related employee costs. Additionally, there are
low levels of unemployment in many of the regions in which we operate. These
low levels of unemployment have led to pressure on wage rates, which can make
it more difficult and costly for us to attract and retain qualified employees.
The loss of key personnel, or the failure to attract additional personnel,
could have a material adverse effect on our business, financial condition and
results of operations and on the price of our common stock.
Our Principal Shareholders Will Have Significant Influence
Upon the completion of this offering, our officers and directors will
beneficially own approximately 31.70% of our common stock, including
approximately 14.08% beneficially owned by our three founding shareholders and
their families. Our founding shareholders and their families are parties to a
voting agreement pursuant to which they have agreed to vote their common stock
as a group. Accordingly, our officers and directors, and particularly our
founding shareholders, are likely to continue to exercise substantial influence
over our business and the election of members of our board of directors. This
concentration of ownership may also delay or prevent an attempt to acquire our
company. See "Principal and Selling Shareholders."
We Face the Risk of System Failure
Our operations are dependent upon our ability to support our network
infrastructure and avoid damage from fires, earthquakes, floods, power losses,
telecommunications failures, network software flaws, transmission cable cuts
and similar unforeseen events. The occurrence of a natural disaster or other
unanticipated problems at our national operations center or any of our regional
centers could cause interruptions in our services. In addition, failures by our
service providers could cause interruptions in our services. Any damage or
failure that causes interruptions in our services could
16
<PAGE>
have a material adverse effect on our business, financial condition and results
of operations and on the price of our common stock.
We Face Year 2000 Risks
The year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year. This
programming defect could result in date-sensitive software recognizing a date
using "00" as the year 1900 rather than the year 2000. This error could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, provide data or voice services or engage in similar normal
business activities. We have identified portions of two of our systems acquired
in recent acquisitions that are not currently year 2000 ready. If our systems
or the systems of other companies on whose services we depend or with whom our
systems interface are not year 2000 ready when they need to be, any resulting
disruptions could have a material adverse effect on our business, financial
condition and results of operations and on the price of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In addition, spending on voice and data network equipment may decrease in the
second half of 1999 as customers focus on year 2000 readiness and systems
testing rather than investing in new products. As a result, our revenues from
the sale of voice and data products and network systems could be adversely
affected, which in turn could have a material adverse effect on our business,
financial condition and results of operation and on the price of our common
stock.
Terms of Our Indebtedness Restrict Our Corporate Activities
The terms of the indenture governing our 13% Senior Notes and our credit
facilities restrict, and in some cases significantly limit or prohibit our
ability and the ability of our subsidiaries to:
.pay dividends and make other distributions on capital stock and redeem
capital stock;
.incur additional indebtedness or refinance existing indebtedness;
.make prepayments of certain indebtedness;
.create liens on our assets;
.make investments;
.engage in transactions with shareholders and affiliates;
.engage in mergers and consolidations; and
.engage in sales of assets.
We cannot assure you that the covenants in our indenture or our credit
facilities will not adversely affect our ability to finance our future
operations or capital needs or to engage in other business activities that may
be in the best interests of our shareholders. As a result, these restrictive
covenants could have a material adverse effect on our business, financial
condition and results of operations and on the price of our common stock. See
"Description of Indebtedness."
Possible Volatility of Our Stock Price
An active trading market for our common stock may not develop or be sustained
after this offering. Together with the underwriters, we will determine the
initial public offering price. The price at
17
<PAGE>
which our common stock will trade after this offering is likely to be volatile
and may fluctuate substantially due to factors such as:
. our historical and anticipated quarterly and annual operating results;
. variations between our actual results and the expectations of investors
and analysts;
. announcements by us or others and developments affecting our business;
.investor perceptions of our company and comparable public companies; and
. conditions and trends in data and voice communications industries.
In particular, the stock market has from time to time experienced significant
price and volume fluctuations affecting the common stocks of communications
companies, like us. These fluctuations may result in a material decline in the
market price of our common stock.
We Do Not Expect to Pay Dividends
We have not declared or paid, and for the foreseeable future we do not
anticipate declaring or paying, dividends on our common stock. In addition, the
agreements governing our indebtedness, including the indenture for our 13%
Senior Notes and our credit facilities, limit our ability to pay dividends on
our common stock.
An Economic Downturn May Have an Adverse Effect on Our Company
If the general economic health of the United States declines from recent
historically high levels, or if companies fear such a decline is imminent,
companies may reduce expenditures for products and services such as ours. Any
decline or concern about an imminent decline in the economy could delay
decisions among our customers to utilize more of our products and services or
could delay decisions by prospective customers to make initial evaluations of
our services. These delays would have a material adverse effect on our
business, prospects, financial condition and results of operations and on the
price of our common stock.
Dilution
If you buy shares in this offering, you will incur immediate, substantial
dilution. To the extent outstanding warrants and options to purchase our common
stock are exercised or additional equity securities are issued at a price below
the price of a share in this offering, you may experience further dilution. See
"Dilution."
We May Face Potential Liability for Information Disseminated through Our
Network
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. The potential
liability for material carried on or disseminated through our systems which
might include defamatory statements and materials infringing on copyrights,
could require us to implement measures to reduce our exposure to such
liability, which may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. In addition, the costs
incurred in defending against any claims and the potential adverse outcomes of
those claims could have a material adverse effect on our business, financial
condition and results of operations and on the price of our common stock.
18
<PAGE>
USE OF PROCEEDS
We will receive estimated net proceeds from this offering of approximately
$72.9 million ($86.9 million if the underwriters' over-allotment option is
exercised in full) after deducting the estimated underwriting discount and
offering expenses payable by us. We will use these proceeds for general
corporate purposes, including working capital requirements, capital
expenditures, acquisitions, debt payments and to fund continued operating
losses. In addition, we will use approximately $2.0 million to repay the
remaining balance of $456,000 on an 11% promissory note due July 1999 and
$1,490,000 on an 8% promissory note due February 2000. These notes were issued
in connection with the March 1999 acquisition of Kansas Communications, Inc.
Pending these uses, we intend to invest the net proceeds from this offering in
short-term, investment-grade, interest-bearing securities.
We will not receive any of the proceeds from the sale of 1,661,736 shares of
common stock by the selling shareholders. We will, however, pursuant to
contractual commitments with most of the selling shareholders, use
approximately $1.2 million of our proceeds to pay the underwriting discounts
applicable to the shares sold by the selling shareholders.
CORPORATE INFORMATION
Convergent Communications, Inc. was founded in December 1995 and first
capitalized on March 1, 1996. References in this prospectus to "Convergent
Communications", "us", "we" and "our" refer to Convergent Communications, Inc.,
a Colorado corporation, and its subsidiaries.
Convergent Communications(TM), Enterprise Network Carrier(TM), Computer-
Telephony Integrated Support System(TM), Netnomics(TM), ePOP(TM),
converg.com(TM), Convergent Communications, Inc.'s logo and various other words
and logo marks are trademarks or service marks of Convergent Communications and
are the subject of pending trademark and servicemark applications in the United
States and other countries.
DIVIDEND POLICY
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 dividends in the
foreseeable future. In addition, our credit facilities and the indenture
governing our 13% Senior Notes contain restrictions on our ability to pay
dividends or make payments or other distributions on our capital stock.
Currently, these restrictions prohibit the payment of dividends on our common
stock.
19
<PAGE>
DILUTION
For the calculations set forth below, the number of shares that will be
outstanding after this offering is based on the number outstanding as of March
31, 1999, plus the number of shares of common stock we will sell in this
offering and 2,857,143 shares of common stock to be issued upon the automatic
conversion of all of our convertible preferred stock at the completion of this
offering based upon an assumed initial public offering price of $12.00 per
share. In addition, the number of outstanding shares assumes no exercise of
stock options or warrants. As of March 31, 1999, there were options and
warrants outstanding to purchase an aggregate of 9,791,769 shares of common
stock at a weighted average exercise price of $6.60 per share, with individual
exercise prices ranging from $0.02 to $20.00 per share. The exercise of these
options and warrants will result in further dilution to new investors.
Our pro forma negative net tangible book value at March 31, 1999 was $(81.3)
million or $(4.86) per share of outstanding common stock, after giving effect
to an assumed conversion of our convertible preferred stock into 2,857,143
shares of common stock and $10.0 million of borrowing in June 1999 under a
senior secured credit facility with Goldman Sachs Credit Partners L.P. The pro
forma negative net tangible book value per share represents our total tangible
assets less total liabilities, divided by 16,817,495 shares of common stock
outstanding on a pro forma basis before this offering. Dilution per share
represents the difference between the amount per share paid by investors in
this offering and the pro forma as adjusted net tangible book value per share
after this offering. After giving effect to the pro forma adjustments and the
sale of the shares of common stock by us at an assumed initial public offering
price of $12.00 per share (less estimated underwriting discounts and
commissions and expenses we expect to pay in connection with this offering),
our pro forma as adjusted net tangible book value at March 31, 1999 would have
been $(8.9) million or $(0.37) per share. This represents an immediate increase
in the net tangible book value of $4.49 per share to existing shareholders and
an immediate dilution in the net tangible book value of $12.37 per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma negative net tangible book value per share
as of March 31, 1999..................................... $(4.86)
Increase per share attributable to new investors.......... $ 4.49
------
Pro forma as adjusted negative net tangible book value per
share
after this offering...................................... $(0.37)
------
Dilution per share to new investors......................... $12.37
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of March
31, 1999, the difference between the existing shareholders and new investors
with respect to the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid, assuming
new investors pay $12.00 per share in this offering (before deducting estimated
underwriting discounts and commissions and other expenses in this offering):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 16,817,495 71.4 $ 51,167,200 38.8 $ 3.04
New investors(1)........ 6,738,264 28.6 80,859,168 61.2 $12.00
---------- ---- ------------ ----
Total................. 23,555,759 100% $132,026,368 100%
========== ==== ============ ====
</TABLE>
- --------
(1) Sales by the selling shareholders in this offering will reduce the number
of shares held by existing shareholders to 15,155,759, or approximately
64.3% of the total number of shares of common stock outstanding after this
offering (or approximately 61.1% if the underwriters exercise their over-
allotment option in full), and will increase the number of shares held by
new investors to 8,400,000, or approximately 35.7% of the total number of
shares of common stock outstanding after this offering (or 9,660,000 shares
and approximately 38.9% if the underwriters exercise their over-allotment
option in full).
20
<PAGE>
CAPITALIZATION
You should read this table in conjunction with our consolidated financial
statements and accompanying notes included elsewhere in this prospectus. The
following table sets forth our actual and as adjusted capitalization as of
March 31, 1999. Our pro forma capitalization reflects borrowings in June 1999
under the $10.0 million senior secured credit facility with Goldman Sachs
Credit Partners L.P. Our pro forma as adjusted capitalization also reflects:
. our receipt of estimated net proceeds from the sale of shares of
common stock by us in this offering, assuming an initial public
offering price of $12.00 per share; and
. the automatic conversion of all shares of our convertible preferred
stock into 2,857,143 shares of common stock upon completion of this
offering based on an assumed initial public offering price of
$12.00 per share.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
amounts)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments .................................. $ 26,277 $ 35,807 $106,731
Restricted cash(1)............................. 52,825 52,825 52,825
-------- -------- --------
Total restricted and non-restricted cash... $ 79,102 $ 88,632 $159,556
======== ======== ========
Long-term debt, less current portion(2)........ $154,594 $164,594 $164,594
Long-term capital leases, less current
portion(3).................................... 9,186 9,186 9,186
-------- -------- --------
Total long-term debt, less current
portion................................... 163,780 173,780 173,780
-------- -------- --------
Preferred stock, 1 million shares authorized,
800,000 shares of convertible preferred stock
issued and outstanding on an actual and pro
forma basis and no shares outstanding on a pro
forma as adjusted basis ...................... 19,300 19,300 --
Shareholders' equity:
Common shares, no par value, 100,000,000
shares authorized, 13,960,352 shares issued
and outstanding on an actual and pro forma
basis and 23,555,759 shares issued and
outstanding on a pro forma as adjusted
basis........................................ 27,806 27,806 119,975
Warrants(4)................................... 12,172 12,172 12,172
Accumulated other comprehensive income........ 12 12 12
Unearned compensation......................... (137) (137) (137)
Accumulated deficit........................... (81,092) (81,092) (81,092)
-------- -------- --------
Total shareholders' equity (deficit)....... (41,239) (41,239) 50,731
-------- -------- --------
Total capitalization..................... $141,841 $151,841 $224,511
======== ======== ========
</TABLE>
- --------
(1) Approximately $48.6 million of this amount represents a portion of the
proceeds from the sale of the 13% Senior Notes which was deposited into an
escrow account to fund the first six interest payments on the 13% Senior
Notes, the first of which was paid in October 1998 and the second in April
1999.
(2) Long-term debt net of unaccreted discount of $5.4 million relating to the
warrants which were attached to the 13% Senior Notes. Excludes the current
portion of approximately $5.4 million of long-term debt.
(3) Excludes the current portion of approximately $5.8 million of capitalized
leases.
(4) See "Description of Capital Stock--Warrants."
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read along with our
consolidated financial statements and accompanying notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
of which appear later in this prospectus. The selected financial data, except
for the operating statement data and other operating data for the three months
ended March 31, 1998 and 1999, have been derived from our consolidated
financial statements and the financial statements of our predecessor, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
operating statement and other operating data for the three months ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
included later in this prospectus. The operating results for the three months
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the full year. We prepared these unaudited financial statements on
the same basis as the audited statements and, in the opinion of our management,
made all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations for
those periods. On December 17, 1996, we acquired Integrated Communication
Networks, L.C., which is referred to as the "predecessor" for the period prior
to the acquisition. Convergent Communications, since March 1, 1996, together
with Integrated Communication Networks, L.C., since December 17, 1996, is
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>
PREDECESSOR SUCCESSOR
----------------------------------------- ---------------------------------------------------------
For the Three
Months Ended
March 31,
-----------------
For the Year For the Year January 1, 1996 March 1, 1996 For the Year For the Year
Ended Ended through through Ended Ended
December 31, December 31, December 16, December 31, December 31, December 31,
1994 1995 1996 1996 1997 1998 1998 1999
------------ ------------ --------------- ------------- ------------ ------------ ------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Statement Data:
Revenue............ $ 988 $1,434 $1,496 $ 98 $ 10,210 $ 61,600 $ 6,523 $ 30,481
Cost of sales
excluding
depreciation...... 729 964 1,018 79 7,368 43,703 4,798 20,073
Selling, general
and
administrative.... 477 405 554 552 10,983 47,862 6,062 23,338
Depreciation and
amortization...... 106 127 124 41 1,453 7,493 762 2,863
------ ------ ------ ------- -------- -------- ------- --------
Total operating
expenses......... 1,312 1,496 1,696 672 19,804 99,058 11,622 46,274
Operating loss.... (324) (62) (200) (574) (9,594) (37,458) (5,099) (15,793)
Interest expense... (15) (17) (21) (1) (155) (17,502) (53) (5,937)
Interest income.... -- -- -- -- 251 4,632 31 951
Other income
(expense)......... (49) -- -- -- (156) (248) 10 92
------ ------ ------ ------- -------- -------- ------- --------
Net loss........... $ (388) $ (79) $ (221) $ (575) $ (9,655) $(50,576) $(5,111) $(20,687)
====== ====== ====== ======= ======== ======== ======= ========
Net loss per share
(basic and
diluted).......... $ (0.15) $ (0.92) $ (3.68) $(0.38) $ (1.48)
Weighted average
shares outstanding
(basic and
diluted).......... 3,887 10,461 13,732 13,479 13,943
Other Operating
Data:
Net cash provided
by (used in)
operating
activities........ $ (217) $ 60 $ (31) $ (242) $ (6,698) $(28,698) $(2,440) $(13,726)
Net cash used in
investing
activities........ (200) (8) (36) (1,446) (11,648) (94,647) 2,570 (20,437)
Net cash provided
by (used in)
financing
activities........ 427 (61) 91 4,849 15,852 148,274 (384) 18,958
EBITDA(1).......... (218) 65 (76) (534) (8,141) (29,965) (4,337) (12,930)
</TABLE>
- --------
(1) As used in this prospectus, EBITDA consists of earnings before interest
(net), income taxes, depreciation and amortization and other income
(expense). EBITDA is a measure commonly used to analyze companies on the
basis of operating performance. It is not a measure of financial
performance under GAAP and should not be considered as an alternative to
net income (loss) 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 used by other companies.
22
<PAGE>
The following balance sheet data, except the data as of March 31, 1999, have
been derived from our consolidated financial statements and the financial
statements of our predecessor, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet
information as of March 31, 1999 has been derived from our unaudited financial
statements included later in this prospectus, which have been prepared on the
same basis as the audited statements and, in the opinion of our management,
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position for that period.
The pro forma balance sheet information as of March 31, 1999 reflects
borrowings in June 1999 under the $10.0 million senior secured credit facility
with Goldman Sachs Credit Partner L.P.
The as adjusted balance sheet information as of March 31, 1999 below reflects
this adjustment and:
. the automatic conversion of our convertible preferred stock into
2,857,143 shares of common stock upon completion of this offering; and
. our receipt of estimated net proceeds of $72.9 million from this
offering, based upon an assumed initial public offering price of $12.00
per share, after deducting the estimated underwriting discount and
offering expenses payable by us.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------- ---------------------------------------------------------------------
As of
March 31,1999
As of As of As of As of As of ------------------------------
December 31, December 31, December 31, December 31, December 31, Pro Forma
1994 1995 1996 1997 1998 Actual Pro Forma As Adjusted
------------ ------------ ------------ ------------ ------------ ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet:
Cash, cash equivalents
and short-term
investments............ $ 23 $13 $3,161 $ 8,039 $ 25,597 $26,277 $35,807 $106,731
Restricted cash(1)...... -- -- -- 406 51,350 52,825 52,825 52,825
Working capital......... 219 (10) 1,890 5,334 28,500 22,366 31,896 104,766
Goodwill, net........... 228 228 3,201 6,393 46,526 49,035 49,035 49,035
Total assets............ 1,012 797 9,887 24,922 185,656 199,325 209,325 280,249
Total debt.............. 456 440 1,456 1,933 168,268 174,937 184,937 182,991
Total liabilities....... 529 580 1,902 6,194 207,005 221,264 231,264 229,318
Convertible preferred... -- -- -- -- -- 19,300 19,300 --
Shareholders' equity
(deficit).............. 483 217 7,985 18,728 (21,349) (41,239) (41,239) 50,931
</TABLE>
- --------
(1) Approximately $48.6 million of this amount represents a portion of the
proceeds from the sale of our 13% Senior Notes which was deposited in an
escrow account to fund the first six interest payments on our 13% Senior
Notes, the first of which was paid in October 1998 and the second of which
was paid in April 1999.
23
<PAGE>
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 notes included later in this prospectus. This
discussion includes forward-looking statements and is based on current
expectations which involve risks and uncertainties. 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. See "Risk Factors."
Overview
We are a rapidly growing national provider of single-source data and voice
communications systems, services and solutions primarily to businesses with 25
to 500 employees. Inside our customers' premises we own communications networks
and provide professional services, such as the design, installation, management
and monitoring of those networks. Outside our customers' premises we provide a
broad range of data and voice transport services. By operating networks, both
inside and outside our customers' premises, and by offering a broad range of
data and voice products and services, we enable small and medium sized
businesses to use state-of-the-art communications solutions, including data and
voice networks based on Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We offer each of our products and
services on a stand-alone basis and are now also offering a bundled
communications solution, which we call Enterprise Network Services, in which we
design, install, own, manage and monitor the data and voice networks inside our
customers' premises and supply transport services outside our customers'
premises.
We were first capitalized in March 1996. Since that time, we have
successfully raised $204.5 million in capital, including $450,000 in founders'
capital, $24.0 million in two private placements of common stock in 1996 and
1997 (including an additional $450,000 from the founders), $160.0 million
through the 1998 sale of our 13% Senior Notes and related warrants and $20.0
million in a 1999 sale of our convertible preferred stock and warrants to
affiliates of Sandler Capital/21st Century Group. As a result of that
investment in our convertible preferred stock, we also have increased the
borrowing capacity under our existing Comdisco equipment lease facility by
$20.0 million to a total of $30.0 million. In June 1999, we entered into a
$10.0 million senior secured credit facility with Goldman Sachs Credit Partners
L.P.
In the last three years, we completed 14 strategic acquisitions, the most
significant of which was the 1998 acquisition of substantially all of the
assets of Tie Communications at a cost of approximately $51.4 million. With the
acquisition of these assets, we accelerated our growth by adding 24 new markets
and 452 employees with experience in voice products and services. This
acquisition also gave us the opportunity to cross-market our data products and
services, including Enterprise Network Services, to approximately 77,000
customers that purchased products or services from Tie in the past.
We began offering Enterprise Network Services in December 1997 and have now
entered into long-term Enterprise Network Services contracts with 23 customers
with an aggregate of approximately 1,805 computers and telephones. We expect
these contracts to provide us with approximately $2.8 million in annual
contract revenue, and over their terms we expect them to produce total revenue
of approximately $16.2 million. Although these contracts may be canceled by the
customer, exposing us to risks related to remarketing our equipment,
cancellation requires payment of a fee designed to reimburse us for all or
substantially all of our costs incurred in entering into the contract. See
"Risk Factors--There Are Credit Risks Associated with Our Leasing Equipment and
with Enterprise Network Services."
24
<PAGE>
Description of Financial Components
We classify our business into five segments: data services, voice services,
Enterprise Network Services, data products and voice products.
Revenue and cost of sales. The following chart outlines the components of
revenue and the related cost of sales (excluding depreciation), by segment:
Revenue Cost of Sales (excluding depreciation)
------------------------------------ -----------------------------------
Data Services
Professional Services . engineer and technician
web design and hosting and network compensation and benefits
planning, design, maintenance, and
monitoring
. leased line costs of connecting
a customer to a long distance or
local network
Network Services
frame relay (ATM and IP
switching), Internet access and
web hosting
. capacity charges that long
distance and local carriers,
Internet service providers and
others impose to use their
equipment and network
----------------
Voice Services
Professional Services
network planning, design, . engineer and technician
maintenance and monitoring compensation and benefits
. leased line facilities' costs of
connecting a customer to a long
distance or local network
Network Services
long distance service, local
telephone service and public phone
service
. capacity charges that long
distance and local carriers,
Internet service providers and
others impose to use their
equipment and network
----------------
Enterprise Network Services . all the costs associated with
long-term contracts (typically all the data and voice products
three to five years) under which and services described in this
we own, manage and are table
responsible for all or a portion
of the network inside our
customers' premises
----------------
Data Products . cost of data network equipment
sale and installation of network . costs of installation, including
equipment technician compensation and
benefits
----------------
Voice Products
sale and installation of network . cost of voice network equipment
equipment . costs of installation, including
technician compensation and
benefits
25
<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. However, we expect these expenses to decline as
a percentage of our revenue as we expand our customer base and begin selling
additional products and services in each of our markets.
. 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 soliciting potential customers such as telemarketing,
brochures, 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 costs associated with the development, support
and enhancements of our operational support software platform, to the
extent these costs are not capitalized.
Depreciation and amortization expense includes depreciation of property,
network and equipment (over two to five years), including our assets located
inside our customers' premises provided under Enterprise Network Services
contracts. Amortization expense includes the amortization of intangible assets
(over three to ten years), primarily goodwill (over ten years), that result
from business acquisitions. We had $49.0 million of goodwill, net of
amortization, on March 31, 1999. Depreciation and amortization will increase as
we install additional multi-service data and voice switching platforms and
expand our Enterprise Network Services business and as a result of amortization
of intangibles expected to result from future acquisitions.
Interest expense includes interest expense on our debt, including capital
leases. The majority of the interest expense is related to our 13% Senior Notes
which mature in 2008. Interest expense will increase as we continue to finance
a significant portion of our capital expenditures, including our purchase of
Cisco Systems' multi-service data and voice switches and additional Cisco
Systems equipment under the proposed $103.5 million equipment facility with
Cisco Systems Capital Corporation.
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.
As a result, depreciation and amortization are not factors used by management
in evaluating the operating performance of our segments.
The percentages shown in the following table with respect to revenue
represent revenue for each business segment as a percentage of total revenue.
Other percentages shown, with the exception of totals, are a percentage of
revenue for the related segment.
26
<PAGE>
<TABLE>
<CAPTION>
March 1,
1996
through Year ended December 31, Three Months March 31,
December 31, ------------------------ -----------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Data services.......... $ -- -- % $ 586 6% $ 3,620 6% $ 808 12% $ 2,119 7%
Voice services......... 58 59 2,203 22 22,299 36 883 14 12,458 41
Enterprise Network
Services.............. -- -- 6 -- 2,003 3 116 2 733 2
Data products.......... 40 41 6,657 65 20,892 34 4,462 68 7,162 24
Voice products......... -- -- 758 7 12,786 21 254 4 8,009 26
------- ----- ------- --- ------- --- ------ --- ------- ---
Total revenue.......... $ 98 100% $10,210 100% $61,600 100% $6,523 100% $30,481 100%
======= ===== ======= === ======= === ====== === ======= ===
Cost of sales excluding
depreciation:
Data services.......... $ -- -- % $ 51 9% $ 1,509 42% $ 361 45% $ 1,132 54%
Voice services......... 40 69 1,224 56 13,383 60 499 57 7,208 58
Enterprise Network
Services.............. -- -- 3 50 695 35 55 48 142 19
Data products.......... 39 99 5,601 84 18,642 89 3,722 84 6,367 89
Voice products......... -- -- 490 65 9,474 74 161 46 5,225 65
------- ------- ------- ------ -------
Total cost of sales ex-
cluding depreciation.. $ 79 81% $ 7,369 72% $43,703 71% $4,798 74% $20,074 66%
======= ======= ======= ====== =======
Gross margin before de-
preciation:
Data services.......... $ -- -- % $ 534 91% $ 2,111 58% 447 55% $ 987 46%
Voice services......... 17 31 979 44 8,916 40 384 43 5,250 42
Enterprise Network
Services.............. -- -- 3 50 1,308 65 61 52 591 81
Data products.......... 1 1 1,057 16 2,250 11 740 16 795 11
Voice products......... -- -- 268 35 3,312 26 93 54 2,784 35
------- ------- ------- ------ -------
Total gross margin
before depreciation... $ 18 19% $ 2,841 28% $17,897 29% $1,725 26% $10,407 34%
======= ======= ======= ====== =======
</TABLE>
Summary Quarterly Financial Data
The table below presents unaudited quarterly statement of operations data for
each of the last nine quarters through March 31, 1999. This information has
been derived from unaudited financial statements that have been prepared on the
same basis as the audited financial statements contained elsewhere in this
prospectus and, in our opinion, includes all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
information. You should read these unaudited quarterly results along with our
consolidated financial statements and the accompanying notes appearing later in
this prospectus. The operating results for any quarter are not necessarily
indicative of results for any future periods.
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------- ------------------------------------- ---------
1st 2nd 3rd 4th 1st 2nd 3rd(1) 4th 1st
------- ------- ------- ------- ------- -------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Operating
Data:
Revenue................. $ 598 $ 2,020 $ 3,144 $ 4,448 $ 6,523 $ 7,982 $ 22,316 $ 24,779 $ 30,481
Cost of sales excluding
depreciation........... 378 1,359 2,209 3,423 4,798 5,772 14,717 18,416 20,074
Selling, general and
administrative......... 1,188 1,974 3,052 4,769 6,062 7,710 15,507 18,583 23,337
Depreciation and
amortization........... 223 233 296 701 762 1,191 2,646 2,894 2,863
------- ------- ------- ------- ------- -------- -------- -------- ---------
Operating loss......... (1,191) (1,546) (2,413) (4,445) (5,099) (6,691) (10,554) (15,114) (15,793)
Net loss................ $(1,086) $(1,586) $(2,817) $(4,166) $(5,111) $(11,169) $(15,355) $(18,941) $(20,687)
======= ======= ======= ======= ======= ======== ======== ======== =========
EBITDA(2)............... $ (968) $(1,313) $(2,117) $(3,744) $(4,337) $ (5,500) $ (7,908) $(12,220) $(12,930)
======= ======= ======= ======= ======= ======== ======== ======== =========
</TABLE>
27
<PAGE>
- --------
(1) On August 1, 1998, we completed our largest acquisition to date when we
acquired substantially all of the assets of Tie Communications, Inc. for
$51.4 million, including $40.0 million in cash plus other costs and assumed
liabilities.
(2) As used in this prospectus, EBITDA consists of earnings before interest
(net), income taxes, depreciation and amortization and other income
(expense). EBITDA is a measure commonly used to analyze companies on the
basis of operating performance. It is not a measure of financial
performance under GAAP and should not be considered as an alternative to
net income (loss) 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 used by other companies.
We have generated greater revenue in each successive quarter since our
inception, reflecting increases in the number of customers, mainly due to
acquisitions, and in sales to existing customers. Cost of sales excluding
depreciation has increased in every quarter, reflecting product and service
costs directly associated with revenue. Our selling, general and administrative
expenses have increased in every quarter and reflect sales and marketing costs
such as sales commissions, and the development and growth of regional and
corporate support staff. Depreciation and amortization has increased in each
quarter through December 31, 1998. The increases in depreciation are due to the
purchase of property, network and equipment inside and outside our customers'
premises associated with our expansion from one to 35 markets as of March 31,
1999, and due to the deployment of our multi-service data and voice switching
platform in three markets. The increases in amortization are due to the
increase in goodwill and other intangible assets resulting from the completion
of 13 acquisitions through March 31, 1999. We have also experienced increasing
operating and net losses every quarter. However, net loss has declined as a
percentage of revenue from 182% of revenue for the first quarter of 1997 to 68%
of revenue for the first quarter of 1999.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1999
Revenue for the first quarter of 1999 was $24.0 million greater than revenue
for the first quarter of 1998. The increase in revenue was primarily due to the
addition of 27 new markets from 1998 to 1999. The increase in markets resulted
from acquisitions made between the end of the first quarter of 1998 and the
first quarter of 1999. The increase in revenue was also due to internal growth
of our operations and sales staff. Our most significant acquisition was the
acquisition of the assets of Tie Communications, which occurred in the third
quarter of 1998. The Tie acquisition contributed to the sizable increase in
voice product revenue and voice services revenue. The increase in data products
was primarily a result of the development and growth of existing markets and a
result of the expansion of data services markets from eight at March 31, 1998
to twelve at March 31, 1999. As a result of the Tie acquisition and our
continued strategy to increase our service offerings, our overall revenue mix
shifted from approximately 28% in services for the first three months of 1998
to 50% in services for the first three months of 1999.
Cost of sales excluding depreciation increased $15.3 million from the first
quarter of 1998 to the first quarter of 1999 and declined as a percentage of
total revenue from 74% for the first quarter of 1998 to 66% for the first
quarter of 1999. This decline as a percentage of total revenue is a reflection
of the decline in cost of product sales excluding depreciation, as a percentage
of product revenue, from 82% for the first quarter of 1998 to 76% for the first
quarter of 1999. This decrease as a percentage of product revenue is due to an
increase in sales of voice products which have a lower related cost of sales
excluding depreciation than data products. Cost of service sales excluding
depreciation as a percentage of service revenue increased from 51% for the
first quarter of 1998 to 55% for the first quarter of 1999. The increase in
cost of service sales excluding depreciation as a percentage of service revenue
was primarily due to an increase in voice services, primarily long-distance
services which have a higher related cost of sales excluding depreciation.
Selling, general and administrative expenses increased $17.2 million from the
first quarter of 1998 to the first quarter of 1999, but decreased as a
percentage of revenue from 93% to 77%. We expect selling, general and
administrative expenses to continue to decrease as a percentage of
28
<PAGE>
revenue as we expand our customer base and begin selling additional products
and services in each of our markets.
The $17.2 million increase was primarily a result of:
. the expansion from eight to 35 markets;
. the completion of five acquisitions (four in the last nine months of
1998 and one in the first three months of 1999);
. an increase from 209 employees at March 31, 1998 to 1,080 at March 31,
1999 (452 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
$11.2 million or 48% of total selling, general and administrative
expenses for the three months ended March 31, 1999.
Depreciation and amortization expense increased approximately $2.1 million
from the first quarter of 1998 to the first quarter of 1999. This increase is a
direct result of increases of $23.7 million in property, network and equipment,
a $44.5 million increase in goodwill and a $1.7 million increase in other
intangible assets as a result of the five acquisitions completed between March
31, 1998 and March 31, 1999. As of March 31, 1999 we had $49.0 million in
goodwill, net of amortization, which is being amortized over ten years. The
increase in property, network and equipment is largely due to:
. the expansion from eight to 35 markets;
. the development and deployment of our multi-service data and voice
switching platform 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 $5.9 million primarily as a
result of the April 1998 issuance of $160.0 million in principal amount of our
13% Senior Notes and warrants to purchase 864,000 shares of common stock.
Approximately $400,000 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 indebtedness from acquisitions, as well as
increased indebtedness under our equipment financing facilities with Comdisco
and Sun Financial Group, Inc. due to property, network and equipment purchased
for our networks both inside and outside our customers' premises.
Interest expense will increase as we continue to finance a significant
portion of our capital expenditures, including equipment purchased for
installation at our customers' offices in connection with the provision of
Enterprise Network Services.
Interest income increased approximately $919,000 primarily as a result of the
temporary investment of the remaining proceeds of the offering of our 13%
Senior Notes and warrants and the proceeds from the sale of convertible
preferred stock in March 1999, prior to using the proceeds in our business.
Other income (expense), which consists of miscellaneous other non-operating
types of income and expenses, increased by approximately $82,000 from a net
other income of approximately $10,000 for the first quarter of 1998 to a net
other income of $92,000 for the first quarter of 1999.
29
<PAGE>
Net loss increased approximately $15.6 million as a result of the factors
discussed above.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998
Revenue increased by $51.4 million in 1998 to approximately six times 1997
revenue. The increase in revenue was primarily due to our expansion from eight
markets at December 31, 1997 to 32 markets at December 31, 1998, as a result of
the six acquisitions we completed during the year. The increase in revenue was
also due to internal growth of our operations and sales staff. The most
significant acquisition was the acquisition of the assets of Tie, which
occurred in the third quarter of 1998. The Tie acquisition contributed most of
the sizable increase in voice product revenue and an even greater increase in
voice services revenue. The increase in data products was 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 service offerings, our overall revenue mix shifted from
approximately 27% in services in 1997, to 45% in services in 1998.
Cost of sales excluding depreciation increased $36.3 million from 1997 to
1998. While it declined slightly as a percentage of total revenue from 72% in
1997 to 71% in 1998, cost of service sales excluding depreciation as a
percentage of service revenue increased from 46% in 1997 to 56% in 1998. The
increase as a percentage of service revenue was primarily due to a shift in
service mix to services such as long-distance which have a higher related cost
of sales excluding depreciation. Cost of product sales excluding depreciation,
as a percentage of product revenue, remained relatively constant, increasing
from 82% in 1997 to 83% in 1998.
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. 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 eight to 32 markets;
. the completion of six acquisitions, including the assets of Tie;
. an increase from 165 employees at December 31, 1997 to 877 at December
31, 1998 (452 of which were hired as a result of the Tie acquisition);
and
. continued growth of the support services organization required for
expanding field operations, which accounted for approximately $20.2
million or 42% of total selling, general and administrative expenses for
1998.
Depreciation and amortization expense increased approximately $6.0 million
from 1997 to 1998. This increase was a direct result of an increase of $22.7
million in property, network and equipment from 1997 to 1998 and an increase in
goodwill (before 1998 amortization) of $42.6 million and other intangible
assets of $1.7 million as a result of the six acquisitions completed in 1998.
As of December 31, 1998 we had $46.5 million in goodwill, net of amortization,
which will be amortized over the next ten years. The increase in property,
network and equipment is largely due to:
. the expansion from eight to 32 markets;
. the development and deployment of our multi-service data and voice
switching platform in three markets;
. continued development of our operational support system;
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. 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 primarily as a
result of the April 1998 issuance of our $160 million in principal amount of
13% Senior Notes and warrants to purchase 864,000 shares of common stock.
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 indebtedness from acquisitions, as well as
increased indebtedness under our equipment financing facilities with Comdisco
and Sun Financial Group, Inc. due to property, network and equipment purchased
for our networks both inside and outside our customers' premises.
Interest expense will increase as we continue to finance a significant
portion of our capital expenditures, including equipment purchased for
installation at our customers' offices in connection with the provision of
Enterprise Network Services.
Interest income increased approximately $4.4 million primarily as a result of
the temporary investment of the proceeds of the offering of our 13% Senior
Notes and warrants, prior to the use of these proceeds in our business.
Other income (expense) increased from net other expense of $156,000 in 1997
to net other expense of $248,000 in 1998. Other income (expense) primarily
consisted of losses on disposal of assets and miscellaneous other non-operating
types of income and expense.
Net loss increased approximately $40.9 million as a result of the factors
discussed above.
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 two 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 two to eight markets;
. the completion of five acquisitions;
. an increase from 22 employees at December 31, 1996 to 165 at December 31,
1997; and
. the building of our support services organization to support anticipated
growth in field operations which accounted for approximately $7.3 million
or 67% of total selling, general and administrative expenses for 1997.
Depreciation and amortization expense increased approximately $1.4 million
from 1996 to 1997. This increase was a result of assets purchased and developed
as part of our expansion from two to eight markets and capitalized costs
associated with the development of our operational
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<PAGE>
support system. In addition, an increase in goodwill derived from the five
acquisitions we completed in 1997 resulted in 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 by 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 primarily consisting
of losses on disposal of assets and miscellaneous other non-operating types of
expenses.
Net loss increased approximately $9.1 million as a result of the factors
discussed above.
Liquidity and Capital Resources
Since inception, we have funded our net losses and capital expenditures
through financing activities as outlined in the following table in addition to
borrowings under our credit facilities. In the table below, net proceeds equals
the gross proceeds of the offering less advisors' fees, underwriting discounts
and other expenses associated with the offering.
<TABLE>
<CAPTION>
Securities Sold Gross Proceeds Net Proceeds
-------------------------------------------------- -------------- ------------
<S> <C> <C>
Initial sale of 3,750,000 shares of common stock
to founders
(April through October 1996)..................... $ 450,000 $ 450,000
3,500,000 shares of common stock and warrants to
purchase 1,750,000 shares (December 1996 through
February 1997)................................... 7,000,000 6,295,794
3,410,000 shares of common stock and warrants to
purchase 1,705,000 shares (October through
November 1997)................................... 17,050,000 15,339,787
13% Senior Notes and warrants to purchase 864,000
shares (April 1998).............................. 160,000,000 152,377,955
Sale of 800,000 shares of Series A Convertible
Preferred Stock and warrants to purchase a
maximum of 1,000,000 shares (March 1999)......... 20,000,000 19,300,000
------------ ------------
Total funds raised............................. $204,500,000 $193,763,536
============ ============
</TABLE>
Our principal uses of cash are to fund working capital requirements, capital
expenditures, business acquisitions, operating losses and interest expense. We
expect that our expansion will require additional capital expenditures and
direct operating costs and expenses. As a result, we expect to incur net losses
for the next 36 months. However, if our customer base grows and we are
successful in offering all of our data services and products, we believe
revenue will increase in larger proportion than operating expenses.
As of March 31, 1999, we had current assets of $79.9 million, including cash
and cash equivalents of $10.4 million, short-term investments of $15.9 million
and restricted cash of $20.8 million, and working capital of $22.4 million. In
addition, we also had $32.0 million in non-current restricted cash. The
majority of our restricted cash, along with the interest we earn 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 debt payments, capital investments, acquisitions and operations of
the business.
Cash Flows From Operating Activities. Operating activities used cash of
approximately $13.5 million for the first quarter of 1999, $28.7 million during
1998 and $6.7 million during 1997. Cash
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<PAGE>
used in operating activities for the first quarter of 1999 was primarily due to
the net loss of $15.6 million and an increase of $2.3 million in trade accounts
receivable. Those uses of cash were partially offset by an increase in accrued
interest of $5.2 million, depreciation and amortization of $2.9 million and
other non-cash expenses and changes in working capital. While cash used by
operating activities increased by $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 47% of revenue in 1998 compared to 66% of revenue in 1997. 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 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 $20.6
million during the first quarter of 1999, $94.6 million during 1998 and $11.6
million during 1997. Cash used in investing activities during the first quarter
of 1999 primarily consisted of short-term investments and restricted cash of
$17.3 million, business combinations of $1.5 million and capital expenditures
of $1.1 million. An additional $2.3 million of capital expenditures were
financed under our financing facilities. Cash used in investing activities
during 1998 consisted primarily of restricted cash investments in U.S.
government securities of $50.9 million in connection with the sale of our 13%
Senior Notes, acquisitions of $42.4 million ($40.0 million of which was used
for the Tie acquisition) 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 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. 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.
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, 24,925
shares of our common stock and assumed liabilities of $2.4 million. Upon the
completion of the sale of our convertible preferred stock and related warrants
in March 1999, $1.5 million of the notes payable were paid. Upon the completion
of an equity or debt financing with net proceeds in excess of $25.0 million, an
additional $2.0 million of the notes payable will become due. It is anticipated
that they will be repaid with a portion of the proceeds of this offering.
In April 1999, we completed the acquisition of BSSi Innovations, Inc.
("BSSi"). BSSi was a provider of data network integration services based in
Chicago, Illinois. The purchase price consisted of $455,000 in cash, 37,000
shares of our common stock and assumed debt of approximately $525,000. An
additional 10,000 shares may be issued if certain financial conditions are met.
In June 1999, we signed a letter of intent to purchase the assets of a
provider of data network integration services based in Dallas, Texas. The
purchase price is expected to consist of $1,025,000 in cash and $900,000 in
shares of common stock (valued at the initial public offering price). We expect
to consummate this purchase in the third quarter.
Cash Flows From Financing Activities. Financing activities provided cash of
approximately $19.0 million during the first quarter of 1999, $148.3 million
during 1998 and $15.9 million during
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<PAGE>
1997. Cash provided by financing activities during the first quarter of 1999
consisted of approximately $19.3 million in net proceeds from the sale of our
convertible preferred stock and $1.0 million in new borrowings, which was
partially offset by approximately $1.3 million in payments on long-term
borrowings. Cash provided by financing activities during 1998 consisted of
approximately $152.4 million in net proceeds from the sale of our 13% Senior
Notes and warrants, which was partially offset by 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.
In November 1997, we entered into an agreement with Comdisco, Inc. through
which we can receive up to $50.0 million of equipment lease financing. At
December 31, 1998, $10.0 million of financing was available to us under this
facility. As a result of the sale of our convertible preferred stock and
warrants, an additional $20.0 million became available under the facility. As
of March 31, 1999, a total of approximately $10.2 million had been utilized and
$19.8 million was available. This facility will expire on June 30, 2000. The
remaining $20.0 million will become available upon the satisfaction of
additional conditions. See "Description of Indebtedness."
On April 2, 1998, we completed the offering of our 13% Senior Notes, in the
aggregate principal amount of $160.0 million and warrants to purchase 864,000
shares of common stock. At the closing, we invested $56.8 million of the
proceeds from that offering in U.S. government securities which were placed in
an escrow account and pledged to secure the 13% senior notes. The scheduled
maturity of principal and interest on the securities in the escrow account will
be sufficient to pay the first six interest payments on our 13% Senior Notes,
of which two have been made as of April 1, 1999. We received approximately
$95.6 million after deducting offering costs of approximately $7.6 million and
funding the escrow account. The 13% Senior Notes contain certain covenants that
restrict our ability to incur additional debt and make certain payments,
including dividends. See "Description of Indebtedness."
In March 1999, we sold to affiliates of the Sandler Group 800,000 shares of
our convertible preferred stock and warrants to purchase a maximum of 1,000,000
shares of our common stock, for total consideration of $20.0 million. The
proceeds from the sale, net of related offering costs, were approximately $19.3
million. See "Certain Relationships and Related Transactions."
In April 1999, we executed a non-binding proposal letter with Cisco Systems
Capital Corporation for a six-year $103.5 million credit facility. This credit
facility will provide the financing for the purchase and installation of our
Cisco Systems, Inc. powered multi-service data and voice switching platform and
for other Cisco equipment. Under the terms of this proposal, Cisco Systems
Capital Corporation would also receive a warrant to purchase 575,000 shares of
our common stock. The warrant would have an exercise price of $20.00 per share
and be exercisable for three years from the date of issuance. The facility
would be available in three tranches over a three year period with quarterly
payments due over three years beginning one year from the availability of each
tranche.
In June 1999, we entered into, and borrowed the full amount under, a $10.0
million senior secured credit facility with Goldman Sachs Credit Partners L.P.
The proceeds of this facility will be used for working capital and other
general corporate purposes. We cannot re-borrow amounts repaid under this
facility. In connection with this facility, we also issued to Goldman Sachs
Credit Partners L.P. a warrant to acquire 375,000 shares of common stock at an
exercise price of $15.00 per share.
We have an agreement with Sun Financial Group, Inc., a subsidiary of GATX
Capital Corporation, that was used to finance our internal capital needs under
which $4.8 million was outstanding on March 31, 1999.
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<PAGE>
Future Capital Requirements. We have significant debt in relation to our
equity. At March 31, 1999, we had $174.9 million in debt and $41.2 million in
shareholders' deficit, which includes paid-in capital of $40.0 million, but
excluded $19.3 million in convertible preferred stock (which will be converted
into common stock upon the closing of this offering). Our business plan will
continue to require a substantial amount of capital to fund our expansion of
existing markets and acquisitions. Our business plan includes the following:
. deploying our multi-service data and voice switching platform in all of
our markets and providing an IP/ATM network connecting our switches;
. funding the purchase, installation and ownership of the internal networks
of our Enterprise Network Services customers (which includes providing
these customers with all necessary hardware, software, transmission
facilities and management, maintenance and monitoring services);
. continuing to develop customer care and sales organizations;
. continuing to develop our operational support system; and
. funding operating losses and debt service requirements.
In addition, we will continue to evaluate acquisitions and investments.
Completing additional acquisitions and investments could require us to spend a
portion of our cash, compel us to raise additional capital sooner and issue
additional capital stock.
We estimate that our existing funds at March 31, 1999, the proceeds of this
offering, our available borrowing and lease financing capacity and the expected
proceeds from the exercise of warrants expiring in July 1999 will be sufficient
to meet our capital requirements for the foreseeable future. We could, however,
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 would be successful in
raising sufficient debt or equity capital to fund our operations on a timely
basis or on acceptable terms. If needed financing were not available on
acceptable terms, we could be compelled to alter our business strategy, delay
or abandon some of our future plans or expenditures or fail to make interest
payments on our debt. Any of these events would have a material adverse effect
on our business, financial condition, results of operations and liquidity and
on the price of our common stock.
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 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-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
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<PAGE>
98-5 for fiscal year ended December 31, 1998. The amount of start-up costs
written off as a result of the adoption of SOP 98-5 was not material.
Impact of the Year 2000 Issue
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, the inability to process
transactions, send invoices, provide data and voice communications services 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 or modified.
Except for portions of two systems relating to order entry procedures which we
acquired in two of our more recent acquisitions (Tie and KCI), we believe that
our internal systems are year 2000 ready. We are in the process of upgrading
the two systems to make them year 2000 ready based upon the manufacturers'
recommendation, which should be completed by the third quarter of 1999.
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. We have not incurred any significant costs in identifying year 2000
issues other than the opportunity cost of the time spent by our personnel. We
do not anticipate any significant further costs in identifying year 2000
issues. Programming costs associated with upgrading the two non-ready systems
are estimated to be approximately $500,000. We have prepared contingency plans,
including manual order entry procedures and identification of potential
software modifications, in the event that there are delays in upgrading the
non-ready systems. Costs associated with our contingency plans, which we do not
believe would be material, 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 in internal systems or
information processing as a result of year 2000 issues. 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. Although we have taken steps that we believe should have identified
potential year 2000 issues, if some or all of our internal or external systems
and products fail, or if any critical systems are
36
<PAGE>
overlooked or are not year 2000 ready in a timely manner, there could be a
material adverse effect on our business, financial condition and results of
operations and on the price of our common stock. 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 or services 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 financial condition, results of
operations and on the price of our common stock. Potential risks include:
. the disruption of utility services resulting in a closure of the affected
facility for the duration of the disruption;
.the disruption of data or voice services we provide to our customers;
. the inability to process customer billing accurately or in a timely manner;
. the inability to provide accurate financial reporting to management,
auditors, investors and others;
. litigation costs associated with potential suits from customers and
investors; and
.delays in implementing other projects as a result of work by internal
personnel on year 2000 issues.
37
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BUSINESS
Introduction
We are a rapidly growing national provider of single-source data and voice
communications systems, services and solutions primarily to businesses with 25
to 500 employees. Inside our customers' premises we own communications networks
and provide professional services, such as the design, installation, management
and monitoring of those networks. Outside our customers' premises, we provide a
broad range of data and voice transport services. By operating networks both
inside and outside our customers' premises, and by offering a broad range of
data and voice products and services, we enable small and medium sized
businesses to use state-of-the-art communications solutions, including data and
voice networks based on Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based data and voice products and services to small and medium
sized businesses.
Internet Protocol
We offer each of our products and services on
a stand alone basis and are now also offering a Internet Protocol or IP is a
bundled communications solution under long-term standard industry method of
service agreements in which we own all or a identifying, tracking and
portion of the inside network and provide reassembling packets of
professional services inside our customers' information transferred over
premises and supply transport services outside multiple communications
their premises. This comprehensive solution, networks, including the
which we call Enterprise Network Services, Internet.
reduces our customers' capital needs, technical
staffing requirements and risks associated with
evolving communications technologies.
We are deploying Cisco Systems, Inc.'s multi-service data and voice switch in
each of the 35 metropolitan areas in which we currently operate and will also
deploy them in the 15 additional markets we expect to enter. We believe that
these next-generation switches will enable us to route our customers' external
communications traffic more efficiently and with lower capital outlay than with
traditional switches.
Over the last three years, we have:
.rapidly established a nationwide presence in 35 metropolitan areas;
.grown our customer base and provided our products and services to more than
33,000 customers since January 1, 1998, either directly or through businesses
we have
acquired;
.increased sales to $61.6 million in 1998 from $10.2 million in 1997 and
$98,000 in 1996;
ATM
.raised $204.5 million in debt and equity offerings;
Asynchronous Transfer Mode
.completed 14 acquisitions; (or ATM) is a high-speed
technology used to transport
information in packets. ATM
.designed and are in the process of assembling an packets are fixed in size and
IP/ATM network that will connect our multi- allow the transport of size-
service data and voice switching platforms and intensive and time-sensitive
carry our customers' traffic using ATM applications, such as video
technology; and voice, quickly and
efficiently.
.grown our employee base to more than 1,000 and
assembled an experienced sales, technical and
management team;
.devoted significant resources to the
development,
testing and implementation of our operational
support
system; and
.developed, tested and implemented our national network operations center.
38
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Our Market Opportunity
Sophisticated data and voice communications solutions such as IP-based
integrated networks, wide area networks, intranets, extranets, dedicated
Internet access and virtual private networks are becoming increasingly critical
to small and medium sized businesses. According to published reports:
. in 1999, the number of small businesses in the United States is expected
to exceed 7.4 million, of which 81% are expected to use personal
computers, and 59% are expected to have access to the Internet;
. there are more than 86,500 middle market companies (100 to 1,000
employees) in the United States which spend a total of $57.1 billion
annually on information system products and services;
. in 1998, total revenue from the sale of data products and services in
the United States was $98 billion, with data and network services
revenue accounting for approximately $22 billion;
. the value of goods and services sold worldwide through the Internet is
projected to increase from $12 billion in 1997 to over $400 billion in
2002; and
. Internet Protocol is expected to be the dominant protocol in 83% of
enterprise local area networks in 1999.
Small and medium sized businesses today generally purchase their
communications products and services from several, usually local or regional,
suppliers. We believe those potential customers will increasingly seek single-
source solutions providers for their communications needs because of:
. the cost and difficulty of maintaining in-house technical expertise,
including the technical expertise required to integrate IP-based data
and voice systems;
. the need for small and medium sized businesses to focus on and deploy
their limited capital resources in their core operations rather than on
network communications systems;
. the large number of manufacturers of data and voice equipment and the
variety of options and features available on these products;
. the opportunity for the Internet and electronic commerce to enhance the
reach and productivity of small and medium sized businesses;
. the large number of Internet and other communications service providers
and the variety of pricing options available from them; and
. rapid changes in and increasing complexity of computing, data networking
and voice products.
We believe that the national systems integrators, outsourcers, data
technology companies and telecommunications providers have not focused on
selling products and services to small and medium sized businesses and that
regional providers that do serve these businesses do not offer the same level
of sophisticated state-of-the-art products and services as national providers.
In addition, we believe that these regional providers do not offer a complete
package of integrated data and voice systems, services and solutions to these
small and medium sized businesses.
Our Solutions
We offer advanced communications solutions--ones that have traditionally been
readily available only to large enterprises--to small and medium sized
businesses. The combination of our focus on this market and our national scale
enables us to design sophisticated data and voice systems and solutions
tailored to these small and medium sized businesses.
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<PAGE>
Our services utilize the data and voice networks, inside and outside of our
customers' enterprises.
. Inside our customers' enterprises we own networks and design, install,
manage, maintain and monitor our customers' networks (local area
networks, wide area networks, computers, private branch exchanges, key
systems, handsets, etc.). The IP-based integrated data and voice network
solutions that we provide (including internal voice over IP networks),
and which we expect will become a larger portion of our business, can
significantly reduce overall network administration and capital costs
for our customers.
. Outside our customers' enterprises, we provide data transport services,
Internet access, long-distance services and local phone services. As we
build our IP/ATM network, we will migrate many of these services to our
own network.
With one of our solutions, Enterprise Network Services, or ENS, we own all or
a portion of the data and voice communications systems inside our customers'
enterprises. Using these inside networks, we provide comprehensive data and
voice communications solutions to our customers that reduce their capital
expenditures, technical staffing requirements and risks associated with quickly
evolving communications technologies.
Because we provide solutions both inside and outside our customers'
enterprises, we are an "Enterprise Network Carrier" and allow our customers to
focus their efforts on their core businesses.
Our Business Strategy
Our business strategy is designed to generate a broad source of stable and
recurring revenue. In implementing this strategy, we will:
Target Small and Medium Sized Businesses. The small and medium sized
business market has historically been underserved by national systems
integrators, outsourcers, data technology companies and telecommunications
providers, even though many small and medium sized businesses demand high-
performance communications solutions. Because we are focused on this
market, we have developed systems, services and solutions that are well
suited for the financial resources, growth characteristics, technological
sophistication and other needs of small and medium sized businesses.
Provide Sophisticated, One-Stop, Integrated Communications Solutions.
Most small and medium sized businesses do not have the internal capability
or capital required to deploy, fully utilize and effectively manage
evolving data and voice systems. We are increasingly able to respond to
substantially all of our customers' communications needs and offer
equipment leasing and maintenance contracts. This comprehensive approach is
designed to reduce the complexity and expense of owning and operating
communications networks for our customers. Our solutions are designed to
facilitate the migration of traditional communications systems to
integrated IP-based data and voice networks.
Own the Communications Network Inside Our Customers' Enterprises. Through
our Enterprise Network Services, we seek to own the data and voice networks
inside our customers' premises and provide these networks to our customers
along with management, maintenance and monitoring services under long-term
service agreements. This approach is designed to:
. allow our customers to focus on their core business and outsource
their communications needs;
. capture a large portion of our customers' communications spending;
. reduce customer turnover;
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. generate high-margin revenue; and
. enhance our opportunities to sell additional products, systems and
service upgrades to existing customers.
Focus on Solutions-Based Selling. We market our systems and services,
such as Enterprise Network Services, as solutions to business problems
rather than as stand-alone products. We do so by marketing to the senior
management and principals of our potential customers, providing them with
an analysis of the benefits of our complete solutions.
Provide Preeminent, Local Customer Care. We strive to provide best-in-
care service by offering our customers immediate and around-the-clock
access to our customer care staff. Our approximately 240 customer care
specialists are trained in all aspects of the systems, services and
solutions offered in their market.
Capitalize on Our Operational Support System. Our operational support
system is designed to provide comprehensive, real-time customer information
and enable our customer support representatives to respond promptly to
inquiries, provide greater quality customer care, build customer loyalty
and identify opportunities to sell additional products and services.
However, we are still developing our operational support system, see "Risk
Factors--We Are Still Developing Our Operational Support System."
Our Growth Strategy
Our growth strategy is to:
Leverage Our Existing Customer Base. More than 28,000 businesses have
purchased voice services or products since January 1, 1998 from us or a
business that we have acquired. We are now marketing Enterprise Network
Services and our other advanced data products and services to certain of
these voice customers.
Deploy Our Cisco Powered Multi-Service Switching Architecture. We believe
that our Cisco powered switching platform provides similar functionality at
a lower capital and operating cost than traditional switching platforms.
Installing these switches should also improve our operating margins on our
transport services as we switch more of our customers' traffic ourselves.
Increase Our Higher-Margin Service Revenue. We intend to increase the
portion of our revenue that is derived from providing services, especially
professional services, Enterprise Network Services, and long-term
maintenance agreements, each of which has a higher gross margin than
systems and product sales.
Sell IP-based Integrated Network Solutions. We currently sell IP-based
integrated network solutions, including enterprise systems, data services
and internal voice over IP services, and expect that an increasing portion
of our sales will be derived from these systems and services in the future.
These products are attractive to our customers because:
.consolidation of enterprise data and voice networks can reduce staffing
needs and
operational complexity;
.IP-based products can be managed and configured centrally;
. data and voice communications services delivered over facilities
using an IP/ATM network generally are less expensive; and
. these products permit the migration of core applications (such as e-
mail and e-commerce) onto shared servers, reducing costs.
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Make Selective Strategic Acquisitions. We have made and will continue to
make acquisitions of companies that have experience in providing data and
voice systems, services and solutions and companies that will help us
expand our technical expertise and geographic coverage.
Our Products and Services
Our broad range of services, products and solutions include:
Data Services
. Data Network Professional Services. We design, install, manage, maintain
and monitor networks and systems including local area networks, wide
area networks and integrated IP-based networks.
. Internet Access. We currently offer Internet access services in Denver,
Des Moines and Santa Clara using interconnections with UUNet. We will
also be connecting our network to three primary Internet gateways
located at Herndon, VA, Santa Clara, CA, and Chicago, IL.
. Web Development and Hosting Services. We provide web site hosting
services, custom web site design, web site maintenance, ongoing
consulting services, and web site co-location.
. Electronic Commerce Solutions. We develop e-commerce applications for our
customers that enable them to sell products and services over the
Internet.
Frame Relay
. Virtual Private Networks. We are developing Frame relay is a high-
virtual private network services, which are speed service which
designed to provide secure transmission of our transports information
customers' data over the Internet. These in packets of varying
networks are the basis for intranet and sizes. Frame relay is a
extranet services. Intranets are business highly reliable digital
networks that rely on Internet-based service, efficient at
technologies to provide secure links between handling high-speed,
different offices of the same enterprise. "bursty" data over wide
Extranets expand the network to selected area networks.
business partners through secured links on the
Internet.
. Transport Services. We are developing an DSL
asynchronous transfer mode (ATM) service in Digital Subscriber Line
conjunction with our development and (or DSL) enables high-
deployment of a national IP/ATM network. We speed local data
also provide managed frame relay services to transport over the
our customers allowing them to transmit data, existing copper wire
voice and video traffic on a single digital infrastructure.
facility. We are currently testing various
types of digital subscriber line, or DSL,
services with a leading provider. Once we select a primary provider of
digital subscriber line services, we will begin providing those
transport services to our customers.
Voice Services
. Voice Network Professional Services. We provide voice network design,
maintenance and management, and assist our customers with adding and
moving phone lines.
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. Long Distance Services. We provide resold inter-state and intra-state
long distance services. We also provide enhanced services such as toll-
free calling services and travel card services.
. Local Phone Services. We provide resold local phone services.
Enterprise Network Services. We provide Enterprise Network Services solutions
under long-term service agreements in which we purchase, own, manage, maintain
and monitor all or a portion of the data and voice network inside our
customers' premises. Our customers pay a monthly service fee for our services
and the use of our network inside and outside their premises. We believe this
service offering to be particularly attractive to our small and medium sized
business customers because it:
. lowers their all-in cost of network ownership;
. reduces their risks and burdens associated with owning, operating and
maintaining data and voice networks;
. replaces costly and unpredictable capital outlays with stable and
predictible monthly expenses; and
. reduces their need to employ costly and difficult-to-recruit information
technology personnel.
Data Products. We are a provider of products from a large variety of
suppliers needed to create data networks including routers, hubs, bridges,
multiplexers, switches, servers, personal computers, and other equipment. We
also market integrated IP-based private branch exchanges, or PBXs, and a broad
range of other IP-based devices.
Voice Products. We are a provider of voice network products such as private
branch exchanges, key systems (smaller versions of PBXs), handsets, voice
messaging systems and call management software.
Equipment Leasing. In addition to the sale of these products and services, we
provide leasing options to our customers for their data and voice products. We
use our existing credit arrangements, or obtain new credit facilities, to
provide these options to our customers. We believe that these services enhance
our ability to attract customers and act as their single-source provider. We
also believe that these services allow us to maintain contact with customers
and provide us with the opportunity to sell additional products and services to
them.
We have limited experience providing certain of these services described
above. See "Risk Factors--We Have a Limited Operating History," "Risk Factors--
Enterprise Network Services is a New Business Area" and "Risk Factors--Voice
Over Internet Protocol is a New Technology."
Sales and Marketing
Since January 1, 1998, we have provided our products or services to more than
33,000 businesses, either directly or through businesses we have acquired. We
are selling all of our data systems and services in twelve of our markets and
our voice systems and services in all of our markets except Boise. We are
developing additional data, Internet 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 of our markets
by the end of 1999, and in all of our existing markets by the second half of
2002.
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Our Sales Team. We sell our systems, services and solutions through our staff
of approximately 200 sales representatives and approximately 450 technicians in
49 offices in our 35 markets. Our sales force is supervised by area and
regional 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 set
by us.
Selling Our Enterprise Network Services. We market our Enterprise Network
Services to the upper level management of our current and potential customers
as a business solution rather than a technology solution. Our sales teams seek
to demonstrate to the business decision makers the quantifiable benefits of not
owning their inside communications networks and allowing us to own and manage
the communications networks inside their premises. The analyses we use to
accomplish this task include:
. Vendor Cost-Efficiency Analysis. A field audit of a customer's past
communications bills for a variety of services from outside vendors
identifies the total cost for these services, vendor billing errors,
services billed but not provided, or services paid for but not utilized.
. Network Analysis. A physical audit of a customer's communications
network assets quantifies the capital a customer has invested in its
communications network and the costs associated with future upgrades to
the customer's network to meet its growing needs, and identifies design
flaws in the customer's network.
. Resource and Skill Set Analysis. An audit of internal resources required
to maintain the customer's communications network quantifies the labor
costs and identifies the skill sets required to achieve the customer's
stated business goals.
. Security Analysis. An audit of a customer's network determines the
vulnerability of a customer's proprietary information to hackers and
competitors.
. The Convergent Communications Solution. A custom-tailored proposal that
presents our advanced communications solution to the customer's data and
voice requirements.
As part of our solution, we conclude by providing a comparative "total cost of
ownership analysis." This analysis is an economic comparison of our solution to
the customer's current communications network and management approach. The
comparison includes the potential cash infusion the customer will receive from
the sale of its network assets to us and the potential reduction in expenses
associated with reducing personnel and outside vendor costs.
Marketing. We use a variety of marketing programs and media to raise
awareness of our systems, services and solutions and to generate sales leads
and opportunities. In addition, sales leads often come from our existing
satisfied customers. Our programs include:
. advertising in newspapers, magazines and trade journals;
. advertising on radio;
. sending direct mail solicitations;
. conducting business seminars;
. participating in trade shows;
. cross selling products and services to the more than 81,000 customers
who have previously purchased voice products or services from us or
companies we have acquired; and
. creating alliances and lead referral agreements with key vendors and
suppliers.
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One of our marketing alliances is with Strategic Healthcare Solutions, LLC
("SHS"). SHS is a network systems consulting firm that provides their
consulting services to the healthcare industry. Under our agreement, SHS
markets and sells our Enterprise Network Services to customers in the
healthcare industry.
Customers and Markets
Our Customers. We have provided our products and services to more than 33,000
customers since January 1, 1998, either directly or through businesses we have
acquired. Although our focus is on small and medium sized businesses, we have
provided products and services to local or regional offices of the following
nationally recognized entities:
<TABLE>
<S> <C>
American Stores, including: Federal Bureau of Land Management
Acme Markets Franklin Covey
Jewel Osco Kiewit Construction
Lucky Stores Motorola Employees Credit Union--West
Osco Drug State of Georgia Board of Regents (Peachnet)
Save-on Drug Stores
</TABLE>
Our Markets. We currently provide our products and services in 35
metropolitan areas and we intend to expand into an additional 15 markets over
the next two years. Our existing markets are:
[MAP APPEARS HERE]
Customer Care and Operations Support
Our Customer Care Staff. Our sales and customer support functions are highly
integrated. Our 240 customer care specialists are trained in all aspects of the
systems, services and solutions offered in their markets. Our 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.
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Commitment to Superior Service. In order to provide superior service we:
. Act Immediately. Our employees are specialists who will begin
troubleshooting immediately to resolve any problem and can often reach a
conclusion during the initial contact. Our national customer care center
provides additional around-the-clock support, 365 days a year and the
seven regional customer care centers are staffed nine hours a day, five
days a week to handle the anticipated workload.
. Provide a Single Point of Contact. Our customers can call a single toll-
free number for assistance in solving most problems. Because our
customer care teams are trained in the entire suite of communication
systems and services we offer, they are able to assist customers in
solving problems that may involve more than one product or service.
Our Operational Support System. Our operational support system is designed to
integrate all of our internal support services. This integration will permit
customer care, sales engineering, service management, service delivery,
accounting and inventory sales management personnel to access a single customer
record. Accordingly, a customer will be able to get support for any of our
products and services with one phone call. By providing comprehensive, real-
time customer information, this system is designed to enable our customer
support representatives to respond faster to inquiries, provide greater quality
customer care, and identify more opportunities to sell additional products and
services.
We are in the process of adding additional functionality to our operational
support system, including improved order entry systems, dispatch and other
logistics functions, improved trouble ticket systems and contract management
features. These enhancements are designed to increase our efficiency in
supporting our existing voice product and service customers and to increase our
sales of data products and services to them. See "Risk Factors--We Are Still
Developing Our Operational Support System."
National Network Operations Center. Our national network operations center
provides customer support and proactive and fully redundant network monitoring
systems. These systems provide us the ability to monitor all types of network
and customer elements installed in the field. We currently monitor
approximately 3,500 devices, including routers, hubs, servers, switches,
desktop computers, printers and other peripheral devices and track over 12,500
elements of those devices on a continuous basis. For these devices, our system
provides:
. logical depictions of our customers' networks for quick isolation of
trouble;
. graphical presentations of equipment locations by bay, shelf and card
for quick identification;
. remote connection and testing capability; and
. network administration to manage bandwidth and configure and manage
equipment.
Network Architecture
Our Cisco Powered Multi-Service Data and Voice Switching Platform. Our multi-
service data and voice switching platform, which we call our Enterprise Point
of Presence, or ePOP, is designed to carry data and voice 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 data and voice service aggregation point for our customers and a
dissemination point to facilities-based providers of data transport, Internet
services and voice services. This architecture is more efficient and requires
substantially less capital to deploy than the combination of traditional
switches necessary to carry the same types of traffic.
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We have already installed and are carrying customer data and voice traffic
over three ePOPs. We designed, assembled and installed these three ePOPs by
combining a number of independent components manufactured by other companies.
These ePOPs supported our initial launch of our integrated data and voice
services in these markets. This initial launch enabled us to more rapidly build
our ENS sales effort, coordinate our customer care activities, and roll out our
integrated operational support system.
During the next 36 months, we intend to deploy 50 ePOPs using Cisco Systems,
Inc.'s multi-service data and voice switches. We believe that these switches
will offer the same functionality as traditional switches at a lower capital
and operating cost and allow us to integrate the capabilities of IP and ATM
onto our ePOP. Cisco will support our ePOP deployment schedule by providing us
with additional personnel and professional services. Our proposed agreement
with Cisco will also make us a Cisco Powered Network Partner, which is a
designation that recognizes a select group of service providers who are
committed to providing high-performance reliable networking services. In
addition, we have signed a non-binding letter of commitment with Cisco Systems
Capital Corporation to obtain financing for the purchase and installation of
the additional ePOPs and the purchase of other Cisco equipment. See "Risk
Factors--Our Switching Platform Has a Very Limited Performance History," and
"Description of Indebtedness--Cisco Systems Capital Corporation Facility."
Planned IP/ATM Network. Our network will connect our ePOPs and carry our
customers' traffic using Internet Protocol, asynchronous transfer mode
technology and other traditional transmission methods. We will lease fiber
capacity from other carriers and install our equipment at the connection
points. Our IP/ATM network will be connected to three regional Internet
aggregation gateways located in Herndon, VA, Chicago, IL, and Santa Clara, CA.
These gateways will provide redundant connectivity to the Internet, improve
throughput speed and allow private and public connections over the same
customer connection. We expect to have 16 ePOPs connected via our IP/ATM
network during 1999.
We carry voice calls on the local area networks, wide area networks, virtual
private networks and the networks inside the premises of our Enterprise Network
Services customers through the use of Internet Protocol. We plan to use
Internet Protocol to carry all of our customers' voice calls on our network in
the future. Traditionally, voice calls have been transmitted by keeping a
circuit or line between the people on the call constantly open. This method of
transmitting voice calls is inefficient because during conversations there are
pauses and periods of silence when the capacity of the circuit is not being
used. Voice over Internet Protocol transmission is designed to eliminate this
inefficiency. This technology breaks the voice conversation into "packets" of
information and sends those packets over transmission lines individually. The
packets are then re-assembled at or near their destination, so the parties are
able to have a conversation. When the parties on the call pause or are silent,
there are no packets transmitted and the transmission lines can be used for
other purposes. This technology promises to substantially reduce the cost of
carrying voice conversations. However, there are risks associated with adopting
this new and developing technology. See "Risk Factors--Voice Over Internet
Protocol is a New Technology."
Acquisitions
Since our inception, we have completed 14 acquisitions that 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, thereby creating
new sales opportunities. We expect to continue to make selective acquisitions
to expand our expertise and broaden our geographic coverage.
The key factors we have and will continue to use in evaluating potential
acquisitions are:
. cross-selling and up-selling opportunities;
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. size and quality of the acquired customer base;
. acceleration of our new market entry or expansion of existing markets;
. additions to our sales force and technical personnel;
. costs of acquisition; and
. historical and projected financial performance.
The Tie Acquisition. On August 1, 1998, we completed our largest acquisition
to date when we acquired substantially all the assets of Tie Communications 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 452 employees with experience in voice
products and services. The strong consultative sales organization we acquired
from Tie, which remains largely intact, used a marketing approach similar to
our own. Their expertise in selling and servicing complex voice products
complements our historical strength in data networking products and services.
The acquisition is also attractive because of the opportunity to market our
data systems, services and solutions to Tie's voice customers.
Market Environment
Although several larger data and voice companies have entered or will enter
our market, we believe that we will be successful because:
. we have expertise in providing integrated data and voice systems,
services and solutions specifically tailored to the needs of small and
medium sized business;
. we provide broad product and service offerings with a suitable solution
and price point for nearly every business in our target market;
. we have already established a sizeable customer base and a well trained
technical staff;
. we are focused on providing extremely high quality customer service and
technical support;
. we are willing to lease our network solutions to our customers; 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.
We expect that we will face growing competition from a number of systems
integrators, outsourcers, data technology companies and telecommunications
providers, among others. Although we do not believe that a significant number
of other companies are providing Enterprise Network Services solutions or a
comparable range of data and voice systems, services and solutions to small and
medium sized businesses, we do face intense competition in each of our
individual product and service offerings. See "Risk Factors--We Face
Competition From Many Sources."
Regulatory Environment
Overview. Some of our offerings are subject to federal and state regulation.
At the federal level, we are subject to the Communications Act of 1934 and the
regulations of the Federal Communications Commission (FCC) to the extent that
we provide interstate and international telecommunications services. At the
state level, we are subject to state laws and the jurisdiction of the state
public utility commissions. The degree of regulation varies from state to
state.
The regulation of telecommunications services at all levels is in flux in the
aftermath of the Telecommunications Act of 1996, which comprehensively amended
the Communications Act of 1934
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to promote competition in all areas of telecommunications. The
Telecommunications Act of 1996 amendments eliminated many legal barriers to
competition in various telecommunications marketplaces and set many of the
basic terms governing the relationships between competing telecommunications
carriers, particularly in the provision of local telephone service. The
implementation of the Telecommunications Act of 1996 is ongoing. It is the
subject of numerous administrative proceedings both before the FCC and the
various state public utility commissions, and litigation in both the federal
and state courts. These proceedings could, to varying degrees, significantly
alter the regulatory landscape. We cannot predict the outcome of any of these
proceedings or whether they will adversely affect our business.
Federal Regulation. Our interstate and international "telecommunications
services", like those of all carriers, are subject to the regulations of the
FCC. By contrast, our "information services" offerings, network design and
maintenance services, network management services, and web page development and
hosting services are not regulated. Also unregulated is the equipment that we
provide to our customers to use with our telecommunications services, although,
as discussed below, the FCC does require that equipment connected to the public
network meet certain technical standards.
There is some ambiguity regarding the regulatory status of certain of our
services. While we regard those services as unregulated, to date there has been
no ruling on their status by the FCC. It is possible that the FCC will
ultimately rule that they are telecommunications services and therefore are
subject to regulation. For example, under the current regulatory structure, we
believe our national IP/ATM network is an information service, and therefore
exempt from regulation. 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 regulation in the near future. A determination that voice
communications using IP or ATM technologies are not information services could
make them significantly less competitive.
The FCC has established different levels of regulation for dominant and
nondominant carriers. The regional Bell operating companies, GTE, and other
incumbent local exchange telephone companies are classified as dominant. All
other carriers, including us, are classified as nondominant. As a nondominant
carrier, we are subject to much less regulation than are the dominant carriers.
Among other things, the FCC does not regulate the rates that we charge for our
interstate and international services or require us to obtain authorization in
advance for the installation, acquisition or operation of our domestic network
facilities.
The FCC has also decided that nondominant carriers should not file tariffs
setting forth their rates for interstate services. That ruling, however, has
been stayed pending the resolution of a court challenge. Until the stay is
lifted, we are required to file tariffs for our interstate services, including
resold long-distance, frame relay, and operator services. If and when the
decision not to require the filing of tariffs becomes effective, we could
benefit from the decrease in compliance costs and the elimination of delays in
getting new products and services to market.
Regardless of our nondominant status, we must comply with the provisions of
the Communications Act of 1934 pertaining to common carriers. We are subject to
the general requirement that the rates, terms, and conditions of our services
be "just and reasonable" and we may not make any "unjust or unreasonable"
discrimination in our rates, terms, and conditions. The FCC has the authority
to enforce our compliance with these requirements.
We offer some services that are subject to specific regulatory requirements,
including operator services and public phone service. With respect to our
operator services, we are required to disclose to callers that they may obtain
a rate quote before placing a call and must file informational tariffs
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<PAGE>
with the FCC containing detailed information about our rates. With respect to
our public phone services, the FCC requires us to post certain consumer
information at each public phone location.
The FCC also requires that equipment that is connected to the public switched
telephone network will not harm the network. The products we install must meet
the FCC's technical standards. While we are ultimately responsible for ensuring
that our equipment complies with federal network standards, as a practical
matter, the burden of compliance lies with our suppliers.
While the FCC recently ruled that calls to the Internet are interstate calls
and thus subject to the FCC's jurisdiction, the FCC currently does not regulate
the Internet and has said that it will refrain from doing so in the future. We
cannot assure you, however, as to the degree of the FCC's regulation of the
Internet in the future, or its effect on our website hosting and other
Internet-related products or services. Potential negative effects could include
the increased costs to comply with any regulations which are imposed and delays
in getting new products and services to market.
In addition to regulating interstate and international telecommunications
services, the FCC also has a significant new role under the Telecommunications
Act of 1996 in overseeing the opening of the intrastate telecommunications
marketplace to competition. The FCC has issued an extensive framework of rules
governing the terms under which incumbent local exchange companies are required
to open their networks to competing providers. Among other things, the
incumbent local exchange companies must allow competitors to interconnect with
their networks and must make their retail services available to competitors at
wholesale rates for resale. We have taken advantage of these rules to enter the
local telecommunications marketplace by reselling incumbent local exchange
companies' services. Numerous parties have challenged various portions of the
resale regulations both before the FCC and in the courts, including the
discounts at which the local exchange companies must make their services
available to us for resale. If the discounts available to us are decreased as a
result of those challenges, it would affect our costs of providing local
telephone service.
State Regulation. Some of our resold local and long-distance services are
classified as intrastate and therefore are 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 long
distance and 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.
The state public utility commissions also must approve the agreements that we
enter into allowing us to purchase the retail services of the incumbent local
exchange carriers at a discount for resale.
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 long distance services, frame relay services and operator services.
At the state level, we are authorized to provide intrastate long distance
services in 36 states and are certified to provide local telephone services in
seven states. We anticipate being certified to provide local telephone services
in an additional 36 states by the end of 1999.
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Employees
As of March 31, 1999, we had 1,080 full-time employees, none of whom are
currently represented by unions.
<TABLE>
<CAPTION>
Number of
Job Description Employees
----------------------------------------------- ---------
<S> <C>
Sales Representatives and Sales Management..... 197
Technical Staff................................ 444
Customer Care.................................. 239
Information Technology......................... 44
Support Services............................... 156
-----
1,080
=====
</TABLE>
Employee Retention. We believe that our ability to implement our business
plan and continue to grow will depend in large part on our ability to continue
to attract and retain qualified employees. In addition to fixed base
compensation, employees at all levels participate in our incentive compensation
plan. All employees are eligible to receive cash bonuses, while management may
receive bonuses including both cash and shares of our common stock. In
addition, we offer a comprehensive benefits package including a 401(k) plan
with a discretionary company match of shares of our common stock, insurance,
cafeteria plan, tuition reimbursement, and, for upper management, a deferred
compensation plan.
Office Facilities
We lease sales and support facilities in each of our markets. Our principal
corporate and support facilities are also leased, and are as follows:
<TABLE>
<CAPTION>
Location Size (sq. ft) Lease Expiration Use of Facility
- -------- ------------- ----------------- -------------------------------------------
<S> <C> <C> <C>
Englewood, Colorado 28,488 April 30, 2003 Headquarters and support services
Englewood, Colorado 16,700 November 30, 2000 National Operations Center and
Denver operations
Englewood, Colorado 33,832 February 28, 2002 Information systems, information technology
and other support services
Overland Park, Kansas 32,044 November 30, 1999 Short-term offices for support services
</TABLE>
Legal Proceedings
We are involved in legal proceedings, 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.
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MANAGEMENT
Our executive officers and directors 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>
Name Age Position
---- --- --------
<C> <C> <S>
John R. Evans(1)............... 44 Chief Executive Officer, Chairman and
Director
Keith V. Burge(1).............. 45 President, Chief Operating Officer and
Director
Philip G. Allen(2)............. 52 Executive Vice President, Secretary and
Director
Spencer I. Browne(3)........... 49 Director
Roland E. Casati(2)............ 68 Director
Michael J. Marocco(2).......... 40 Director
Richard G. Tomlinson, 63 Director
Ph.D.(3)......................
Martin E. Freidel.............. 35 Executive Vice President, General
Counsel and Assistant Secretary
John J. Phibbs................. 37 Executive Vice President, Chief
Financial Officer and Treasurer
</TABLE>
(1) Class I Director (term expires 2001)
(2) Class II Director (term expires 2000)
(3) Class III Director (term expires 2002)
John R. Evans has served as the Chief Executive Officer and Chairman of the
Board of Directors since our founding. Prior to this, he served as the Chief
Financial Officer and Executive Vice President of ICG Communications, Inc.
("ICG") from 1991 until December 1995. Before joining ICG, Mr. Evans held
various senior accounting and treasury management positions for five years 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 has served as the President, Chief Operating Officer and a
member of the Board of Directors since 1996. Prior to this, he was the founder,
President, 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 and Mr. Burge continued to serve as its President
until 1995. 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 has served as Executive Vice President, Secretary and a
member of the Board of Directors since our founding. Prior to this, he was the
Vice President of Investor Relations and Corporate Communications for ICG from
1992 to 1995. Before joining ICG, 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 Corporation and U S WEST from 1976 to 1986, where he
worked in various media relations, public policy and executive support areas.
Spencer I. Browne is a member of the Board of Directors, and was elected to
that position in 1998. He is a principal and founder of Strategic Asset
Management, LLC, a consulting company that
52
<PAGE>
assists small and medium sized companies in obtaining financing. Mr. Browne was
a director, 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. He is also a director of
Altiva Financial Corporation and Annaly Mortgage Management, Inc.
Roland E. Casati has been a Director since 1997. He has developed in excess
of three million square feet of office buildings in and around Chicago,
Illinois, during the past 35 years. For the last 15 years, Mr. Casati has been
a venture capitalist. Mr. Casati is also a director for Adams Golf.
Michael J. Marocco was elected to our Board of Directors in 1998. He is a
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 & Co. Incorporated, including a fixed
income research analyst specializing in companies in the communications
industry and vice president in the Communications Industries group. Mr. Marocco
is also a director of Source Media, Inc.
Richard G. Tomlinson, Ph.D. has served as a Director since 1997, and is also
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.
Martin E. Freidel has been Executive Vice President, General Counsel and
Assistant Secretary since 1997. He 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
was Vice President and General Counsel at ICG and its predecessors. 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.
John J. Phibbs has been Executive Vice President, Chief Financial Officer and
Treasurer since 1997. He previously served as our Vice President of Finance and
Administration. 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.
----------------
In addition to the Executive Officers listed above, the following individuals
are senior management of our operating subsidiaries, Convergent Communications
Services, Inc. ("CCSI") and Convergent Capital Corporation ("CCC").
<TABLE>
<CAPTION>
Name Position
---- --------
<C> <S>
W. Wood Alberts................ Vice President, Enterprise Network Services for CCSI
Michael R. Dozier.............. Executive Vice President of Market Operations for
CCSI
Michael P. Dykstra............. Senior Vice President of Information Technology and
Chief Information Officer of CCSI
John C. Herbers................ Senior Vice President of Internet Services for CCSI
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Name Position
---- --------
<C> <S>
Brian J. McManus............... Executive Vice President of Internal Operations and
Chief Technical Officer of CCSI
Murray R. Smith................ Executive Vice President of Sales and Marketing of
CCSI
Christopher R. Sullivan........ President and Chief Operating Officer for CCC
Gregory R. Tennant............. Vice President of Network Services for CCSI
</TABLE>
W. Wood Alberts is Vice President of Enterprise Network Services for CCSI and
has served as such since April 1997. Before joining CCSI, he held a variety of
management positions including three years as Division Manager, with
ServiceMaster.
Michael R. Dozier has been Executive Vice President of Market Operations of
CCSI since 1998. He previously served in various capacities at Tie
Communications including Chief Operating Officer and President from June 1997
to August 1998, Executive Vice President from December 1996 to May 1997, and
Vice President of Value Added Services for Tie from May 1995 to November 1996.
Michael P. Dykstra has been Senior Vice President of Information Technology
and Chief Information Officer of CCSI since 1998. He previously served as Vice
President at CSX Technology in Jacksonville, Florida from 1995 to 1998 where he
was responsible for the administration of strategic planning, commercial
planning, and commercial and enterprise services. Previously, he was a Director
in the Management Consulting Division at Price Waterhouse L.L.P. from 1987 to
1995.
John C. Herbers has been Senior Vice President of Internet Services for CCSI
since 1998. Prior to joining CCSI, he served as President of Network Computer
Solutions ("NCS"), a provider of network integration services from May 1996 to
February 1998. Prior to NCS, Mr. Herbers served for three years as President of
U.S. Operations and Senior Vice President of Halozone Technologies Worldwide,
an environmental services company.
Brian J. McManus has been Executive Vice President of Internal Operations and
Chief Technical Officer of CCSI since 1997. He previously served as Director of
Information Systems at ICG from 1992 to 1996.
Murray R. Smith was hired as Executive Vice President of Sales and Marketing
of CCSI in 1999. He previously served from 1992 to 1996 as Director of Field
Marketing--Business Services for MCI, where he was responsible for the
development, rollout, follow up and support of all corporate product
introductions, competitive marketing programs, promotion programs, customer
base programs and marketplace intelligence. From 1996 until joining us, Mr.
Smith was Vice President of Corporate Services for KN Energy of Denver,
Colorado.
Christopher R. Sullivan is the President and Chief Operating Officer for CCC.
He has served in that capacity since 1998. Before joining CCC, he was corporate
counsel at GATX/Sun Financial from 1997 to 1998. Prior to 1997, he was Vice
President of the law firm of Malloy & Sullivan, Lawyers P.C.
Gregory R. Tennant is the Vice President of Network Services for CCSI. Mr.
Tennant has been with CCSI since 1998. Prior to that, he served as Director of
Data Services for Intermedia Communications with responsibilities for frame
relay, ATM, Internet access and web hosting, management services and
collocation services from 1995 to 1998. Before that, he was a Senior Strategic
Marketing Manager for AT&T Paradyne Corporation.
54
<PAGE>
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 2,500 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;
. 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. Browne, Evans and Dr. Tomlinson 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.
55
<PAGE>
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.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------- Securities
Name and Principal Other Annual Underlying All Other
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 -- -- 100,000 --
Chairman and Chief 1997 $150,000 $75,000 $12,781 -- $81,579
Executive Officer 1998 $200,000 $87,500 $14,799 50,000 $97,100
Keith V. Burge.......... 1996 $ 5,417 -- -- 100,000 --
President and Chief 1997 $130,000 $65,000 $ 8,625 -- $71,944
Operating Officer 1998 $180,000 $78,750 $ 9,775 50,000 $88,350
Philip G. Allen......... 1996 $ 4,167 -- -- 100,000 --
Executive Vice 1997 $100,000 $50,000 $12,172 -- $55,735
President and Secretary 1998 $150,000 $32,813 $ 9,000 50,000 $42,413
Martin E. Freidel....... 1997 $ 36,939(6) $19,569 $ 2,199 150,000 $21,445
Executive Vice 1998 $139,583(6) $54,688 $ 6,000 -- $64,132
President, General
Counsel and Asst
Secretary
John J. Phibbs.......... 1997 $ 95,833(7) $32,383 $ 5,000 150,000 $29,134
Executive Vice 1998 $137,500(7) $33,268 $ 6,250 -- $41,338
President, Chief
Financial Officer and
Treasurer
</TABLE>
- --------
(1) During 1996, we were in our initial formation stage and the executive
officers did not receive salaries 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, which amount is
reflected under "All Other Compensation".
(3) Includes automobile allowance and other fringe benefit payments.
(4) Amounts listed are shares of our common stock underlying options granted,
which vest over five years. Twenty percent 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 officers are as follows: Mr. Evans,
23,260; Mr. Burge, 20,826; Mr. Allen, 13,543; Mr. Phibbs, 9,169; and Mr.
Freidel, 9,794.
(6) 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.
(7) 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.
56
<PAGE>
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
Percent Potential Realizable Value
Number of of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted Exercise for Option Term(2)
Options to Price Expiration ---------------------------
Name Year Granted(1) Employees Per Share Date 5% 10%
---- ---- ---------- --------- --------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Evans........... 1996 100,000 11.0% $ 2.20 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 50,000 3.0% $11.00 4/13/2008 $ 264,000 $ 747,000
Keith V. Burge.......... 1996 100,000 11.0% $ 2.20 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 50,000 3.0% $11.00 4/13/2008 $ 264,000 $ 747,000
Philip G. Allen......... 1996 100,000 11.0% $ 2.20 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
1998 50,000 3.0% $11.00 4/13/2008 $ 264,000 $ 747,000
Martin E. Freidel....... 1997 150,000 7.9% $ 5.00 9/15/2007 $ 472,000 $ 1,195,000
John J. Phibbs.......... 1997 150,000 7.9% $ 2.00 3/3/2007 $ 189,000 $ 478,000
</TABLE>
- --------
(1) 20% of the options to purchase shares of our common stock 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.
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........... 40,000/110,000 $312,000/$468,000
Keith V. Burge.......... 40,000/110,000 $312,000/$468,000
Philip G. Allen......... 40,000/110,000 $312,000/$468,000
Martin E. Freidel....... 30,000/120,000 $240,000/$960,000
John J. Phibbs.......... 30,000/120,000 $150,000/$600,000
</TABLE>
- --------
(1) Based on an assumed fair market value of our common stock as of December
31, 1998.
Employment Agreements
We have employment agreements with each of our executive 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 currently receives a base salary of $300,000, Mr.
Burge currently receives a base salary of $275,000, and Mr. Allen currently
receives a base salary of $165,000. 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 75% 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 benefits for a period of 24 months, as well as accrued
bonus and 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.
57
<PAGE>
Mr. Phibbs' employment agreement is effective as of March 3, 1997 and
provides for a term of four years. Mr. Freidel's employment agreement is
effective as of September 15, 1997 and provides for an initial term of five
years. Each of Mr. Phibbs and Mr. Freidel receive an annual base salary of
$175,000. In addition, each receives a car allowance, benefit package and an
incentive bonus of up to 75% of their base salary. The incentive bonus is
determined by our Compensation Committee. If we terminate the employment
agreement without cause, the employee is entitled to continue to receive his
salary and benefits for a period of 24 months. In the event of termination
because of a change in control, the employee is entitled to continue to receive
his salary and benefits for a period of 24 months as well as accrued bonus and
immediate vesting of all options.
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 as of
May 31, 1999:
<TABLE>
<CAPTION>
Shares Authorized Options Outstanding Options Exercisable
----------------- ------------------- -------------------
<S> <C> <C> <C>
1996 Plan............ 1,350,000 1,065,500 429,500
1997 Plan............ 600,000 467,000 105,900
1998 Plan............ 1,750,000 1,680,300 195,400
1999 Plan............ 750,000 346,500 12,500
--------- --------- -------
Total.............. 4,450,000 3,559,300 743,300
========= ========= =======
</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; and
. 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 $2.00 to $20.00.
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
58
<PAGE>
the 401(k) plan are fully vested when they are issued. As of May 31, 1999 we
had issued a total of 144,500 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 cannot be less than one year from the deferral date. As of
May 31, 1999, 142,096 shares of common stock are being held in the trust
account.
59
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our common stock as of June 18, 1999, by (i) each of our directors
and officers, (ii) each person who we know beneficially owns more than 5% of
our common stock (iii) all of our officers and directors as a group and (iv)
the selling shareholders as a group. Options, warrants exerciseable within 60
days and the convertible preferred stock are expressed in terms of common share
equivalents. Percentage ownership is calculated by dividing (i) the sum of the
number of shares owned by the shareholder plus the number of shares the
shareholder 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 as of June 18, 1999 plus the
shareholder's conversion shares. References to Other Shares are shares held in
our 401(k) plan, our Deferred Compensation Plan trust account, and the maximum
number of shares issuable upon conversion of our convertible preferred stock.
<TABLE>
<CAPTION>
Total Shares Total Shares
Beneficially Beneficially
Shares of owned prior to Shares Owned After the
Common Stock the Offering Sold Offering
Beneficially Other ----------------- in the -----------------
Name and Address Owned Options Warrants Shares Number Percent Offering Number Percent
---------------- ------------ ------- --------- ---------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John R. Evans
(1)(2)(3).............. 3,150,000 50,000 24,795 23,260 3,432,014 23.17% -- 3,432,014 14.08%
Keith V. Burge (1)(3)... 3,150,000 50,000 24,795 20,827 3,432,014 23.17% -- 3,432,014 14.08%
Philip G. Allen
(1)(3)................. 3,150,000 50,000 24,795 13,543 3,432,014 23.17% -- 3,432,014 14.08%
Spencer I. Browne (4).. 67,500 5,000 22,500 -- 95,000 * -- 95,000 *
Roland E. Casati........ 375,000 25,000 258,400(5) 71,429(5) 729,829 4.83% -- 729,829 2.96%
Michael J.
Marocco (6)........... 600,000 5,000 808,200(5) 2,309,143(5) 3,722,343 20.84% -- 3,722,343 13.57%
Dr. Richard G.
Tomlinson............. 20,000 20,000 10,810 -- 50,810 * -- 50,810 *
Martin E. Freidel (7)... 21,800 30,000 10,900 9,794 72,494 * -- 72,494 *
John J. Phibbs.......... -- 60,000 -- 9,169 69,169 * -- 69,169 *
Sandler Group (8)....... 600,000 -- 840,000(5) 2,400,000(5) 3,840,000 21.36% -- 3,840,000 13.94%
First Continental Group,
L.C. (9)............... 902,500 -- -- -- 902,500 6.12% -- 902,500 3.71%
All Officers and
Directors
as a group
(9 persons)............ 4,234,300 295,000 1,185,195 2,457,164 8,171,659 50.38% -- 8,171,659 31.70%
293 selling
shareholders,
each of whom will be
selling less than 1% of
the outstanding common
stock (10)............. 5,407,500 14,100 2,507,968 -- 7,929,568 46.03% 1,661,736 6,267,832 23.37%
</TABLE>
- --------
* Less than 1%
(1) Messrs. Evans, Burge and Allen and their spouses 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 1,083,055 shares owned for Mr. Evans, 1,215,622 shares owned for
Mr. Burge, and 1,133,338 shares owned for Mr. Allen. The address for these
individuals is 400 Inverness Drive South, Suite 400, Englewood, CO 80112.
(2) Includes 102,500 shares held in trusts for the benefit of Mr. Evans'
children because Mr. Evans has voting rights over those shares.
60
<PAGE>
(3) Includes 250,000 shares held by the holder's spouse.
(4) As Mr. Browne is a principal of Strategic Asset Management, LLC, this
number includes 32,500 shares and warrants to purchase 30,000 shares owned
by that firm.
(5) Consists of the maximum number of shares of common stock issuable upon (i)
conversion of shares of convertible preferred stock issued in March 1999
and (ii) exercise of the related warrants. The number of shares issuable
upon conversion or exercise will vary depending on the price of the shares
to be sold in this offering. The maximum number of shares will be issuable
if the per share offering price is $14.00 or less, and the minimum number
of shares will be issuable if the per share offering price is $20.00 or
more. The range of common shares issuable to Mr. Marocco, Mr. Casati and
the Sandler Group upon conversion of the convertible preferred stock and
exercise of the related warrants is as follows:
<TABLE>
<CAPTION>
Convertible Related
preferred stock warrants
----------------- ---------------
Shareholder Minimum Maximum Minimum Maximum
----------- ------- --------- ------- -------
<S> <C> <C> <C> <C>
Mr. Casati.................................... 25,000 71,429 18,750 25,000
Mr. Marocco................................... 808,200 2,309,143 606,150 808,200
Sandler Group................................. 840,000 2,400,000 630,000 840,000
</TABLE>
(6) Includes 406,820 shares owned by 21st Century Communications Partners,
L.P., 138,420 shares owned by 21st Century Communications T-E Partners,
L.P. and 54,760 shares owned by 21st Century Communications Foreign
Partners, L.P., as well as shares 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. over which Mr. Marocco has voting power. Mr.
Marocco disclaims beneficial ownership in these shares, except to the
extent of his equity interest in them.
(7) Includes 20,000 shares and warrants to purchase 10,000 shares owned by
Freidel Development International, LLC, as Mr. Freidel has voting power
over these shares.
(8) The address for Sandler Group is 767 5th Avenue, 45th Floor New York, NY
10153.
(9) The address for First Continental Group, L.C. is 3818 N.W. 92nd Place Polk
City, IA 50226.
(10) The number of shares to be sold by the selling shareholders in this
offering may be reduced to the extent any selling shareholder fails to
deliver its shares or any required documentation prior to the closing of
the offering.
61
<PAGE>
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 ("SHS"). The agreement is a two year agreement and provides for
the payment of a monthly fee and commissions to SHS for new Enterprise Network
Services customers in the healthcare industry that are introduced to us by SHS
and that become customers. Under the agreement, we issued a warrant to SHS
which entitles SHS to receive up to a maximum of 131,250 shares of our common
stock at an exercise price of $12.00 per share. The warrant includes
performance objectives which are reviewed semi-annually. If SHS does not meet
those performance objectives, all or a portion of the shares available for
exercise is reduced. As of May 31, 1999, 32,812 shares had been canceled due to
SHS's failure to meet the performance objective. The warrant is not exercisable
until August 1, 2000 and expires August 1, 2003. Spencer I. Browne is a
principal of Strategic Asset Management which has an ownership interest in
Strategic Healthcare Solutions.
In March 1999, we sold to one of our directors and various affiliates of the
Sandler Group 800,000 shares of our convertible preferred stock and warrants
for net proceeds of $19.3 million. The convertible preferred stock will
automatically convert into common stock upon a public offering which provides
gross proceeds to us in excess of $50.0 million. As a result, upon the closing
of this offering of our common stock, each share of our convertible preferred
stock will convert into a minimum of 2.5 and a maximum of 3.57 shares of common
stock, depending on the price of common stock in the public offering. Based on
an assumed offering price of $12.00 per share, each share of our convertible
preferred stock is convertible into 2,857,143 shares of our common stock and
the warrants entitle the holders to purchase an aggregate maximum of 1,000,000
shares of our common stock at an exercise price of $15.00 per share, subject to
adjustment. The warrants have a term of period of five years. See "Description
of Capital Stock -- Preferred Stock" and "Description of Capital Stock --
Warrants." One of our directors, Michael Marocco, is a principal of several of
the entities in the Sandler Group and is deemed to be the beneficial owner of
646,560 shares of convertible preferred stock and related warrants. Roland
Casati, one of our directors, purchased 20,000 shares of convertible preferred
stock and related warrants at the same time.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Stock
The authorized capital stock of Convergent Communications, Inc. consists of
100 million shares of common stock, no par value, and 1,000,000 shares of
preferred stock, no par value. All of the issued and outstanding capital stock
is fully paid and nonassessable. The following summary of our common stock and
preferred stock is qualified by reference to our Articles of Incorporation a
copy of which has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock, of
which 800,000 have been designated as Series A Convertible Preferred Stock. All
of the convertible preferred stock are issued and outstanding. None of the
remaining preferred shares are outstanding.
In March 1999, we sold to various affiliates of the Sandler Group 800,000
shares of convertible preferred stock and warrants. The convertible preferred
stock will automatically convert into shares of common stock (the number of
which is dependent upon the price per share of common stock in the offering)
upon a public offering which provides gross proceeds to us in excess of $50.0
million. As a result, upon the closing of this offering of our common stock,
each share of this preferred stock will automatically convert into a minimum of
2.5 shares of common stock (if the initial public offering price is $20.00 or
higher) and a maximum of 3.57 shares of common stock, (if the initial public
offering price is $14.00 or lower). An intermediate number of shares shall
issue if the offering price falls between $14.00 per share and $20.00 per
share. Based on an assumed initial public offering price of $12.00 per share,
each share of our convertible preferred stock is convertible into
2,857,143 shares of our common stock.
Our Board of Directors is authorized, subject to any limitations prescribed
by Colorado law, to issue shares of preferred stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to establish or alter the voting powers, designations, preferences and
other rights, or the qualifications, limitations or restrictions thereof, and
to increase (but not above the total number of authorized shares of the class)
or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series without any further vote
or action by the shareholders. Our Board of Directors is also authorized to
issue preferred stock with voting, conversion and other rights and preferences
that could adversely affect your voting power or other rights, as a holder of
common stock. Although we have no current plans to issue any such shares, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire us. Such an issuance
could also dilute your voting power or other incidents of ownership as a holder
of common stock.
Common Stock
As of May 31, 1999, there were 14,176,431 shares of common stock outstanding
held by approximately 500 shareholders. In addition there are options, warrants
and other convertible securities outstanding that, if exercised or converted,
would cause the issuance of an additional 10,104,948 shares of common stock,
subject to further adjustment based on the offering price of shares to be sold
in this offering. See "--Warrants." As a holder of common stock, you would be
entitled to receive ratable dividends in respect of common stock when and as
declared by the Board of Directors and to one vote for each share held of
record on each matter submitted to a vote of shareholders. We do not, however,
expect to pay dividends for the foreseeable future and are
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currently prevented from doing so by the indenture governing our 13% Senior
Notes. If we liquidate, or dissolve, you would be entitled to share ratably in
all assets remaining after payments to creditors and other payments required by
law. You would have no preemptive rights and no rights to convert your common
stock into any other securities.
Warrants
Our outstanding warrants to purchase shares of common stock consist of the
following as of May 31, 1999:
. warrants to purchase 2,091,429 shares of common stock issued in
connection with a private round of financing from December 1996 through
February 1997, expiring November 2001, 1,748,929 of which are at an
exercise price of $3.00 and 342,500 of which are at an exercise price of
$2.40;
. warrants to purchase 1,984,830 shares of common stock issued in
connection with a private round of financing from October through
November 1997, 1,683,750 of which are at an exercise price of $7.50 per
share, expiring July 1999 and 301,080 of which are at an exercise price
of $6.00 per share and expire in November 2002;
. warrants to purchase 40,285 shares of common stock at an exercise price
of $6.00 per share, expiring May 2002, issued in connection with the Sun
Financial facility in May 1997;
. warrants to purchase 166,666 shares of common stock at an exercise price
of $6.00 per share, expiring November 2007 which were issued in November
1997, and warrants to purchase 200,000 shares of common stock at an
exercise price of $10.00 per share, expiring March 2009, issued in March
1999, all of which were issued in connection with our Comdisco facility;
. warrants to purchase 25,000 shares of common stock at an exercise price
of $15.00 per share, expiring December 1999, issued in connection with
an acquisition;
. warrants to purchase 75,000 shares of common stock at an exercise price
of $10.00 per share, expiring in August 2008 issued in August 1998 to
Clay Biddinger for consulting services rendered;
. warrants to purchase 98,437 shares of common stock at an exercise price
of $12.00 per share, expiring in August 2003, issued in August 1998 to
Strategic Healthcare Solutions for services rendered;
. warrants to purchase 864,000 shares of common stock at an exercise price
of $0.02 per share, expiring April 2008, issued in April 1998 connection
with our 13% Senior Notes; and
. warrants to purchase a maximum of 1,000,000 shares of common stock,
which number shall decrease to a minimum of 750,000 shares of common
stock if the offering price in the initial public offering exceeds
$20.00 per share. The maximum number of shares shall issue if the
offering price is less than $14.00 per share, and an intermediate number
of shares shall issue if the offering price is between $14.00 per share
and $20.00 per share. These warrants were issued in March 1999 in
connection with the sale of our convertible preferred stock and expire
March 2004.
In addition, warrants to purchase 375,000 shares of common stock at an
exercise price of $15.00 per share, expiring on the earlier of (i) the third
anniversary of the closing of this offering and (ii) June 3, 2003, were issued
in June 1999 in connection with the Goldman Sachs Credit Partners L.P. senior
secured credit facility.
We have described options to purchase common stock that we have granted to
various officers, directors and employees under the heading "Management."
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Registration Rights
Before March 1999, holders of approximately 8.8 million shares of common
stock and warrants to purchase approximately 4.4 million shares of common stock
had contractual rights to require us to register their shares (either as a
result of demand or piggy-back registration rights). In March 1999, we offered
to each of these holders (other than the holders of warrants to purchase
864,000 shares of common stock issued in connection with the 13% Senior Notes)
the opportunity to include a portion of their respective share holdings in this
offering and the potential to include the rest of their shares in any
subsequent offering, in exchange for a lock-up of their shares for 180 to 270
days following this offering, and a waiver of all of their registration rights.
Of the holders from whom we requested waivers, holders of all but 320,000
shares of common stock and warrants to purchase 160,000 shares of common stock
have signed these waivers. With respect to these holders who have not signed
waivers, and whose piggy-back registration rights require that we offer to
include their shares in this offering, we will include their shares in this
offering subject to the terms of their registration rights.
Also in March 1999, we issued 800,000 shares of our convertible preferred
stock which will be automatically converted into 2,857,143 shares of common
stock based upon an assumed initial public offering price of $12.00 per share,
and warrants to purchase a maximum of 1,000,000 shares of common stock (subject
to adjustment as set forth above). All of these holders have registration
rights, and we did not seek waivers from these holders in connection with this
offering, however, all of these holders have agreed to lock up their shares for
a period of 180 days from the date after completion of this offering. In
addition, the warrants we issued in connection with the Goldman Sachs Credit
Partners L.P. senior credit facility have registration rights.
As a result, the following registration rights exist with respect to our
common stock:
.13% Senior Note Warrants--After 180 days following this offering, holders of
warrants to purchase 864,000 shares of common stock have the ability,
upon the request of holders of a majority of the warrants, to require
us to register their shares. They also may include the common shares
in a "piggy-back" registration when we file another registration
statement covering the sale of common stock (or like security) (other
than a registration statement on Form S-4 or S-8, a registration
statement covering sales solely to existing shareholders, a
registration statement filed pursuant to a demand registration by
these holders or relating to any offering of common stock or like
security under any benefit plan, employee compensation plan or
employee or director stock purchase plan.)
.Series A Convertible Preferred Stock and Warrants--After the 180-day lock up
period following this offering, holders of these shares and warrants
(convertible into or exercisable for 2,857,143 shares of common
stock, assuming an offering price of $12.00 per share for the shares
to be sold in this offering) have the ability, upon the request of
holders of at least 33% of these securities, to require us to
register their shares of common stock. They may also include the
common shares in a piggy-back registration when we file another
registration statement covering the sale of common stock, except for
registration statements:
. filed on Form S-4 or S-8;
. covering sales solely to existing shareholders;
. filed within 180 days of this offering, unless it includes holders of
existing registration rights who are not affiliates or
affiliates who are selling more than 10% of the shares they
beneficially own; and
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. filed as a result of the demand rights associated with the 13% Senior Note
Warrants if such rights allow underwriters to exclude other
shares, unless holders of such warrants otherwise agree.
.Goldman Sachs Credit Partners L.P. Warrants--After the 180-day lock up period
following this offering, holders of these warrants have the ability,
upon the request of holders of a majority of the warrants, to require
us to register their shares of common stock issuable upon exercise of
the warrants. They may also include the common shares in a piggy-back
registration when we file another registration statement covering the
sale of common stock, except for registration statements:
. filed as a result of the demand registration rights associated with the 13%
Senior Note warrants or the Series A convertible preferred
stock and warrants unless holders of such securities and
warrants otherwise agree.
. filed on Form S-4 or S-8;
. covering sales solely to existing shareholders;
. filed within 180 days of this offering, unless it includes holders of
existing registration rights who are not affiliates or
affiliates who are selling more than 10% of the shares they
beneficially own; and
.1997 Private Placement Units--Holders of these securities who have not
executed the waivers described above have piggy-back registration
rights which allow them to include shares of common stock held by
them in registration statements we file. Approximately 27,500 of the
shares sold by selling shareholders in this offering are sold as a
result of the exercise of these rights. After the closing of this
offering, holders of up to 360,000 shares (including shares issuable
upon exercise of warrants) will have these piggy-back rights.
. 1996 Private Placement Units--A holder of 100,000 shares of these
securities who has not executed the waiver described above has
piggy-back registration rights which allow that holder to include
those shares of common stock in registration statements that we
file.
Limitation of Directors' Liability
Our Articles of Incorporation eliminate, subject to certain exceptions, the
personal liability of our directors for monetary damages for their breach of
fiduciary duty. However, these provisions do not eliminate or limit the
personal liability of directors for the following:
. any breach of the director's duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful corporate distributions; or
. any transaction from which a director derives an improper personal
benefit.
These provisions will limit the remedies available to you as a shareholder.
If you are dissatisfied with a decision of the Board of Directors protected by
this provision your only remedy may be to bring a suit to prevent the action of
the Board. This remedy may not be effective in many situations because
shareholders are often unaware of a transaction or event before Board action
relating to
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that transaction or event. In these cases, the shareholders could be injured by
a Board's decision and have no effective remedy.
Our Articles of Incorporation also provide that we will indemnify our
directors and officers to the fullest extent permitted by Colorado law. We have
been advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities under the Securities Act is against public
policy and is unenforceable.
Transfer Agent
American Stock Transfer & Trust Co. acts as the registrar and transfer agent
for our common stock.
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DESCRIPTION OF INDEBTEDNESS
13% Senior Notes due 2008
On April 2, 1998, we sold units which consisted of, in the aggregate,
$160,000,000 principal amount of 13% Senior Notes, and warrants to purchase
864,000 shares of common stock at $0.02 per share. On December 1, 1998, we
issued in an offering registered under the Securities Act of 1933 an aggregate
principal amount of $160,000,000 13% Senior Notes in exchange for all the
unregistered 13% Senior Notes issued on April 2, 1998. All of the 13% Senior
Notes are still outstanding.
The 13% Senior Notes are governed by the terms of an indenture. The material
terms of the indenture are described below. As a summary, the following
discussion necessarily omits many of the details of the indenture. A copy of
the indenture has been filed as an exhibit to the Registration Statement of
which this prospectus is a part.
We used approximately $56.8 million of the net proceeds of the sale of the
13% Senior Notes to purchase Treasury securities which were placed in an escrow
account. The principal and interest payments on these Treasury securities will
be sufficient to make the first six semi-annual interest payments on the 13%
Senior Notes, the first two of which have been paid. Interest on the 13% Senior
Notes accrues at a rate of 13% per year, and is payable semiannually in arrears
on each April 1 and October 1.
Optional Redemption
The 13% Senior Notes are redeemable, in whole or in part, at any time on or
after April 1, 2003 at our option at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest to the redemption date, if redeemed during the 12-month period
beginning April 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2003...................................................... 106.50%
2004...................................................... 104.33%
2005...................................................... 102.17%
2006 and thereafter....................................... 100.00%
</TABLE>
However, on or before April 1, 2001, we may, at our option, redeem up to 35%
of the aggregate principal amount of 13% Senior Notes originally issued
(provided at least 65% of the aggregate principal amount of the 13% Senior
Notes remains outstanding), at a redemption price of 113% of their principal
amount plus accrued and unpaid interest. However, we can redeem the 13% Senior
Notes in this manner only with the net proceeds of one or more underwritten
public offerings of common stock, or one or more sales of common stock to
certain types of investors engaged in the same industry and having a net worth
in excess of $1 billion, and in each case, only if the net proceeds from such
offering or sale are in excess of $50 million.
Change of Control
If a change of control (as defined in the indenture) occurs, we must make an
offer to purchase all outstanding 13% Senior Notes then outstanding at a
purchase price equal to 101% of their principal amount plus accrued and unpaid
interest. This requirement could deter a change of control transaction in which
shareholders could receive a premium.
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Covenants Restricting Our Actions
The indenture for our 13% Senior Notes contains covenants which prohibit or
restrict our ability to:
. incur indebtedness;
. make investments and other payments;
. sell assets;
. enter into transactions with affiliates;
. issue or sell capital stock of our subsidiaries;
. engage in businesses other than telecommunications; and
. designate subsidiaries as unrestricted.
As a result of these covenants, we will not be able to pay dividends for the
foreseeable future. For a complete description of these covenants you may refer
to the indenture, which has been filed as an exhibit to this registration
statement.
Events of Default
The following are "events of default" under the indenture:
. default in the payment of interest on the 13% Senior Notes when it
becomes due and payable which default continues for a period of 30
days or more; if such a default occurs before April 1, 2001, there
will be no 30 day grace or cure period;
. default in the payment of the principal of, or premium, if any, on
the 13% Senior Notes when due;
. default in the performance, or breach, of covenants relating to
changes of control, consolidations, mergers or asset sales;
. default in the performance, or breach, of any other covenant in the
indenture which is continued for a period of 30 days or more after
written notice to us;
. failure to perform any term, covenant, condition or provision of
one or more classes or issues of indebtedness in an aggregate
principal amount of $5.0 million or more, and either (a) such
indebtedness is already due and payable in full or (b) such failure
results in the acceleration of the maturity of such indebtedness;
. one or more final non-appealable judgments, orders or decrees for
the payment of money of $5.0 million or more, either individually
or in the aggregate, shall be entered against us and is not
discharged, and 60 days shall have passed without such judgment
being stayed;
. a bankruptcy, insolvency, reorganization or receivership or similar
proceedings with respect to us or one of our significant
subsidiaries; or
. we assert or acknowledge in writing that the security agreement
relating to the escrow account is invalid or unenforceable.
Cisco Systems Capital Corporation Facility
In April 1999, we executed a non-binding proposal letter with Cisco Systems
Capital Corporation for a six year $103.5 million credit facility. This credit
facility will provide the financing for the purchase of our Cisco Systems, Inc.
powered multi-service data and voice switching platform and other Cisco
products that will be deployed in our enterprise networks. Under the terms of
this proposal, Cisco would also receive warrants to purchase 575,000 shares of
our common stock. The warrants would have an exercise price of $20.00 per share
and be exercisable for three years from the date of issuance. The facility
would be available in three tranches over a three year period with quarterly
payments due over three years beginning one year from the availability of each
tranche.
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Comdisco Facility
In November 1997, we entered into a $50.0 million agreement with Comdisco,
Inc., a computer and telecommunications equipment leasing and financing
company. The agreement provides for lease financing of equipment. Under the
agreement, we can either lease equipment from Comdisco's inventory or issue
purchase orders to third-party vendors on behalf of Comdisco and lease the
purchased equipment from Comdisco. Comdisco receives a security interest in the
equipment leased. As of March 31, 1999, there is $10.2 million utilized and
$19.8 million available under the agreement, which expires on June 30, 2000.
The remaining $20.0 million will become available upon the satisfaction of
additional conditions.
In addition, we are required to issue a warrant to acquire common stock in an
amount equal to ten percent (10%) of the available 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 and will, in no event, be less
than $6.00 per share. The warrants will be issued in three installments based
upon amounts available under the facility. On November 19, 1997, we issued a
warrant for the purchase of 166,666 shares of common stock at an exercise price
of $6.00 per share for the first $10.0 million of the facility, and on March
22, 1999, we issued a warrant for the purchase of 200,000 shares of common
stock at an exercise price of $10.00 per share for the next $20.0 million of
the facility.
Sun Financial Facility
In May 1997, we entered into a master equipment lease with Sun Financial
Group, Inc., a subsidiary of GATX Capital Corporation, to lease equipment,
facilities and related items for our internal expansion as well as equipment to
be used for customer installations. We have $4.8 million of this credit
facility outstanding at March 31, 1999. The facility is secured by a $100,000
standby letter of credit. We also issued a warrant to Sun Financial Group, Inc.
for the purchase of 40,285 shares of common stock at an exercise price of
$6.00.
Goldman Sachs Credit Partners L.P. Senior Secured Credit Facility
In June 1999, we entered into a $10.0 million senior secured credit facility
with Goldman Sachs Credit Partners L.P., under which our operating subsidiary,
Convergent Communications Services, Inc. and our leasing subsidiary, Convergent
Capital Corporation borrowed an aggregate of $10.0 million. The proceeds from
this facility may be used for working capital and other general corporate
purposes. We have agreed to guaranty our subsidiaries' obligations under this
facility. We have granted to Goldman Sachs Credit Partners L.P. a security
interest in, among other things, our eligible accounts receivable, inventory
held for sale (except inventory subject to purchase money indebtedness) and
intellectual property. In addition, the facility is secured by a pledge to
Goldman Sachs Credit Partners L.P. of all of the capital stock of our
subsidiaries.
The facility contains extensive affirmative and negative covenants, including
among others, covenants relating to leverage, revenue and cash flow and certain
limits on, among other things, dividends and other restricted payments,
incurrence of indebtedness, capital expenditures, liens, mergers and
consolidations, asset sales, investments and transactions with affiliates. The
facility also contains customary events of default provisions, including upon a
change of control.
In connection with the facility, we also issued a warrant to Goldman Sachs
Credit Partners L.P. to acquire 375,000 shares of common stock at an exercise
price of $15.00 per share. Goldman Sachs Credit Partners L.P. may exercise the
warrant, in whole or in part, at any time after the earlier of (i) consummation
of this offering or (ii) October 2, 1999. The warrant contains demand and piggy
back registration rights. See "Description of Capital Stock--Registration
Rights."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 23,771,838 shares
of common stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares, the
8.4 million shares sold in this offering will be freely tradable without
restriction under the Securities Act unless purchased by our "affiliates", as
that term is defined in Rule 144 under the Securities Act. Of the remaining
shares, a total of approximately 14.2 million shares held by existing
stockholders are subject to lock-up agreements.
All of our executive officers, directors and certain shareholders are subject
to lock-up agreements providing that they will not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any shares for a
period of 180 days from the date of the closing of this offering. This group
holds a total of approximately 14.2 million shares. As a result of these lock-
up agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144 and 701 of the Securities Act, none of these shares can
be sold until 181 days after the date of the closing of this offering. In
addition, a total of approximately 4.5 million shares held by existing
stockholders are subject to an additional 90-day lock-up period (until 270 days
after the closing of this offering). There are approximately 1.1 million shares
of common stock not subject to lock-up agreements at all. We also have entered
into an agreement with the underwriters that we will not offer, sell or
otherwise dispose of common stock for a period of 180 days from the date of
completion of this offering without their consent.
As a result, beginning 181 days after the closing of this offering
approximately 19.3 million shares will be eligible for sale in the public
market, and beginning 271 days after the closing of this offering, all of our
shares will be eligible for sale in the public market, subject in each case to
certain volume limitations and the expiration of applicable holding periods
under Rule 144. Of these shares, approximately 9.7 million have been held for
more than two years, and therefore may be freely tradeable under Rule 144
unless held by affiliates. Affiliates hold approximately 8.1 million of these
shares.
In general, under Rule 144, a person (or persons whose shares are aggregated)
who has beneficially owned "restricted shares" for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding
(which will equal approximately 240,000 shares immediately after this offering)
or (2) the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
affiliates sell in a registered public offering, sales by them made while they
our an affiliate or within three months after they cease being an affiliate,
will still be subject to the volume restrictions notice above.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any of our employees, officers, directors or consultants who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period
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requirements of Rule 144. Rule 701 further provides that non-affiliates may
sell such shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144.
As discussed more fully in the section entitled "Description of Capital
Stock," there are shares of common stock issuable upon exercise of warrants
and options granted by the Company. Of the shares which could be issued upon
exercise of these warrants and options, approximately 6.5 million would be
subject to a lock-up period for 180 days after the closing of this offering,
approximately 2.7 million would be subject to a lock-up period for an
additional 90 days (270 days after the closing of this offering) and
approximately 6.5 million would be freely tradable in the public market
immediately, subject to the applicable volume and holding period requirements
of Rule 144.
In addition, and also as discussed more fully in the section entitled
"Description of Capital Stock," holders of approximately 6.8 million shares of
common stock (including shares issuable upon exercise of outstanding warrants)
have the right to cause us to file a registration statement relating to the
resale of their shares (either as a result of demand or piggy-back registration
rights.) All shares covered by such a registration statement would be freely
tradable in the public market.
As part of our growth strategy, we pursue making strategic selective
acquisitions. We may in the future issue shares of common stock to pay part of
the purchase price for these acquisitions. These shares may also have the
benefit of registration rights.
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed on
for us by Gibson, Dunn & Crutcher LLP. The partner of Gibson, Dunn & Crutcher
LLP in charge of the engagement owns 10,000 shares of common stock. Certain
legal matters will be passed on for the underwriters by Shearman & Sterling.
EXPERTS
The consolidated balance sheets of Convergent Communications, Inc., as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the period from
January 1, 1996 to December 16, 1996, March 1, 1996 through December 31, 1996
and the years ended December 31, 1997 and 1998, included in this Registration
Statement, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated balance sheets of Tie Communications, Inc. as of December
31, 1995, 1996 and 1997 and July 31, 1998, and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for the
two months ended December 31, 1995, the years ended December 31, 1996 and 1997
and the seven months ended July 31, 1998, included in this Registration
Statement, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
We have filed with the U.S. Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the offer of
common stock hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
For further information with respect to us, please refer to the registration
statement, including the exhibits and schedules thereto, which may be inspected
without charge and copied at prescribed rates at the Public Reference Section
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Northwestern Atrium Center, 500 West Madison
Street, Suite 140, Chicago, Illinois 60661. The Commission maintains a website
that contains reports, proxy and information statements and other information
filed electronically with the Commission at http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Convergent Communications, Inc.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999................................................................ F-3
Consolidated Statements of Operations for the period from January 1, 1996
to December 16, 1996, the period from inception (March 1, 1996) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 and 1999.............................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period
from January 1, 1996 to December 16, 1996, the period from inception
(March 1, 1996) to December 31, 1996, the years ended December 31, 1997
and 1998 and the three months ended March 31, 1999...................... F-5
Consolidated Statements of Cash Flows for the period from January 1, 1996
to December 16, 1996, the period from inception (March 1, 1996) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 and 1999.............................. F-6
Notes to Consolidated Financial Statements............................... F-8
Pro Forma Combined Financial Statement
Pro Forma Combined Financial Statement................................... F-28
Pro Forma Combining Statement of Operations for the year ended December
31, 1998................................................................ F-29
Notes to Pro Forma Combining Statement of Operations..................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Convergent Communications, Inc.
The reverse stock split described in Note 17 to the consolidated financial
statements has not been consummated at June 24, 1999. When it has been
consummated, we will be in the position to file the following report:
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 Convergent Communication'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 April 29, 1999
F-2
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
(unaudited)
<CAPTION>
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............ $ 667,344 $ 25,597,461 $ 10,392,752
Short-term investments............... 7,371,303 -- 15,884,601
Restricted cash...................... -- 20,800,000 20,800,000
Trade accounts receivable, net of
allowance for doubtful accounts of
$21,389, $1,908,811 and $2,932,559,
respectively........................ 2,075,150 17,661,220 20,750,560
Inventory............................ 230,809 6,826,732 9,026,881
Prepaid expenses, deposits and other
current assets...................... 218,349 2,134,210 2,995,457
----------- ------------ ------------
Total current assets................ 10,562,955 73,019,623 79,850,251
----------- ------------ ------------
Property, network and equipment....... 5,448,183 28,139,460 31,882,773
Less accumulated depreciation......... (610,386) (4,882,832) (6,353,628)
----------- ------------ ------------
Total property, network and
equipment.......................... 4,837,797 23,256,628 25,529,145
Restricted cash....................... 405,816 30,549,658 32,024,750
Goodwill, net of amortization of
$475,052, $2,967,283 and $4,174,400,
respectively......................... 6,392,600 46,526,288 49,035,071
Other intangible assets, net of
amortization of $358,486, $1,470,363
and $1,880,211, respectively......... 1,728,575 10,281,016 10,365,858
Investments and other assets.......... 994,426 1,225,626 1,231,792
Leases receivable, net of current
portion.............................. -- 796,790 1,288,573
----------- ------------ ------------
Total assets........................ $24,922,169 $185,655,629 $199,325,440
=========== ============ ============
Liabilities and Shareholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable............... $ 2,040,457 $ 15,061,514 $ 15,795,372
Accrued compensation................. 1,467,587 4,583,140 6,564,699
Accrued interest..................... -- 5,214,133 10,414,133
Other accrued liabilities............ 691,781 8,666,182 7,728,239
Deferred revenue and customer
deposits............................ 61,545 5,211,748 5,824,101
Current portion of notes payable..... 163,220 603,919 5,358,614
Current portion of capital leases.... 804,138 5,179,251 5,798,921
----------- ------------ ------------
Total current liabilities........... 5,228,728 44,519,887 57,484,079
Long-term notes payable, less current
portion.............................. 378,761 153,730,573 154,594,138
Long-term capital leases, less current
portion.............................. 586,950 8,754,054 9,185,791
----------- ------------ ------------
Total liabilities................... 6,194,439 207,004,514 221,264,008
----------- ------------ ------------
Commitments (Note 8)
Convertible preferred stock........... -- -- 19,300,000
Shareholders' equity (deficit):
Common stock, no par value, 100
million shares authorized,
13,429,500, 13,924,135 and
13,960,350 issued and outstanding,
respectively........................ 24,004,297 27,486,554 27,806,290
Warrants............................. 4,773,751 11,719,399 12,171,879
Treasury stock....................... -- (501,674) (501,674)
Deferred compensation obligation..... -- 501,674 501,674
Accumulated other comprehensive
income.............................. (16,864) -- 11,700
Unearned compensation................ (204,750) (150,150) (136,500)
Accumulated deficit.................. (9,828,704) (60,404,688) (81,091,937)
----------- ------------ ------------
Total shareholders' equity
(deficit).......................... 18,727,730 (21,348,885) (41,238,568)
----------- ------------ ------------
Total liabilities and shareholders'
equity (deficit)................... $24,922,169 $185,655,629 $199,325,440
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
------------
January
1, 1996
through
December 16,
1996
------------
<S> <C>
Data and voice service revenue............ $1,495,977
Data and voice product revenue............ --
----------
Total revenue........................... 1,495,977
----------
Cost of sales excluding depreciation...... 1,018,494
Selling, general and administrative....... 554,109
Depreciation and amortization............. 124,086
----------
Total operating expenses................ 1,696,689
----------
Operating loss............................ (200,712)
Interest expense.......................... (20,588)
Interest income........................... --
Other income (expense).................... --
----------
Net loss................................ (221,300)
Other comprehensive income, Unrealized
holding gains on securities.............. --
----------
Comprehensive loss........................ $ (221,300)
==========
Net loss per share (basic and diluted)....
Weighted average shares outstanding (basic
and diluted).............................
- --------------------------------------------------
<CAPTION>
SUCCESSOR
-------------------------------------------------------------------
For the For the
March 1, 1996 year ended three months
through December 31, ended March 31,
December 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
------------- ------------ ------------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Data and voice service revenue............ $ 57,754 $ 2,794,777 $ 27,922,022 $ 1,807,073 $ 15,310,576
Data and voice product revenue............ 39,987 7,415,247 33,678,089 4,715,792 15,170,290
------------- ------------ ------------- ------------ -------------
Total revenue........................... 97,741 10,210,024 61,600,111 6,522,865 30,480,866
------------- ------------ ------------- ------------ -------------
Cost of sales excluding depreciation...... 79,459 7,368,509 43,703,183 4,798,024 20,073,569
Selling, general and administrative....... 552,092 10,982,769 47,861,785 6,061,845 23,337,581
Depreciation and amortization............. 40,698 1,453,019 7,493,613 762,439 2,862,892
------------- ------------ ------------- ------------ -------------
Total operating expenses................ 672,249 19,804,297 99,058,581 11,622,308 46,274,042
------------- ------------ ------------- ------------ -------------
Operating loss............................ (574,508) (9,594,273) (37,458,470) (5,099,443) (15,793,176)
Interest expense.......................... (884) (155,450) (17,501,512) (52,568) (5,936,665)
Interest income........................... -- 251,290 4,632,420 31,478 950,646
Other income (expense).................... -- (156,346) (248,422) 9,867 91,946
------------- ------------ ------------- ------------ -------------
Net loss................................ (575,392) (9,654,779) (50,575,984) (5,110,666) (20,687,249)
Other comprehensive income, Unrealized
holding gains on securities.............. -- -- -- 57,690 11,700
------------- ------------ ------------- ------------ -------------
Comprehensive loss........................ $(575,392) $(9,654,779) $(50,575,984) $(5,052,976) $(20,675,549)
============= ============ ============= ============ =============
Net loss per share (basic and diluted).... $ (0.15) $ (0.92) $ (3.68) $ (0.38) $ (1.48)
============= ============ ============= ============ =============
Weighted average shares outstanding (basic
and diluted)............................. 3,887,325 10,460,784 13,731,734 13,479,233 13,942,617
- --------------------------------------------------
============= ============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
Predecessor
Balance, January 1, 1996............................................. $ 216,833
Net loss allocated to members....................................... (221,300)
---------
Contributions from members.......................................... 214,128
---------
Balance, December 16, 1996........................................... $ 209,661
=========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Other Com-
Common Common Treasury Compensation Unearned prehensive
Shares Stock Warrants Stock Obligation Compensation Income
---------- ----------- ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Successor
Balance, March
1, 1996........ -- $ -- $ -- $ -- $ -- $ -- $ --
Conversion from
Subchapter
S corporation.. -- (401,467) -- -- -- -- --
Initial sale of
stock to
founders....... 3,750,000 450,000 -- -- -- -- --
Sale of stock in
private
placement...... 2,369,762 4,587,525 152,000 -- -- -- --
Offering costs.. -- (411,310) -- -- -- -- --
Stock issued in
acquisition of
ICN............ 1,750,000 3,500,000 -- -- -- -- --
Compensation.... -- 282,267 -- -- -- -- --
Net loss........ -- -- -- -- -- -- --
---------- ----------- ----------- --------- -------- --------- -------
Balance,
December 31,
1996........... 7,869,762 8,007,015 152,000 -- -- -- --
Sale of stock in
private
placement...... 4,530,237 15,845,915 3,414,560 -- -- -- --
Offering costs.. -- (2,780,400) 777,291 -- -- -- --
Stock issued to
SONeTech....... 187,500 375,000 -- -- -- -- --
Stock issued in acquisitions.. 437,500 2,112,500 -- -- -- -- --
Exercise of
stock options.. 475,000 261,750 -- -- -- (204,750) --
Stock
purchases...... (100,000) (12,000) -- -- -- -- --
Compensation.... 29,500 194,517 -- -- -- -- --
Warrants........ -- -- 429,900 -- -- -- --
Other comprehensive income:
Unrealized loss on securities.. -- -- -- -- -- -- (16,864)
Net loss........ -- -- -- -- -- -- --
---------- ----------- ----------- --------- -------- --------- -------
Balance,
December 31,
1997........... 13,429,499 24,004,297 4,773,751 -- -- (204,750) (16,864)
Common stock
issued for:
401(k) match.... 68,997 435,894 -- -- -- -- --
Payments to
consultants.... 10,166 55,000 -- -- -- -- --
Correction of
private
placement...... 10,000 -- -- -- -- -- --
Business
combinations... 240,000 2,266,400 -- -- -- -- --
Exercise of
stock options.. 43,500 16,500 -- -- -- -- --
Exercise of
warrants....... 34,975 129,235 (20,635) -- -- -- --
Compensation.... 86,996 579,228 -- -- -- 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........ -- -- -- -- -- -- --
---------- ----------- ----------- --------- -------- --------- -------
Balance, December
31, 1998....... 13,924,133 $27,486,554 $11,719,399 $(501,674) $501,674 $(150,150) $ --
Common stock issued for:
401(k) match (unaudited).. 21,217 169,736 -- -- -- -- --
Business combinations
(unaudited)... 15,000 150,000 -- -- -- -- --
Compensation (unaudited).. -- -- -- -- -- 13,650 --
Warrants issued in connection
with financing (unaudited).. -- -- 452,480 -- -- -- --
Other comprehensive income:
Unrealized loss on securities
(unaudited)... -- -- -- -- -- -- 11,700
Net loss
(unaudited).... -- -- -- -- -- -- --
---------- ----------- ----------- --------- -------- --------- -------
Balance, March 31, 1999
(unaudited).... 13,960,350 $27,806,290 $12,171,879 $(501,674) $501,674 $(136,500) $11,700
========== =========== =========== ========= ======== ========= =======
<CAPTION>
Accumulated
Deficit Total
------------- -------------
<S> <C> <C>
Successor
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) (173,925)
------------- -------------
Balance,
December 31,
1996........... (173,925) 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) (9,654,779)
------------- -------------
Balance,
December 31,
1997........... (9,828,704) 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) (50,575,984)
------------- -------------
Balance, December
31, 1998....... $(60,404,688) $(21,348,885)
Common stock issued for:
401(k) match (unaudited).. -- 169,736
Business combinations
(unaudited)... -- 150,000
Compensation (unaudited).. -- 13,650
Warrants issued in connection
with financing (unaudited).. -- 452,480
Other comprehensive income:
Unrealized loss on securities
(unaudited)... -- 11,700
Net loss
(unaudited).... (20,687,249) (20,687,249)
------------- -------------
Balance, March 31, 1999
(unaudited).... $(81,091,937) $(41,238,568)
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- -------------------------------------------------------------------
For the year ended For the three months
December 31, ended March 31,
-------------------------- -------------------------
January 1, 1996 March 1, 1996
through through
December 16, December 31,
1996 1996 1997 1998 1998 1999
--------------- ------------- ------------ ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss........................... $ (221,300) $ (575,392) $ (9,654,779) $(50,575,984) $(5,110,666) $(20,687,249)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization...... 124,076 40,698 1,453,019 7,493,613 762,439 2,862,892
Amortization of deferred financing
costs and accretion of debt
discount.......................... -- -- -- 1,162,465 -- 400,927
Provision for uncollectable
accounts.......................... 3,802 -- -- 196,532 -- 902,468
Stock compensation expense......... -- 282,267 194,517 633,828 27,300 13,650
401k contributions through the
issuance of stock................. -- -- -- 435,894 -- 169,736
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) (2,333,283) (2,275,973)
Inventory......................... -- -- (230,809) (2,068,102) 21,106 439,135
Prepaid expenses, deposits and
other current assets............. 1,107 (51,697) (43,420) (870,269) (299,099) (565,651)
Trade accounts payable............ 10,341 56,278 1,326,723 12,357,189 1,906,273 (421,975)
Accrued compensation.............. -- -- 1,467,587 2,591,776 799,600 1,630,229
Accrued interest.................. -- -- -- 5,214,133 -- 5,200,000
Deferred revenue and customer
deposits......................... -- -- 61,545 3,299,802 33,956 (205,321)
Other accrued liabilities......... (10,544) 103,731 164,127 2,321,332 1,752,207 (979,918)
----------- ----------- ------------ ------------ ----------- ------------
Net cash used in operating
activities........................ (30,671) (241,856) (6,698,283) (28,697,661) (2,440,167) (13,517,050)
Cash flows from investing activities
Additions of property and
equipment......................... (35,742) (28,713) (2,042,203) (6,877,095) (1,711,759) (1,074,597)
Acquisitions, net of cash
acquired.......................... -- (1,157,304) (1,542,208) (42,364,328) (424,302) (1,500,000)
Short-term investments............. -- -- (7,388,167) 7,388,167 4,926,509 (15,872,901)
Restricted cash.................... -- -- (405,816) (50,943,842) (3,482) (1,475,092)
Leases receivable.................. -- -- -- (1,174,302) -- (700,262)
Intangible and other assets........ (115) (259,637) (269,425) (675,206) (217,245) (22,865)
----------- ----------- ------------ ------------ ----------- ------------
Net cash used in investing
activities........................ $ (35,857) $(1,445,654) $(11,647,819) $(94,646,606) $ 2,569,721 $(20,645,717)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- -------------------------------------------------------------
For the year ended For the three months
December 31, ended March 31,
------------------------ ---------------------
January 1, 1996 March 1, 1996
through through
December 16, December 31,
1996 1996 1997 1998 1998 1999
--------------- ------------- ---------- ------------ -------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
financing activities
Proceeds from senior
notes and warrants,
net................... $ -- $ -- $ -- $152,377,955 $ -- $ --
Proceeds from sale of
convertible preferred
stock................. -- -- -- -- -- 19,300,000
Payments on notes
payable............... (9,214) -- (317,927) (1,397,043) (166,805) (29,743)
Payments on capital
leases................ -- -- -- (2,940,834) (231,776) (1,298,042)
Proceeds from
borrowings............ 100,000 -- -- 109,206 -- 985,843
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 14,500 --
Repurchase of common
shares................ -- -- (12,000) -- -- --
------- ---------- ---------- ------------ -------- -----------
Net cash provided by
financing activities.. 90,786 4,848,897 15,852,059 148,274,384 (384,081) 18,958,058
------- ---------- ---------- ------------ -------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 24,258 3,161,387 (2,494,043) 24,930,117 (254,527) (15,204,709)
Cash and cash
equivalents at
beginning of period.... 13,438 -- 3,161,387 667,344 667,344 25,597,461
------- ---------- ---------- ------------ -------- -----------
Cash and cash
equivalents at end of
period................ $37,696 $3,161,387 $ 667,344 $ 25,597,461 $412,817 $10,392,752
======= ========== ========== ============ ======== ===========
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 $537,500 $ 2,281,484
Interest paid.......... $18,190 $ -- $ 144,782 $ 11,124,914 $ 97,958 $ 335,738
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
References in these footnotes to "Convergent Communications," "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, manage and monitor 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 multi-functional data and voice switch 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.
F-8
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Financial Information:
The interim consolidated financial statements as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999 and related disclosures included
herein are unaudited, but reflect, in the opinion of our management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the results for all of these periods. All disclosures subsequent
to March 5, 1999, other than Note 16, are unaudited.
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
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, 1998. 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:
F-9
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<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.
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-
F-10
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-11
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and 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-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 1,750,000 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 25,000
F-12
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 37,500 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 375,000
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 5,000 shares of our common stock which for purchase
accounting purposes were assigned a value of $8.00 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 50,000 shares of our common stock which for purchase accounting
purposes were assigned a value of $8.00, 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. We paid
$200,000 in cash, issued 15,000 shares of our common stock, which for
accounting purposes were assigned a value of $8.50 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 170,000 shares of our
common stock, which for accounting purposes were assigned a value of $10.00 per
share, for total consideration of $1.7 million.
F-13
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 25,000 shares of our common stock at an exercise price of $15.00 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.
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
========== ========== ===========
</TABLE>
F-14
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C> <C>
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.............................. $ (2.37) $ (4.27)
Weighted average shares......................... 10,981,658 13,923,401
</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 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:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Receivable:
1999......................................................... $ 468,189
2000......................................................... 402,864
2001......................................................... 266,832
2002......................................................... 174,728
2003......................................................... 78,670
----------
Gross receivables.............................................. 1,391,283
</TABLE>
F-15
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
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>
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
</TABLE>
F-16
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
--------- ------------
<S> <C> <C>
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 and 640,000 warrants to purchase 864,000 of our common shares.
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 1.35 shares of our common
stock at an exercise price of $0.02 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:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Due in:
1999........................................................... $603,919
2000........................................................... 58,388
2001........................................................... 37,918
</TABLE>
F-17
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
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,
1998
------------
<S> <C>
Due in:
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 an agreement with
Comdisco, Inc. ("Comdisco") which provides for up to $50 million of equipment
lease financing. At December 31, 1998, $10.0 million of the $50.0 million was
available for us to use of which $7.6 million was being utilized. The agreement
expires on June 30. The last $20.0 million will be available if we meet certain
financial criteria.
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 $6.00 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 166,666
shares of our common stock at an exercise price of $6.00 per share for the
first $10 million of the facility. The warrants 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.
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
F-18
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 40,285 shares of our common stock at an exercise price of
$6.00 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>
December 31,
1998
------------
<S> <C>
Due in:
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 (Deficit):
We have 1,000,000 shares of preferred stock authorized none of which were
outstanding as of December 31, 1998 and 800,000 of which were outstanding as of
March 31, 1999.
In connection with the acquisition of certain assets of Sigmacom (Note 3), we
issued warrants to purchase 25,000 shares of our common stock exercisable at
$15.00 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-POP(TM) network strategy
and the development of service logic for our call processing design. We issued
187,500 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 $0.12 per share if SONeTech terminates the agreement.
In February 1997, we completed the second of two tranches of an offering of
an aggregate of 3,500,000 units. Each of the units consisted of one share of
common stock and a warrant to purchase one-half share of common stock (the
first tranche of 2,369,762 units closed in late 1996). The units were sold at a
price of $2.00 each. The warrants entitle the holders to purchase 1,750,000
shares of common stock for a price of $3.00 per share for five years from the
date of the offering.
F-19
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We also issued warrants to purchase 370,625 of our common shares to the
placement agents, which are exercisable at $2.40 per share through November 7,
2001.
In October 1997, we completed an offering of 3,410,000 units consisting of
one share of our common stock and a warrant to purchase one-half share of our
common stock. The units were sold at a price of $5.00 each. The warrants
entitle the holders to purchase 1,705,000 shares of our common stock for a
price of $7.50 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 307,930 of our common shares to the placement
agents exercisable at $6.00 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 166,666
shares of our common stock and granted Sun Financial warrants to purchase
40,285 shares of our common stock. All of these warrants are exercisable at
$6.00 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 62,500 shares of our common stock at $10.00 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
3,700,000 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.
F-20
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1997, we accelerated the vesting provisions related to options of
certain employees to purchase 475,000 shares with an exercise price of $0.12
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 100,000 shares for $0.12 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 185,000 shares were no longer subject to repurchase.
<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........................... 392,500 2.18 0.40
Below market value........................ 512,500 0.12 0.92
Exercised................................... -- -- --
Canceled.................................... -- -- --
--------- ----- -----
Outstanding at December 31, 1996.............. 905,000 1.02 --
Granted
Above market value........................ 1,405,000 3.60 0.52
At market value........................... 492,500 3.90 1.12
Exercised................................... (475,000) 0.12 --
Canceled.................................... (6,000) 2.66 --
--------- ----- -----
Outstanding at December 31, 1997.............. 2,321,500 3.38 --
Granted
Above market value........................ 1,319,000 11.26 0.16
At market value........................... 320,500 7.48 1.74
Exercised................................... (43,500) 0.38 --
Canceled.................................... (634,750) 5.26 --
--------- ----- -----
Outstanding at December 31, 1998.............. 3,282,750 $6.50 $ --
========= ===== =====
</TABLE>
The following table indicates the number of shares exercisable and the
weighted average exercise prices at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ------- -------
<S> <C> <C> <C>
Options exercisable.................................... -- 172,500 495,050
Weighted average exercise price........................ -- $ 2.58 $ 3.32
</TABLE>
F-21
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
1,119,000........................ $2.00 to $2.20 6.6 years
459,000.......................... $4.00 to $5.00 8.6 years
466,250.......................... $6.00 8.9 years
479,750.......................... $10.00 to $11.00 7.7 years
758,750.......................... $12.00 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:
<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...................... $ (0.15) $ (0.92) $ (3.68)
Pro-forma........................ $ (0.15) $ (0.93) $ (3.71)
</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
F-22
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
March 1, 1996 Three Months ended March
through Year ended December 31, 31,
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------- ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Data services......... $ -- $ 585,385 $ 3,620,222 $ 808,015 $ 2,118,940
Voice services........ 57,754 2,203,182 22,298,886 882,667 12,458,199
ENS................... -- 6,210 2,002,914 116,391 733,437
Data products......... 39,987 6,656,813 20,892,491 4,462,299 7,161,752
Voice products........ -- 758,434 12,785,598 253,493 8,008,538
--------- ----------- ------------ ----------- ------------
Total............... 97,741 10,210,024 61,600,111 6,522,865 30,480,866
--------- ----------- ------------ ----------- ------------
Gross margin before
depreciation:
Data services......... -- 534,020 2,111,684 446,731 987,008
Voice services........ 17,739 979,225 8,915,797 383,400 5,250,256
ENS................... -- 3,266 1,307,685 61,374 591,455
Data products......... 543 1,056,705 2,249,700 740,389 794,861
Voice products........ -- 268,299 3,312,062 92,946 2,783,717
--------- ----------- ------------ ----------- ------------
Total............... 18,282 2,841,515 17,896,928 1,724,841 10,407,297
--------- ----------- ------------ ----------- ------------
Reconciliation to net
loss:
Selling, general and
administrative....... (552,092) (10,982,769) (47,861,785) (6,061,845) (23,337,581)
Depreciation and
amortization......... (40,698) (1,453,019) (7,493,613) (762,439) (2,862,892)
--------- ----------- ------------ ----------- ------------
Operating loss...... (574,508) (9,594,273) (37,458,470) (5,099,443) (15,793,176)
Interest expense...... (884) (155,450) (17,501,512) (52,568) (5,936,665)
Interest income....... -- 251,290 4,632,420 31,478 950,646
Other income
(expense)............ -- (156,346) (248,422) 9,867 91,946
--------- ----------- ------------ ----------- ------------
Net loss............ $(575,392) $(9,654,779) $(50,575,984) $(5,110,666) $(20,687,249)
========= =========== ============ =========== ============
</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 (deficit) section of the balance sheet. As of December 31,
1998, 77,172 shares of our common stock are being held in the rabbi trust.
F-23
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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>
March 1, 1996 Year ended
through 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......................... -- % -- % -- %
=== ====== ======
</TABLE>
F-24
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Net Loss Per Share:
The net loss available to common shareholders consists of the following:
<TABLE>
<CAPTION>
March 1, 1996 Three Months ended March
through Year ended December 31, 31,
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------- ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss................ $ (575,392) $(9,654,779) $(50,575,984) $(5,110,666) $(20,687,249)
The weighted average
shares consist of the
following:
Weighted average
common shares used
for basic earnings
per share............ 3,887,325 10,460,784 13,731,734 13,479,233 13,942,617
Warrants.............. -- -- -- -- --
Stock options......... -- -- -- -- --
Weighted average
common shares used
for fully diluted
earnings per share... 3,887,325 10,460,784 13,731,734 13,479,233 13,942,617
---------- ----------- ------------ ----------- ------------
Anti-dilutive weighted
average options and
warrants not
included............. 153,590 3,826,517 6,975,055 6,467,562 8,866,478
========== =========== ============ =========== ============
</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
F-25
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase up to a maximum of 131,250 shares of our common stock at an exercise
price of $12.00. 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 (32,812 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 32,812 shares applicable to that period were canceled.
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 219,000 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 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 24,925 shares of our common stock (which may
be increased pursuant to certain financial adjustments) which for purchase
accounting purposes were assigned a value of $10.00 per share, and assumed
liabilities of $2.4 million for total consideration of $8.6 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 Series A Convertible Preferred Stock and warrants to purchase a maximum of
1,000,000 shares of our common stock. We sold 640,000 shares of Convertible
Preferred A Stock and warrants to purchase a maximum of 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 were purchased for $4.0 million on March 31,
1999. Each share of Series A Convertible Preferred 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 Series
A Convertible Preferred Stock will convert into a minimum of 2.5 and a maximum
of 3.57 shares of common stock, depending on the price of common stock in the
public offering. The warrants entitle the holder to purchase one share of our
common stock at an exercise price of $15.00 per share for a period of five
years. The number of shares issuable upon exercise of the warrants are subject
to adjustment based upon the initial public offering price. The proceeds from
the sales, net of related offering costs, were approximately $19.3 million. One
of our directors, Michael Marocco, is a principal of several of the entities in
the Sandler/21st Century Group.
In April 1999, we completed the acquisition of BSSi Innovations, Inc. (BSSi).
BSSi was a provider of data network integration services based in Chicago,
Illinois. The purchase price consisted of $455,000 in cash, 37,000 shares of
our common stock which for accounting purposes were
F-26
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assigned a value of $10.00 per share and assumed liabilities of approximately
$24,925 for total consideration of $1.5 million. An additional 10,000 shares
may be issued if certain financial conditions are met.
In April 1999, we executed a memorandum of understanding with Cisco Systems,
Inc. for the purchase of approximately $100 million of Cisco equipment,
including Cisco's IP + ATM switches to be installed in our multi-service
switching platforms (which we call our ePOP).
In addition, in conjunction with our memorandum of understanding with Cisco
Systems, Inc., we executed a non-binding proposal letter with Cisco Systems
Capital Corporation for the financing of the Cisco equipment to be purchased
from Cisco Systems, Inc.
17. Unaudited Subsequent Events:
In July 1999 we expect to complete a one-for-two reverse split of our common
stock. The accompanying consolidated financial statements have been restated
for all periods presented to reflect the reverse stock split.
In June 1999, we entered into a $10.0 million senior secured credit facility
with Goldman Sachs Credit Partners L.P., under which our operating subsidiary,
Convergent Communications Services, Inc. and our leasing subsidiary, Convergent
Capital Corporation borrowed an aggregate of $10.0 million. The proceeds from
this facility may be used for working capital and other general corporate
purposes. We have agreed to guaranty our subsidiaries obligations under this
facility. To secure repayment of the proceeds, Goldman Sachs Credit Partners
L.P. has a security interest in, among other things, our eligible accounts
receivable, inventory held for sale (except inventory subject to purchase money
indebtedness) and intellectual property. In addition, the facility is secured
by a pledge to Goldman Sachs Credit Partners L.P. of all of the capital stock
of our subsidiaries.
F-27
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENT
Effective August 1, 1998, Convergent Communications acquired substantially
all of the assets and certain liabilities of Tie Communications, Inc. (Tie).
Consideration for the purchase consisted of (i) $40.0 million in cash (ii) the
assumption of certain liabilities, which, together with legal and professional
and other costs resulted in a total purchase price of approximately $51.4
million. The acquisition has been accounted for using the purchase method of
accounting.
The following unaudited Pro Forma Combining Statement of Operations for the
year ended December 31, 1998 assumes that the acquisition of Tie occurred on
January 1, 1998. The information for Tie presented in the Pro Forma Combining
Statement of Operations consists of historical amounts through the acquisition
date of August 1, 1998. The results of operations from the closing date are
included in our historical financial statements. Although we have completed or
are in the process of completing other acquisitions, the operations of those
business are not significant to the pro forma combined total assets or
operations and, accordingly, the effects of these acquisitions have not been
included in the accompanying Pro Forma Combining Statement of Operations.
The unaudited Pro Forma Combining Statement of Operations should be read in
conjunction with the historical audited financial statements and related notes
of Convergent and Tie included later in this prospectus. The unaudited
Combining Pro Forma Statement of Operations is not necessarily indicative of
the results that actually would have occurred had the pro forma transactions
been consummated at the dates indicated, nor is it necessarily indicative of
our future operating results.
F-28
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Historical(1)
-------------------------------
Convergent Tie
Communications, Communications, Pro Forma Pro Forma
Inc. Inc. Adjustments(2) Combined
--------------- --------------- -------------- ---------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues................ $ 61,600 $ 46,472 $ -- $108,072
Cost of sales excluding
depreciation........... 43,703 36,616 -- 80,319
Selling, general and
administrative......... 47,862 15,775 -- 63,637
Depreciation and
amortization........... 7,493 2,909 620(a) 11,022
Reorganization expense.. -- 1,439 -- 1,439
Other operating
expense................ -- 1,000 -- 1,000
-------- -------- ----- --------
Operating loss.......... (37,458) (11,267) (620) (49,345)
Interest income
(expense) and other.... (13,118) (2,185) 967(b) (14,336)
-------- -------- ----- --------
Income (loss) from
continuing operations
before income taxes.... (50,576) (13,452) 347 (63,681)
Income tax benefit...... -- 4,064 -- 4,064
-------- -------- ----- --------
Income (loss) from
continuing operations.. $(50,576) $ (9,388) $(347) $(59,617)
======== ======== ===== ========
Net loss per share
(basic and diluted).... $ (3.68) $ (4.34)
======== ========
Weighted average shares
outstanding (basic and
diluted)............... 13,732 13,732
======== ========
</TABLE>
See the accompanying notes to pro forma combining statement of operations.
F-29
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO PRO FORMA COMBINING STATEMENT OF OPERATIONS
Basis of Presentation:
(1) The unaudited Pro Forma Combining Statement of Operations for the year
ended December 31, 1998 includes historical results of operations for the
Convergent Communications for the entire year and through the acquisition date
of August 1, 1998 for Tie.
(2) The following pro forma adjustments have been made to the unaudited
combined pro forma financial statements of Convergent Communications and Tie.
(a) Amortization of step-up of intangibles recorded for the Tie acquisition
on a straight-line basis over 10 years, net of the amortization expense
of intangibles not purchased, which were being amortized on a straight-
line basis over 10 years. Also, included in this adjustment is the
elimination of the historical depreciation on property, plant and
equipment based primarily on straight-line depreciation over periods
from 3 to 10 years. Offsetting this elimination is the addition of
depreciation based on Convergent Communication's periods of
depreciation, 2 to 5 years.
(b) Adjustment to interest expense for debt of Tie which was not assumed in
the acquisition.
F-30
<PAGE>
FINANCIAL STATEMENTS FOR TIE/COMMUNICATIONS, INC.
Effective August 1, 1998, Convergent Communications acquired substantially
all the assets of Tie/Communications, Inc., which was a debtor-in-possession
operating under Chapter 11 of the United States Bankruptcy Code. Convergent
Communications did not acquire all the liabilities of Tie and did not acquire
the corporation in which Tie's business had been conducted and as to which the
financial statements on the following pages relate.
INDEX TO TIE COMMUNICATIONS, INC. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Tie Communications, Inc.
Report of Independent Accountants....................................... TIE-3
Consolidated Balance Sheets as of December 31, 1995, 1996 and 1997 and
July 31, 1998.......................................................... TIE-4
Consolidated Statements of Operations for the two months ended December
31, 1995, years ended December 31, 1996 and 1997 and the seven months
ended July 31, 1998.................................................... TIE-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the two months ended December 31, 1995, years ended December 31, 1996
and 1997 and the seven months ended July 31, 1998...................... TIE-7
Consolidated Statements of Cash Flows for the two months ended December
31, 1995, years ended December 31, 1996 and 1997 and the seven months
ended July 31, 1998.................................................... TIE-8
Notes to Consolidated Financial Statements.............................. TIE-9
</TABLE>
TIE-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
TIE-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Tie/communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholder's
equity/(deficit) and of cash flows present fairly, in all material respects,
the financial position of Tie/communications, Inc. (a wholly-owned subsidiary
of TIE Acquisition Co. and a Debtor-in-Possession) at December 31, 1995,
December 31, 1996, December 31, 1997 and July 31, 1998 and the results of its
operations and its cash flows for the period from November 1, 1995 through
December 31, 1995, the years ended December 31, 1996 and 1997, and the seven
months ended July 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of TIE'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.
The accompanying financial statements have been prepared assuming TIE will
continue as a going concern. As discussed in Note 1 to the financial
statements, TIE has experienced net losses since its inception and is not in
compliance with certain provisions in its loan agreement with a financial
institution. Additionally, on April 10, 1998, TIE filed a voluntary petition
(as a debtor-in-possession) for relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code. Effective August 1, 1998, TIE sold substantially
all of its operating assets to a third party. The accompanying financial
statements do not reflect the sale of substantially all of the assets to and
the assumption of certain liabilities by the third party. These uncertainties
raise substantial doubt about TIE's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments which may
result from the outcome of these uncertainties.
PricewaterhouseCoopers LLP
Kansas City, Missouri
September 4, 1998
TIE-3
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash.......................... $ 1,812 $ 469 $ 326 $ 650
Accounts receivable, net of
allowance of $1,640, $1,126,
$1,914 and $2,517,
respectively................. 11,131 10,659 12,041 8,508
Inventories, net of reserves
of $4,664, $4,932, $2,273 and
$2,520, respectively......... 6,540 8,789 5,447 4,782
Prepaid expenses.............. 833 801 541 1,032
Net assets held for sale...... 9,196 -- -- --
Other current assets.......... 1,922 1,961 819 1,182
Deferred tax asset............ -- -- -- 6,892
------- ------- ------- -------
Total current assets....... 31,434 22,679 19,174 23,046
Property and equipment, net... 1,596 1,792 4,597 3,428
Excess purchase price over
fair value of net assets
acquired, net................ 28,209 28,623 25,246 20,731
Equipment credit receivable... 1,500 -- -- --
Debt issuance costs, net...... 543 622 64 --
Other assets.................. 1,104 1,886 619 519
------- ------- ------- -------
Total assets............... $64,386 $55,602 $49,700 $47,724
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
TIE-4
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S
EQUITY/(DEFICIT)
Liabilities subject to
compromise................... $ -- $ -- $ -- $ 38,779
Liabilities not subject to
compromise
Current liabilities:
Note payable and current
maturities of long-term
debt:
Related parties............. -- 1,515 5,734 --
Other....................... -- 15,896 16,913 1,644
Advance from Convergent
Communications Services,
Inc.......................... -- -- -- 15,917
Accounts payable.............. 3,720 7,770 12,583 4,458
Accrued wages and benefits.... 3,897 2,922 3,369 2,667
Restructuring reserve......... 2,399 1,684 523 --
Other accrued expenses:
Related parties............. -- 136 2,418 --
Other....................... 7,418 5,873 6,001 6,634
Deferred service revenue...... 6,625 6,114 5,538 2,186
Income taxes payable.......... 1,732 1,114 939 33
------- ------- -------- --------
Total current
liabilities.............. 25,791 43,024 54,018 72,318
Long-term debt:
Related parties.............. 10,000 10,000 10,000 --
Other........................ 20,000 59 2,325 1,495
Other non-current
liabilities.................. 1,339 117 58 --
------- ------- -------- --------
Total liabilities......... 57,130 53,200 66,401 73,813
Commitments and contingencies
Stockholder's equity/(deficit)
Series A preferred stock..... -- -- 9 9
Common stock................. -- -- 102 102
Additional paid-in capital... 7,833 7,753 7,642 7,642
Accumulated deficit.......... (577) (5,351) (24,454) (33,842)
------- ------- -------- --------
Total stockholder's
equity/(deficit)......... 7,256 2,402 (16,701) (26,089)
------- ------- -------- --------
Total liabilities and
stockholder's
equity/(deficit)......... $64,386 $55,602 $ 49,700 $ 47,724
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
TIE-5
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Seven
November 1, Months
1995 through Year Ended Year Ended Ended
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Net revenue:
Equipment.................. $ 7,302 $45,114 $ 40,338 $ 17,258
Services................... 7,562 45,111 43,390 21,334
Other...................... 1,499 6,332 11,646 7,880
------- ------- -------- --------
16,363 96,557 95,374 46,472
Cost of sales:
Equipment.................. 5,502 32,706 32,767 15,250
Services................... 4,620 28,518 28,362 14,115
Other...................... 663 2,467 8,230 7,251
------- ------- -------- --------
10,785 63,691 69,359 36,616
Gross margin:
Equipment.................. 1,800 12,408 7,571 2,008
Services................... 2,942 16,593 15,028 7,219
Other...................... 836 3,865 3,416 629
------- ------- -------- --------
5,578 32,866 26,015 9,856
Selling, general and
administrative expenses..... 4,837 28,944 33,667 15,775
Depreciation and
amortization................ 712 4,632 4,851 2,909
Reorganization expenses...... -- -- -- 1,439
Other operating expenses..... -- 706 893 1,000
------- ------- -------- --------
Operating income/(loss)...... 29 (1,416) (13,396) (11,267)
Interest expense:
Related parties (contractual
interest at July 31, 1998
was $2,965)................. -- 1,443 2,997 832
Other........................ 560 1,588 2,517 1,295
Other expenses, net.......... 38 291 158 58
------- ------- -------- --------
Loss before income taxes..... (569) (4,738) (19,068) (13,452)
Provision for (benefit from)
income taxes................ 8 36 35 (4,064)
------- ------- -------- --------
Net loss..................... $ (577) $(4,774) $(19,103) $ (9,388)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
TIE-6
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock,
$0.01 par,
Common Stock, Common Stock, Common Stock, 1,000,000 Series A
$0.01 par, $0.10 par, $0.01 par, 8.0785%
100 shares 10,000,000 shares 15,000,000 shares cumulative,
authorized authorized authorized shares authorized Additional
------------- ------------------ ----------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount capital deficit Total
------ ------ ---------- ------ ---------- ------ ---------- -------- ---------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
November 1,
1995............ -- $-- 3,988,392 $ 398 -- $-- -- $ -- $15,727 $ -- $ 16,125
Recapitalization
due to merger
with TIE Merger
Co.............. 100 -- (3,988,392) (398) -- -- -- -- (7,894) -- (8,292)
Net loss for the
period from
November 1, 1995
through December
31, 1995........ -- -- -- -- -- -- -- -- -- (577) (577)
---- ---- ---------- ----- ---------- ---- ---------- ------- ------- -------- --------
Balance at
December 31,
1995............ 100 -- -- -- -- -- -- -- 7,833 (577) 7,256
Return of equity
to TIE
Acquisition
Co.............. -- -- -- -- -- -- -- -- (80) -- (80)
Net loss for the
year ended
December 31,
1996............ -- -- -- -- -- -- -- -- -- (4,774) (4,774)
---- ---- ---------- ----- ---------- ---- ---------- ------- ------- -------- --------
Balance at
December 31,
1996............ 100 -- -- -- -- -- -- -- 7,753 (5,351) 2,402
Recapitalization.. (100) -- -- 10,200,000 102 940,000 9 (111) -- --
Net loss for the
year ended
December 31,
1997............ -- -- -- -- -- -- -- -- -- (19,103) (19,103)
---- ---- ---------- ----- ---------- ---- ---------- ------- ------- -------- --------
Balance at
December 31,
1997............ -- -- -- -- 10,200,000 102 940,000 9 7,642 (24,454) (16,701)
Net loss for the
seven month
period ended
July 31, 1998... -- -- -- -- -- -- -- -- -- (9,388) (9,388)
---- ---- ---------- ----- ---------- ---- ---------- ------- ------- -------- --------
Balance at July
31, 1998........ -- $-- -- $ -- 10,200,000 $102 940,000 $ 9 7,642 $(33,842) $(26,089)
==== ==== ========== ===== ========== ==== ========== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
TIE-7
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Seven
November 1, 1995 Year Ended Year Ended Months Ended
through December December 31, December 31, July 31,
31, 1995 1996 1997 1998
---------------- ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (577) $ (4,774) $(19,103) $(9,388)
Adjustments to
reconcile net loss to
cash flows utilized
for operating
activities:
Depreciation and
amortization.......... 712 4,632 4,851 2,909
Provision for doubtful
accounts.............. (53) 788 717 635
Deferred income taxes.. -- -- -- (4,085)
Changes in working
capital, net:
Accounts receivable... (1,459) (316) (2,099) 2,899
Inventories........... 486 (924) 3,342 665
Prepaid expenses...... (268) 32 260 (491)
Other current assets.. (282) 203 993 (376)
Accounts payable...... 484 4,050 4,810 4,366
Accrued wages and
benefits............. (475) (975) 568 (662)
Restructuring
reserve.............. (101) (1,941) (991) (37)
Other accrued
expenses............. 605 (1,508) 2,701 4,613
Deferred service
revenue.............. (60) (511) (576) (635)
Income taxes payable.. 24 (1,716) (175) 22
Other.................. -- -- 2,175 94
------- -------- -------- -------
Cash provided by
(utilized for)
operating activities... (964) (2,960) (2,527) 529
Cash flows from
investing activities:
Purchases of property
and equipment.......... (123) (2,556) (1,075) (23)
Proceeds from sales of
property and
equipment.............. -- 265 518 --
Proceeds from sale of
assets held for sale... -- 8,456 -- --
Other................... (131) (1,793) (58) --
------- -------- -------- -------
Cash provided by
(utilized for)
investing activities... (254) 4,372 (615) (23)
Cash flows from
financing activities:
Net borrowings
(repayments) under
revolving lines of
credit................. -- 15,838 (307) (7,811)
Proceeds from advances
from Convergent
Communications
Services, Inc.......... -- -- -- 15,197
Cash contributed by TIE
Acquisition Co......... 2,353 -- -- --
Proceeds from note with
affiliate.............. 1,515 4,500 --
Proceeds from borrowing
from former majority
stockholder............ 400 -- --
Repayment of note with
affiliate.............. -- -- (300) --
Repayment of term loan.. -- -- -- (7,000)
Repayment of bridge loan
facility............... -- (20,000) -- --
Return of equity to TIE
Acquisition Co......... -- (80) -- --
Capitalized lease
payments............... -- (28) (894) (568)
Payment of long-term tax
liability.............. (296) -- -- --
------- -------- -------- -------
Cash provided by
(utilized for)
financing activities... 2,457 (2,755) 2,999 (182)
======= ======== ======== =======
Net increase/(decrease)
in cash................ 1,239 (1,343) (143) 324
======= ======== ======== =======
Cash at beginning of the
period................. 573 1,812 469 326
======= ======== ======== =======
Cash at end of the
period................. $ 1,812 $ 469 $ 326 $ 650
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
TIE-8
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share related data)
1. Nature of Business and Going Concern Uncertainty
Nature of business
Tie/communications, Inc. (together with its subsidiaries, "TIE") is engaged
in the sale, installation and servicing of telecommunications products and
services including the resale of long distance services. TIE's principal
products are multi-featured, fully electronic, digitally controlled key
systems, private automated branch exchange ("PABX") systems and hybrid
telephone systems, voice response and processing products with computer
telephone integration hardware and software, video conferencing systems and
network services including long distance products as well as pre-owned phone
systems, which are primarily for business use. TIE's products also include
other peripheral data and telecommunications products.
TIE resells long distance services to its customers under separate reseller
agreements with certain major interexchange carriers. By offering both premise-
based telecommunications equipment and services along with competitive resold
long distance services, TIE delivers a single point of contact for the
telecommunications needs of its customers which is a valuable and beneficial
service for its small to medium commercial customers.
TIE's core business sells, installs and services its products through a U.S.
network of approximately 40 sales, service and warehouse facilities located
throughout major U.S. metropolitan areas.
Going concern uncertainty
The accompanying consolidated financial statements have been prepared
assuming that TIE continues as a going concern, which contemplates continuity
of operations and realization of assets and liquidation of liabilities in the
ordinary course of business. TIE was not in compliance with certain of the
restrictive covenants contained in the loan and security agreement with one of
its lenders throughout 1996, 1997 and 1998. These events of noncompliance
indicated that the related obligations were callable by the lender.
Additionally, TIE has a working capital deficit of $49,272 as of July 31, 1998
and has generated net losses of $33,842 since its inception in October 1995
resulting in a stockholder's deficit of $26,089 as of July 31, 1998.
On April 10, 1998, TIE filed a voluntary petition for relief under Chapter 11
of Title 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the
United States Bankruptcy Court for the Central District of California (the
Bankruptcy Court), Case No. SA 98-15547-JB. TIE is currently operating its
business as a debtor-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and is subject to the jurisdiction of the Bankruptcy Court.
Since filing the petition for relief, TIE has reported reorganization expenses
relating to professional and legal fees of $1,439.
On June 16, 1998, TIE entered into an asset purchase agreement with
Convergent Communications Services, Inc. for the acquisition of substantially
all of the assets and the assumption of certain liabilities for a cash payment
of $40 million. The agreement was subject to the approval of the Bankruptcy
Court, which was obtained on July 20, 1998. Pursuant to the asset purchase
agreement, on July 31, 1998, the purchase price for the acquisition was
delivered to an escrow agent and was partially used to repay TIE's indebtedness
under the loan and security agreement referred to above. The sale transaction
closed effective August 1, 1998. See Note 15.
TIE-9
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As a result of the filing under Chapter 11 of the Bankruptcy Code and related
circumstances, including TIE's leveraged financial structure, the substantial
recurring net losses and working capital and stockholder's deficits and the
disposition of substantially all of TIE's assets, the realization of any
remaining assets and liquidation of remaining liabilities is subject to
significant uncertainty.
While under the protection of Chapter 11 of the Bankruptcy Code, TIE may sell
or otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the accompanying financial statements.
Further, a plan of reorganization could materially change the amounts reported
in such financial statements, which do not give effect to all adjustments of
the carrying value of assets or liabilities that might be necessary as a
consequence of a confirmed plan of reorganization.
2. Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of TIE and its
majority-owned subsidiaries. During 1996, all of TIE's active subsidiaries
merged into TIE. All significant intercompany accounts and transactions have
been eliminated.
Basis of presentation
The accompanying financial statements do not reflect sale of substantially
all of the assets to and the assumption of certain liabilities by Convergent
Communications Services, Inc. effective August 1, 1998. See Note 15.
Reclassifications
Certain amounts in 1995 financial statements have been reclassified to
conform to the current year's presentation.
Revenue recognition
Revenue from equipment sales and installation service work to end users is
recognized at the time of its completion. Deferred service revenue from
maintenance contracts is amortized in equal increments over the terms of the
contracts which are generally for one year. Revenue from the reselling of long
distance service is recognized at the time of the performance and the cost
associated for providing those services is charged to cost of sales.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounts receivable
Accounts receivable represent billed and accrued receivables for equipment
sales, installation service work and long distance reseller services. These
receivables are unsecured. TIE provides
TIE-10
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
allowances for returns, billing adjustments and doubtful accounts equal to the
estimated losses expected to be sustained.
Inventories
Inventories, which consist primarily of new and refurbished equipment for
resale, are valued at the lower of cost or net realizable value, using the
first-in, first-out method. TIE provides reserves for estimated losses related
to excess and obsolete inventory.
Warranty claims
TIE accrues for warranty expense in the period that the related revenue is
recognized based upon historical experience.
Property and equipment
Property and equipment primarily consist of equipment that is of an
administrative nature such as office furniture and computers, which are not
used to generate revenues are recorded at cost. At the time fixed assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss, if any, is
included in the determination of income. Maintenance and repair costs are
expensed as incurred.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements and equipment
under capital leases are capitalized and amortized over the lesser of their
estimated useful lives or the lives of the related leases.
<TABLE>
<CAPTION>
Assigned
Life
----------
<S> <C>
Building......................................................... 30 years
Equipment........................................................ 3-9 years
Leasehold improvements........................................... 1-5 years
Furniture and fixtures........................................... 3-10 years
</TABLE>
Liabilities subject to compromise
In accordance with Statement of Position 90-7 (SOP 90-7), Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code, prepetition
liabilities which are unsecured or estimated to be undersecured are classified
as liabilities subject to compromise. The accrual of interest on such
liabilities has been discontinued for periods after April 10, 1998.
Intangible assets
Excess purchase price over fair value of net assets acquired and the
identifiable intangible assets are being amortized over their estimated useful
life of 10 years. The principal identifiable intangible assets are TIE's
installed customer base and its tradename. Accumulated amortization as of
December 31, 1995, December 31, 1996, December 31, 1997 and July 31, 1998 was
$384, $3,336, $6,195 and $7,863, respectively. TIE periodically assesses the
realizability of the excess purchase price over fair value of net assets
acquired based upon estimated fair value.
TIE-11
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Debt issuance costs
Debt issuance costs are capitalized and amortized as interest expense using
the effective interest method over the lives of the related debt. Accumulated
amortization as of December 31, 1995, December 31, 1996, December 31, 1997 and
July 31, 1998 was $188, $894, $1,496 and $1,541, respectively.
Impairment of long-lived assets
TIE assesses its long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets (or group of assets) may not be recoverable. Impairment is
determined to exist if the estimated future cash flows (undiscounted and
without interest charges) is less than carrying value. The amount of any
impairment then recognized would be calculated as the difference between
carrying value and fair value. With respect to assets to be disposed of,
impairment is measured as the excess of carrying value over fair value less
cost of disposal.
Income taxes
TIE accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which is an
asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is recorded for
deferred tax assets which management determines are more likely than not
unrealizable. TIE joins in the filing of a consolidated federal income tax
return with TIE Acquisition Co., with the tax liability allocated on a separate
company basis.
Stock options
TIE accounts for stock options granted to employees and non-employee
directors using the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) which permits companies to use either the
APB 25 intrinsic value method or the fair value method as prescribed by SFAS
No. 123, but encourages companies to adopt the fair value method. Companies
electing to use the APB 25 method are required to disclose pro forma net income
(if materially different from net income as reported) in the notes to the
financial statements, as if they had adopted the SFAS No. 123 fair value
method. TIE accounts for stock options issued to parties other than employees
and non-employee directors using the SFAS No. 123 fair value method.
3. Fair Value Of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments,
TIE-12
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Fair values are based on settlements using present value
or other valuation techniques.
TIE's financial instruments include cash, accounts receivable and payable,
debt and irrevocable standby letters of credit ($172, $464, $685 and $0 as of
December 31, 1995, December 31, 1996, December 31, 1997 and July 31, 1998,
respectively). Management believes the fair values of the cash and accounts
receivable and payable approximate their respective carrying values because of
their short term nature. Management does not believe that it is practicable to
estimate the fair values of the debt or irrevocable standby letters of credit
because of the uncertainty surrounding TIE's financial status as described in
Note 1.
4. Property And Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Land....................... $ 10 $ 10 $ 10 $ 10
Buildings.................. 123 123 123 123
Equipment.................. 1,316 2,101 1,790 1,814
Leasehold improvements..... 52 91 426 436
Furniture and fixtures..... 235 232 239 239
Equipment under capital
leases.................... -- 145 4,629 4,629
Construction in progress... -- 139 20 20
------- ------- ------- ------
1,736 2,841 7,237 7,271
Less accumulated
depreciation and
amortization (including
$0, $12, $1,007 and $1,915
of accumulated
amortization related to
equipment under capital
leases)................... 140 1,049 2,640 3,843
------- ------- ------- ------
$ 1,596 $ 1,792 $ 4,597 $3,428
======= ======= ======= ======
</TABLE>
(dollars in thousands, except share related data)
Depreciation expense (including amortization of equipment under capital
leases) aggregated $140, $921, $1,704 and $1,193 for the period from November
1, 1995 through December 31, 1995, and the years ended December 31, 1996 and
December 31, 1997 and the seven months ended July 31, 1998, respectively.
Depreciation expense represents depreciation on plant and equipment that is
primarily of an administrative nature such as office furniture and computers,
which are not used to generate revenues.
TIE-13
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Subordinated promissory
note to related party..... $ 10,000 $ 10,000 $ 10,000 $10,000
Bank revolving credit
facility.................. -- 8,838 8,531 --
Bank term loan facility.... 20,000 7,000 7,000 --
Subordinated demand notes
payable to related party.. -- 1,515 5,734 5,734
Capitalized lease
obligations............... -- 117 3,707 3,139
--------- --------- --------- -------
30,000 27,470 34,972 18,873
Less current maturities of
long-term debt............ -- 17,411 22,647 17,378
--------- --------- --------- -------
Long-term debt............. $ 30,000 $ 10,059 $ 12,325 $ 1,495
========= ========= ========= =======
</TABLE>
In connection with the acquisition discussed in Note 9, TIE Acquisition Co.
borrowed $20,000 under a bank loan facility agreement, as amended, which bore
interest at the prime rate, as defined, plus 2.5% and was secured by TIE's
stock acquired by TIE Acquisition Co. The principal and interest on the loan
were due and repaid 90 days after the stock tender offer (January 16, 1996).
Concurrent with the merger described in Note 9, TIE entered into a $10,000
subordinated promissory note payable to TIE Acquisition Co. Interest is payable
monthly at the rate of 10%. The note is due and payable in full on February 15,
1999. Interest expense was $53, $1,017, $1,014 and $281 for the period from
November 1, 1995 through December 31, 1995, and the years ended December 31,
1996 and December 31, 1997 and the seven months ended July 31, 1998,
respectively. In accordance with SOP 90-7, the accrual of interest on this note
was discontinued after April 10, 1998. The unrecorded interest expense was $308
for the period from April 10 through July 31, 1998.
In January 1996, TIE entered into a Loan and Security Agreement with a bank
(the "Agreement"), which consisted of two facilities: a $20,000 revolving
credit facility and a $5,000 term loan facility. The Agreement was subsequently
amended to decrease the revolving credit facility to $18,000 and increase the
term loan facility to $7,000. The revolving credit facility terminates on
December 1, 1998, but shall be automatically extended for successive one-year
periods unless either the lender or the borrower provides to the other written
notice of termination not less than 60 days prior to the then effective
termination date. The revolving credit facility bears interest, at TIE's
option, at either the prime rate plus 1% or LIBOR plus 3.25% (9.5% at December
31, 1997). The advances available under this facility are limited to specified
percentages of eligible accounts receivable and inventory. The term loan
facility expired on January 31, 1998 and bore interest at LIBOR plus 4%
(9.6875% at December 31, 1997). The proceeds from these two facilities were
used to retire the $20,000 bank bridge loan utilized for the acquisition in
November 1995. The obligations under this Agreement are secured by
substantially all of TIE's assets as well as TIE Acquisition Co.'s
stockholdings in TIE and other assets which have been pledged by certain
related parties. Effective February 1, 1998, the interest rate of each of these
facilities increased 2% due to TIE's failure to pay the term loan when it
became due.
TIE-14
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Agreement contains numerous financial and operating covenants, including,
among other things, requirements that TIE maintain certain financial ratios and
restrictions on the ability of TIE to (i) incur indebtedness or create liens,
(ii) make certain capital expenditures and lease payments, and (iii) make
certain restricted distributions and payments. During 1996, 1997 and 1998, TIE
violated certain financial covenants of the Agreement. See Note 1.
In accordance with the bankruptcy filing, TIE repaid the term loan and the
revolving credit facility with operating cash receipts during the second
quarter of 1998. A debtor-in-possession loan was established with the bank on
April 10, 1998 to provide for TIE's operating expenses. The loan was secured by
TIE's accounts receivable and bore interest at 10.5%. Pursuant to the asset
purchase agreement on July 31, 1998 the purchase price for the acquisition was
delivered to an escrow account and was partially used to repay TIE's
indebtedness under the debtor-in-possession loan.
In February 1996, TIE entered into a $1,515 subordinated demand note payable
to SP Investments, Inc., a related party. Interest on this note was initially
payable quarterly in arrears at an annual rate equal to the greater of 12% or
the prime rate plus 5%. Effective January 1997 and July 1997, the note was
amended to increase the interest rate to 20% and 30%, respectively. Interest
expense for the years ended December 31, 1996 and 1997 and for the seven months
ended July 31, 1998 was $185, $444 and $126, respectively. Also in 1997, TIE
entered into three additional demand notes payable to SP Investments, Inc.
totaling $4,500. Interest on these notes is payable at an annual rate of 30%
and is payable on demand. Interest expense related to these notes aggregated
$507 and $344 for the year ended December 31, 1997 and for the seven months
ended July 31, 1998. In accordance with SOP 90-7, the accrual of interest on
these notes was discontinued after April 10, 1998. The unrecorded interest
expense was $530 for the period from April 10 through July 31, 1998.
During 1997, TIE also entered into various collateral guarantee fee
arrangements with certain members of management and shareholders of TIE
Acquisition Co. The agreements call for individuals to be compensated for
personal assets used to guarantee certain debt of TIE. As of December 31, 1997
and July 31, 1998, a liability of $1,005 and $1,086 has been recorded for these
fees and the related expense has been recorded in interest expense.
Interest expense included in the Consolidated Statements of Operations for
the period from November 1, 1995 through December 31, 1995, for the years ended
December 31, 1996 and 1997, and for the seven months ended July 31, 1998
includes non-cash interest expense of $188, $528, $602 and $45, respectively,
representing amortization of debt issuance costs as described in Note 2.
TIE-15
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
TIE entered into various capital lease agreements during 1997 of which each
had a lease period of three years. Three agreements were entered into for the
sale and simultaneous leaseback of equipment and software, with aggregate lease
payments totaling $1,798. Three lease agreements were entered into for the
purchase of office furniture and other equipment, with aggregate lease payments
totaling $698. In addition, TIE entered into six lease agreements for equipment
with aggregate lease payments totaling $1,988. At July 31, 1998, the future
minimum lease payments under capital leases were as follows:
<TABLE>
<S> <C>
Five months ending December 31, 1998................................. $ 939
Year ending December 31:
1999............................................................... 1,645
2000............................................................... 899
------
Total minimum rentals............................................ 3,483
Less amount representing interest.................................... 344
------
Present value of minimum rentals..................................... $3,139
======
</TABLE>
6. Liabilities Subject to Compromise
Certain prepetition liabilities, which may be impaired, have been classified
as liabilities subject to compromise in the Chapter 11 reorganization
proceedings and include the following estimated amounts at July 31, 1998:
<TABLE>
<S> <C>
Debt instruments:
Subordinated promissory note payable to TIE Acquisition Co........ $10,000
Subordinated demand notes payable to a related party.............. 5,734
-------
Total debt instruments.......................................... 15,734
-------
Accounts payable.................................................... 12,490
Other accrued expenses:
Related party..................................................... 3,478
Other............................................................. 2,947
Deferred service revenue............................................ 2,716
Restructuring reserve............................................... 486
Income taxes payable................................................ 928
-------
Total........................................................... $38,779
=======
</TABLE>
TIE-16
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
The components of the income tax provision for the period from November 1,
1995 through December 31, 1995, for the years ended December 31, 1996 and 1997,
and for the seven months ended July 31, 1998 are as follows:
<TABLE>
<CAPTION>
Period from
November 1, 1995 Seven Months
through Year Ended Year Ended Ended
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current tax expense
(benefit):
Federal............... $-- $-- $-- $ --
State................. 8 36 35 21
Deferred tax expense
(benefit):
Federal............... -- -- -- (3,472)
State................. -- -- -- (613)
---- ---- ---- -------
$ 8 $ 36 $ 35 $(4,064)
==== ==== ==== =======
</TABLE>
The differences between TIE's provision for income taxes and income taxes
based upon the federal statutory rate are:
<TABLE>
<CAPTION>
Period from
November 1, 1995 Seven Months
through Year Ended Year Ended Ended
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income tax (benefit)
computed at the
statutory federal
rate................... $(193) $(1,150) $(6,070) $(3,753)
Changes resulting from:
Changes in the
valuation allowance
for deferred income
tax assets allocated
to income taxes...... 54 796 5,563 (697)
Nondeductible
amortization of
excess purchase price
over fair value of
net assets acquired.. 130 353 457 226
Other................. 17 37 85 160
----- ------- ------- -------
$ 8 $ 36 $ 35 $(4,064)
===== ======= ======= =======
</TABLE>
TIE-17
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The significant components of TIE's deferred income tax balances are as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31, July 31,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Net operating loss
carryover................ $ 3,728 $ 5,747 $ 17,787 $ 21,551
Accounts and notes
receivable............... 749 536 766 978
Inventories............... 2,556 2,523 1,346 1,499
Property and equipment.... 8 105 145 160
Accrued expenses and other
liabilities.............. 2,420 1,773 1,468 1,612
Deferred revenue.......... 109 80 -- --
Equipment credit
receivable............... (600) -- -- --
Other..................... -- (48) -- --
8,970 10,716 21,512 25,800
Valuation allowance....... (8,970) (10,716) (21,512) (18,908)
------- -------- -------- --------
Net deferred income tax
balance.................. $ -- $ -- $ -- $ 6,892
======= ======== ======== ========
</TABLE>
TIE has net operating loss carryovers of $53,060. TIE's ability to utilize
these operating loss carryovers incurred prior to the acquisition was
materially limited due to the change of ownership which occurred in 1995. Due
to these limitations, the amount of future taxable income which can be offset
by federal operating losses incurred prior to November 1, 1995, is
approximately $533 annually ($7,018 in the aggregate).
In addition to the annual limitation on the utilization of the pre-
acquisition operating loss carryforwards, taxable gains on the sale of assets
whose value exceeded their tax bases at November 1, 1995 can be offset by the
pre-acquisition operating loss carryforwards to the extent that such built-in
gains are recognized during a period of five years following the acquisition
(see Note 9). TIE has unrecognized built-in gains in excess of its net
operating loss at the time of the acquisition. Federal operating loss
carryforwards are scheduled to expire between 2005 and 2018.
Pursuant to SFAS No. 109, excess purchase price over the fair value of net
assets acquired was reduced by $2,807 for the tax benefit recognized due to the
reduction of the valuation allowance for the future utilization of pre-
acquisition operating loss carryforwards.
TIE has a $912 tax liability recorded relating to a negotiated settlement
with the Internal Revenue Service and with certain states for tax years through
December 31, 1986. TIE was entitled to make payments of the federal and state
tax liabilities over a period of six years due to a Chapter 11 bankruptcy
reorganization in 1991. The outstanding balance accrues interest at the six
month U.S. Treasury Bill rate.
8. Employee Benefit Plan
TIE's Profit Sharing and Savings Plan (the "Plan") allows participating
employees to authorize payroll deferrals of up to 16% of their total
compensation and to contribute such amounts to the Plan. Under the Plan, TIE
matches a portion of a participant's contribution equal to 50% of that portion
of a participant's deferred compensation which does not exceed 6% of the
participant's eligible compensation. During the period from November 1, 1995
through December 31, 1995, TIE's contributions were $75. During the years ended
December 31, 1996 and December 31, 1997 and the
TIE-18
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
seven months ended July 31, 1998, TIE did not meet its contribution
requirements due to financial difficulties. As of December 31, 1996, December
31, 1997, and July 31, 1998, $461, $933 and $1,200, respectively, were due to
the Plan and have been recorded in the accompanying financial statements.
9. Stockholder's Equity/(deficit)
Acquisition and merger
On October 18, 1995, TIE Acquisition Co. entered into a stock tender offer
with the former stockholders of TIE and acquired 3,749,587 shares
(approximately 94%) of the outstanding common stock for $8.60 per share (the
"Acquisition").
The aggregate consideration for TIE amounted to $36,125 including financing
debt issuance and acquisition costs and $8.60 per share for untendered shares.
The purchase price exceeded the estimated fair market value of the net
identifiable assets by $28,501, and the Acquisition has been accounted for
under the purchase method of accounting.
On December 13, 1995, TIE Acquisition Co. contributed cash and the TIE common
stock it held to TIE Merger Co. (a wholly-owned subsidiary of TIE Acquisition
Co.). In conjunction with the contributions, TIE Acquisition Co. made a payment
of $1,800 to repay TIE's note payable to the former majority stockholder and
TIE Merger Co. assumed certain TIE Acquisition Co. accrued liabilities,
including liabilities amounting to $1,992 for untendered TIE common stock (the
shares were converted into the right to receive $8.60 per share upon surrender
of the corresponding stock certificates) and TIE Acquisition Co.'s $20,000 bank
debt, which is secured by all TIE's outstanding stock. In addition, TIE Merger
Co. entered into a long-term note payable with TIE Acquisition Co. for $10,000.
The note payable corresponds with the notes payable entered into by TIE
Acquisition Co. in connection with the tender offer for TIE's stock.
Also effective December 13, 1995, TIE Merger Co. was merged into TIE (the
"Merger"). In conjunction with the Merger, all shares of TIE's common stock
were canceled and extinguished. After the Merger, TIE had 100 shares of $0.01
par value common stock authorized, issued and outstanding, all of which were
owned by TIE Acquisition Co.
Recapitalization
In January 1997, TIE amended its Restated Certificate of Incorporation to
increase the number of authorized shares of common stock, par value of one cent
($.01), to fifteen million shares and authorized five million shares of
preferred stock, par value of one cent ($.01). The amendment further designated
one million shares of the preferred stock to be Series A 8.0785% Cumulative
Preferred Stock (the Series A Preferred Stock), without voting rights.
In connection with the increase in authorized shares of stock, TIE was
recapitalized by substituting, for the 100 shares of TIE's then issued and
outstanding common stock, 10,200,000 shares of common stock, par value of one
cent ($.01) and 940,000 shares of Series A 8.0785% Cumulative Preferred Stock.
TIE-19
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends on the Series A Preferred Stock accrue at a rate per annum of
8.0785% of the liquidation preference thereof ($10.51 per share) and are
payable semi-annually on October 18 and April 18 of each year.
Each Series A Preferred Stock dividend shall be fully cumulative and shall
accrue (whether or not earned or declared) without interest from the first day
of issuance of the Series A Preferred Stock. No dividends on the Series A
Preferred Stock were declared or paid during 1997 or 1998. As of December 31,
1997 and July 31, 1998, the accumulated dividends on the Series A Preferred
Stock approximated $713 and $1,156.
Upon a liquidation, winding up or dissolution of the affairs of TIE, whether
voluntary or involuntary, the holders of the Series A Preferred Stock are
entitled to be paid $10.51 per share, plus all accrued and unpaid dividends
(whether or not earned or declared) before any assets of TIE shall be
distributed to holders of TIE common stock.
Additionally, at the option of TIE, the Series A Preferred Stock may be
redeemed at any time in whole or in part at a cash redemption price of $10.51
per share plus accrued and unpaid dividends to the scheduled redemption date.
Stock options
In January 1997, TIE established the Tie Communications, Inc. Employees'
Stock Incentive Plan (National Plan), the Tie Communications, Inc. Employees'
Stock Incentive Plan (California Plan) and the Tie Communications, Inc. Non-
Employee Directors' Stock Option Plan which provide for the availability of
1,800,000; 180,000 and 220,000 shares, respectively, of TIE's common stock for
the grant of awards to TIE employees or non-employee directors. Awards granted
under these plans may take the form of stock options or stock appreciation
rights (SARs). The option exercise price and SAR initial value under these
plans must be at least equal to the fair market value of the underlying shares
of common stock on the date of grant (110% of the underlying fair market value
in the case of a ten percent shareholder). Plan participants vest in their
awards (generally over five years) and such awards expire (generally 10 years
after the grant date) as determined by a committee of TIE board of directors.
A summary of stock option activity under these plans is presented in the
table below:
<TABLE>
<CAPTION>
Shares underlying options for the Shares underlying options for the
year ended December 31, 1997 seven months ended July 31, 1998
--------------------------------- ---------------------------------
<S> <C> <C>
Outstanding at January
1...................... -- 966,500
Granted................. 1,324,000 --
Exercised............... -- --
Canceled................ (357,500) (134,000)
--------- --------
Outstanding............. 966,500 832,500
========= ========
Exercisable............. 88,800 232,500
========= ========
</TABLE>
The exercise price for all options outstanding and vested is $1.00 per share.
Under SFAS No. 123, companies must either record compensation expense based
on the estimated grant date fair value of stock options granted or disclose the
impact (if material) on net
TIE-20
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
income as if they had adopted the fair value method. TIE's pro forma net loss
as if expense was recorded using SFAS No. 123 was $19,168 and $9,424 for the
year ended December 31, 1997 and the seven months ended July 31, 1998.
The weighted average fair value of options granted in 1997 was $.27 per
share. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C>
Expected option term................................................. 5 years
Dividend yield....................................................... 0%
Risk free interest rate.............................................. 6.29%
</TABLE>
Due to the fact that TIE's common stock is not publicly traded, volatility
was not considered in TIE's calculations of fair value of stock options issued
to employees and non-employee directors.
The weighted average remaining life of the options at July 31, 1998 was 8.75
years.
During 1997, TIE entered into a consulting agreement with Burton Training
Group (Burton), which is owned by a former member of TIE's Board of Directors.
The agreement, which expired June 30, 1998, calls for Burton to provide
consulting services to TIE. Under this agreement, Burton was paid $272 during
the year ended December 31, 1997, and is eligible to earn options to purchase
up to 60,000 shares of TIE's common stock based on the formula specified in the
agreement. As of July 31, 1998, none of these options had been earned.
10. Restructuring Reserve
On November 1, 1995, TIE announced a restructuring plan in which numerous
field activities would be centralized in order to streamline operations and
increase productivity. The restructuring involved the centralization of all
accounting, dispatch, order entry and customer service related functions. As of
November 1, 1995, TIE established a restructuring reserve of $2,500, which was
increased by $1,226 in 1996 and decreased by $170 in 1997 to complete the
previously announced restructuring. Amounts reserved for restructuring at
November 1, 1995 and December 31, 1996 resulted in adjustments to goodwill from
the purchase of TIE. The reserve was established primarily to support
severance, outplacement, relocation, travel and legal fees associated with
centralization. The centralization, under which TIE terminated 153 employees,
was completed during 1997. The amounts remaining in the reserve relate to
termination benefits to be paid. The following amounts had been charged against
the reserve:
<TABLE>
<CAPTION>
Year Ended
December Seven Months
31, Ended
----------- July 31,
1996 1997 1998
------ ---- ------------
<S> <C> <C> <C>
Termination benefits.... $1,200 $714 $ 37
Relocation.............. 364 65 --
Early termination of
lease and service
agreements............. 346 178 --
Other................... 132 35 --
</TABLE>
11. Discontinued Operations
On May 1, 1996, TIE sold the assets and liabilities of its TAI
Telecommunications Accessories division in Canada to Norelco Telecom LTD. for
$529. On May 23, 1996, TIE sold the assets and
TIE-21
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
liabilities of its TIE Repair division to Aztec East, Inc. for $1,700. In
addition, TIE received deferred payments over a six month period totaling $134.
On August 29, 1996, the Company sold the stock of its TIE/telecommunications
Canada Limited subsidiary to 3280993 Canada Inc. for $6,536. In connection with
the Canadian sale, TIE retained the right to receive the proceeds of a
liquidated pension plan of $535 which was received during 1997.
The discontinued operations recorded revenues for the period January 1, 1996
through the sale dates of $16,999, and net income during the same period of
$782. Interest costs allocated to net assets held for sale for the period
January 1, 1996 through the sale date was $692. A loss of $1,721 on the
disposition of these operations was recorded as an adjustment of the original
purchase price allocation during 1996.
12. Related Party Transactions
TIE agreed to pay Security Properties Real Estate Services Inc. ("Security
Properties"), which is a subsidiary of SP Investments Inc. (owned by the
majority stockholders of TIE Acquisition Co.), a management fee aggregating
$240 annually beginning December 1, 1995 and amended to $300 annually beginning
January 1, 1997. TIE also agreed to reimburse Security Properties for all
reasonable expenses it incurs in connection with services to TIE. TIE recorded
expense of $20 for the period from November 1, 1995 through December 31, 1995,
$220 for the year ended December 31, 1996, $300 for the year ended December 31,
1997 and $83 for the seven months ended July 31, 1998 related to the management
agreement.
13. Supplemental Cash Flow Information
Supplemental cash flow information for the period from November 1, 1995
through December 31, 1995, for the years ended December 31, 1996 and 1997, and
for the seven months ended July 31, 1998.
<TABLE>
<CAPTION>
Period from
November 1, 1995
through Year Ended Year Ended Seven Months
December 31, December 31, December 31, Ended July 31,
1995 1996 1997 1998
---------------- ------------ ------------ --------------
(dollars in thousands, except share related data)
<S> <C> <C> <C> <C>
Supplemental cash flow
information:
Cash paid during the
period for:
Interest.............. $ 24 $1,810 $ 923 $ --
Income taxes.......... $272 $1,672 $ 194 $ --
Reorganization
expenses............. $-- $ -- $ -- $1,251
Supplemental noncash
investing and financing
activities:
Capital asset and lease
obligation additions.. $-- $ 145 $4,484 $ --
</TABLE>
TIE-22
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. Commitments And Contingencies
Purchase commitments
TIE has entered into several long term contracts to purchase long distance
services and equipment. A summary of those commitments is as follows:
<TABLE>
<CAPTION>
Vendor Minimum Commitment Penalties
------ ------------------ ---------
<S> <C> <C>
MCI.................. $6,000 of long Difference between actual usage
distance services and annual minimum.
annually
Phoenix.............. $1,000 of long 25% of difference between
distance services monthly minimum and actual
monthly usage.
Northern Telecom..... $8,000 in equipment Termination of agreement or $30
purchases penalty plus the difference in
discount rates.
</TABLE>
During 1997 and 1998, TIE's resales of Phoenix long distance service were
below the required monthly minimum of the contract. TIE accrued penalties of
$179 and $736 at December 31, 1997 and July 31, 1998, respectively, for the
differences.
TIE had purchased $2,824 of long distance services under the MCI contract and
has recorded a liability of $676 for estimated penalties based on usage during
the first seven months of 1998.
TIE had purchased $5 million of equipment leases under the Northern Telecom
agreement through the seven months ended July 31, 1998.
The long-term contracts for MCI, Phoenix, and Northern Telecom expire on
December 31, 2000, December 31, 1999 and December 31, 2000, respectively. The
MCI commitment increases to $9,000 and $12,000 in January 1999 and January
2000, respectively, and the minimum commitment for Northern Telecom is adjusted
annually every October 1.
Operating leases
TIE leases office and warehouse space under noncancellable operating leases
expiring at various dates through 2003, and leases certain equipment under
operating lease agreements expiring in 1998. At July 31, 1998, the future
minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
5 months ending December 31, 1998.................................... $1,067
Year ending December 31,
1999............................................................... 1,740
2000............................................................... 696
2001............................................................... 480
2002............................................................... 182
2003............................................................... 37
------
Total minimum rentals............................................ $4,202
======
</TABLE>
TIE-23
<PAGE>
TIE/COMMUNICATIONS, INC.
(a wholly-owned subsidiary of TIE Acquisition Co. and a Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense charged to operations for the period from November 1, 1995
through December 31, 1995, the years ended December 31, 1996 and 1997 and for
the seven months ended July 31, 1998 was $627, $3,591, $2,931 and $1,654,
respectively. In the ordinary course of business, leases expire and are
replaced or renewed, therefore, the rent expense in future periods may exceed
the minimum annual rentals noted above.
Litigation
TIE is party to various lawsuits, proceedings and other matters arising from
the conduct of its business. It is management's opinion that the final
resolution of these matters will not have a material effect upon the business,
financial condition or results of operations of TIE.
15. Subsequent Events
As discussed in Note 1, TIE entered into an asset purchase agreement with
Convergent Communications Services, Inc. (Convergent Communications) for the
acquisition of substantially all of the operating assets and the assumption of
certain liabilities for a cash payment of approximately $40 million. The sale
was consummated on August 1, 1998 and the proceeds were used to pay off TIE's
advance from Convergent Communications. The remainder of the proceeds were
placed into a trust until the plan of reorganization is approved by the
Bankruptcy Court. The following unaudited condensed pro forma balance sheet
reflects the sale of operating assets, the pay-off of the advance from
Convergent Communications, receipt of sale proceeds and the assumption of
certain liabilities by Convergent Communications subsequent to the closing.
<TABLE>
<CAPTION>
Historical July 31, Pro Forma Pro Forma July
1998 Adjustments 31, 1998
------------------- ----------- --------------
Unaudited
<S> <C> <C> <C>
Assets
Cash..................... $ 650 $ 23,942 (a) $ 24,592
Deferred tax assets...... 6,892 (6,892)(b) --
Other current assets..... 15,504 (15,504)(c) --
Noncurrent assets........ 24,678 (24,678)(c) --
-------- -------- --------
Total assets......... $ 47,724 $(23,132) $ 24,592
======== ======== ========
Liabilities and
stockholder's deficit
Notes payable............ $ 17,378 $ -- $ 17,378
Other current
liabilities............. 54,940 (26,151)(d) 28,789
Noncurrent liabilities... 1,495 (1,495)(d) --
-------- -------- --------
Total liabilities.... 73,813 (27,646) 46,167
Stockholder's equity
(deficit)............... (26,089) 4,514 (e) (21,575)
-------- -------- --------
Total liabilities and
stockholder's equity
(deficit)........... $ 47,724 $(23,132) $ 24,592
======== ======== ========
</TABLE>
- --------
(a) Represents the receipt of sales proceeds net of the advance from Convergent
Communications.
(b) Represents utilization of the deferred tax asset.
(c) Represents assets purchased by Convergent Communications.
(d) Represents the assumption of certain liabilities by Convergent
Communications and payoff of the advance from Convergent Communications.
(e) Represents gain on sale of assets net of income taxes.
TIE-24
<PAGE>
UNDERWRITING
Convergent Communications, the selling shareholders and the underwriters
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., J.P. Morgan Securities Inc., Warburg Dillon Read
LLC, and William Blair & Company, L.L.C. are the representatives for the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co......................................
J.P. Morgan Securities Inc...............................
Warburg Dillon Read LLC..................................
William Blair & Company, L.L.C...........................
---------
Total.................................................. 8,400,000
=========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,260,000 shares from Convergent Communications to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by Convergent Communications and the
selling shareholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Convergent
Communications
------------------------- ---
No Exercise Full Exercise
----------- -------------
<S> <C> <C> <C>
Per Share................................... $ $
Total....................................... $ $
<CAPTION>
Paid by the
Selling Shareholders
------------------------- ---
No Exercise Full Exercise
----------- -------------
<S> <C> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Convergent Communications, its officers and directors and the selling
shareholders have agreed with the underwriters not to dispose of or hedge any
of their common stock or securities convertible into or exchangeable for shares
of common stock during the period from the date of this prospectus continuing
through the date 180 days after the closing date of this offering, except with
the prior written consent of the representatives. This agreement does not apply
to any existing employee benefit plans. See "Shares Eligible for Future Sale"
for a discussion of certain transfer restrictions.
U-1
<PAGE>
Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among Convergent
Communications and the representatives. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be Convergent Communications' historical
performance, estimates of the business potential and earnings prospects of
Convergent Communications, an assessment of its management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
The common stock will be quoted on the Nasdaq National Market under the
symbol "CONV".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have purchased shares sold by or for
the account of such underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
Certain of the underwriters or their affiliates have in the past and may in
the future provide investment banking or other services for Convergent
Communications. In June 1999, Goldman Sachs Credit Partners L.P. ("GSCP"), an
affiliate of Goldman, Sachs & Co., provided a $10.0 million senior secured
credit facility to Convergent Communications. This facility is described in
greater detail in "Description of Indebtedness." In connection with this
facility, Convergent Communications issued a warrant to GSCP to acquire 375,000
shares of common stock at an exercise price of $15.00 per share. In addition to
the warrants, GSCP received customary compensation in connection with this
transaction.
Convergent Communications and the selling shareholders estimate that the
total expenses of the offering, excluding underwriting discounts and
commissions, will be approximately $ 1,133,970 and $29,300 , respectively.
Convergent Communications and the selling shareholders have agreed to
indemnify the several underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
U-2
<PAGE>
[INSIDE BACK COVER ART AND TEXT]
[Pictures of people from companies that use our network and quotes about the
advantages they have obtained from the network. Title caption contains text
"What our Customers Say...". Under title caption is a caption reading "Motorola
Credit Union" (photograph of customer) next to caption is text that reads
"Convergent Communications stepped up to provide a technology path that will
help us better serve our members and help us stay competitive into the next
millennium." Dan Desmond, President". Under the caption "Emco" (photograph of
customer) next to caption text that reads "Convergent Communications provides
EMCO with around-the-clock monitoring that's crucial to our aggressive
business. With Convergent Communication' "24x7' monitoring, problems are
prevented before they become apparent to us and are quickly corrected when they
do." Ronald N. Langston, Vice President of Administration & Organizational
Management." Above the caption "Franklin Covey" (photograph of customer) next
to caption text that reads "We selected Convergent Communications because they
have the necessary data expertise and they deliver on their promises." Brad
Jones, Network Manager". Under caption "Yellow Cab" (photograph of three
customers) with text next to the caption that reads "Convergent Communications
sharpens our competitive edge... Our business is booming and that's in part due
to our technological advantages over other cab companies." Michael Brown,
Information Technological Director." Below the text is more text "(clockwise,
from left) Steve Fowler, President; Bruce Moomaw, Chief Financial Officer;
Michael Brown, Information Technology Director".]
<PAGE>
[OUTSIDE BACK GATE ART AND TEXT]
[Continuation of gatefold. Above the caption "Accent Health" (photograph of
customer) text next to caption reads "Convergent Communications gives us
technological flexibility that allows us to concentrate on the needs of our
customers. Their voice and data technology management capabilities help us do
our job more efficiently." Jody Strain, Customer Service Manager". Under
caption "New Horizons" (photograph of customer) text next to caption reads "The
Convergent Communications professionals in Des Moines did an excellent job of
providing a turnkey communications solution for us, including all the training
we needed. It's a convenient alternative (to network ownership) we haven't seen
before." Frank Yamen, Partner". Under caption "Redd Engineering" (photograph of
customer) text next to caption reads "Convergent Communications gave us the
identify we were looking for. They were able to communicate our special
business strategy in a way that's easy to understand and that showcases the
excitement and uniqueness of what we do." J. Michael Redd, Chairman". Over
caption "Campbell Irvine & Rosenbaum, P.C." (photograph of three customers)
text next to caption reads "Convergent Communications made it a point to
understand our business so that they could provide us with the best solutions
for our needs." (clockwise from left) David C. Irvin, Brian Campbell, Allan S.
Rosenbaum".
<PAGE>
[INSIDE BACK GATE ART AND TEXT]
[Cover contains the following copy and photographs: Caption for the cover
with text "Convergent Communications...". Below the caption is a photograph of
our National Operations Center. Caption in the photograph with text "Convergent
Communications' National Operations Center in Englewood, Colorado." Next to the
photograph is text "Our network management and monitoring services support our
customers' increasing need for superior performance and reliability throughout
their networks. We can augment corporate Information Systems staff to make them
more effective or assume all of their functions through a comprehensive package
of "24x7," around-the-clock network coverage." Below the text is a photograph
depicting one of our employees monitoring at a computer. Below this photograph
is a photograph depicting a system user at a computer. Next to the bottom
photograph is text "Convergent Communications' Computer Telephony Integrated
Support System(TM) (CTISS) automates the critical business processes and
systems that support our diverse products and services. This Oracle-based
platform is driven by each customer's service records and is web enabled." In
the bottom corner of the page is the Convergent Communications(TM) logo.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary................................................................. 3
Risk Factors............................................................ 8
Use of Proceeds......................................................... 19
Corporate Information................................................... 19
Dividend Policy......................................................... 19
Dilution................................................................ 20
Capitalization.......................................................... 21
Selected Financial Data................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 24
Business................................................................ 38
Management.............................................................. 52
Principal Shareholders.................................................. 60
Certain Relationships and Related Transactions.......................... 62
Description of Capital Stock............................................ 63
Description of Indebtedness............................................. 68
Shares Eligible for Future Sale......................................... 71
Legal Matters........................................................... 72
Experts................................................................. 72
Available Information................................................... 73
Index to Financial Statements........................................... F-1
Index to TIE Financial Statements....................................... TIE-1
Underwriting............................................................ U-1
</TABLE>
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,400,000 Shares
Convergent Communications, Inc.
Common Stock
-----------
[LOGO] CONVERGENT
COMMUNICATIONS/TM/
-----------
Goldman, Sachs & Co.
J.P. Morgan & Co.
Warburg Dillon Read LLC
William Blair & Company
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The registrant's expenses in connection with the Offering described in this
registration statement are set forth below. All amounts except the Securities
and Exchange Commission registration fee, the NASD filing fee and the listing
fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $31,970
NASD filing fee................................................... 13,000
NASD Listing fee.................................................. 120,000
Printing and engraving expenses................................... 250,000
Accounting fees and expenses...................................... 150,000
Legal fees and expenses........................................... 400,000
Fees and expenses (including legal fees) for qualification under
state
securities laws.................................................. 4,000
Transfer agent's fees and expenses................................ --
Miscellaneous..................................................... 165,000
---------
Total........................................................... 1,133,970
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to C.R.S. (S) 7-108-102 (1994), which provides for
indemnification of directors, officers and other employees in certain
circumstances, and to C.R.S. (S) 7-108-402 (1994), which provides for the
elimination or limitation of the personal liability for monetary damages of
directors under certain circumstances. The Amended and Restated Articles of
Incorporation of the Company eliminates the personal liability for monetary
damages of directors under certain circumstances and provides indemnification
to directors and officers of the Company to the fullest extent permitted by the
Colorado Business Corporation Act. Among other things, these provisions provide
indemnification for officers and directors against liabilities for judgments in
and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following tables summarize securities issued or sold by us within the
past three years that were not sold pursuant to registered offerings:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES OF COMMON STOCK
OR CLASS OF COMMON WARRANTS/ OTHER EXEMPTION
DATE PURCHASERS STOCK OPTIONS SECURITIES CONSIDERATION CLAIMED*
---- ------------ --------- ---------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
From Apr Founders 3,750,000 $450,000 Section 4(2)
18, 1996 to
Oct 4, 1996
- ------------------------------------------------------------------------------------------------------
Oct 31, 1996 Sellers in 187,500 10% equity Section 4(2)
an interest in
acquisition target company
- ------------------------------------------------------------------------------------------------------
From Dec 13, 1996 Accredited 3,500,000 1,750,000 $7,000,000 (of Regulation D
to Feb 18, investors which $224,700
1997 is attributed to
warrants)
- ------------------------------------------------------------------------------------------------------
Feb 18, 1997 Placement 370,625 (28,125 Services in Regulation D
Agents exercised) connection with
offering.
- ------------------------------------------------------------------------------------------------------
Dec 17, 1996 Sellers in 1,750,000 100% equity Section 4(2)
an interest in
acquisition target company
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Number of Common
Underwriters Shares of Stock
or Class of Common Warrants/ Other Exemption
Date Purchasers Stock Options Securities Consideration Claimed*
---- -------------- --------- --------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Apr 10, 1997 Sellers in an 25,000 100% equity Section 4(2)
acquisition interest in
target company
- ----------------------------------------------------------------------------------------------
May 15, 1997 Credit 40,285 Extension of Section 4(2)
facility credit
provider
- ----------------------------------------------------------------------------------------------
Jun 30, 1997 Employee 375,000 $45,000 Rule 701
options
exercised
- ----------------------------------------------------------------------------------------------
Sep 10, 1997 Sellers in an 37,500 100% equity Section 4(2)
acquisition interest in
target company
- ----------------------------------------------------------------------------------------------
Sep 23, 1997 Sellers in an 375,000 100% equity Section 4(2)
acquisition interest in
target company
- ----------------------------------------------------------------------------------------------
From Oct 1, Accredited 3,410,000 1,705,000 $17,050,000 (of Regulation D
1997 and Nov investors which $3,351,689
5, 1997 is attributed to
warrants)
- ----------------------------------------------------------------------------------------------
Nov 14, 1997 Placement 307,930 Services in Regulation D
Agents connection with
private
placement.
- ----------------------------------------------------------------------------------------------
Nov 19, 1997 Credit 166,666 Consideration Section 4(2)
facility for extension of
provider $10.0 million in
credit.
- ----------------------------------------------------------------------------------------------
Dec 3, 1997 Sellers in an 25,000 Substantially Section 4(2)
acquisition all of the
assets of the
target company
- ----------------------------------------------------------------------------------------------
Jan 15, 1998 Investment 6,000 Investment Section 4(2)
Bank banking services
performed
- ----------------------------------------------------------------------------------------------
Jan 15, 1998 Investment 4,166 Investment Section 4(2)
Bank banking services
performed
- ----------------------------------------------------------------------------------------------
Feb 19, 1998 Employee 5,000 $10,000 Rule 701
options
- ----------------------------------------------------------------------------------------------
Feb 20, 1998 Sellers in an 5,000 Substantially Section 4(2)
acquisition all of the
assets of the
target company
- ----------------------------------------------------------------------------------------------
Mar 10, 1998 Consultants 37,500 $4,500 plus Rule 701
services
- ----------------------------------------------------------------------------------------------
Apr 2, 1998 Accredited 864,000 $160,000,000 $160,000,000 Rule 144(A)
investors-- 13% Senior and
Merrill Lynch Notes due Regulation S
& Co.; Bear, 2008
Stearns & Co;
and BT Alex.
Brown
(underwriters)
- ----------------------------------------------------------------------------------------------
Apr 9, 1998 Private 28,125 $67,500 Section 4(2)
placement
agent warrant
exercise
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number of
Underwriters or Shares of
Class of Common Common Stock Other Exemption
Date Purchasers Stock Warrants/ Options Securities Consideration Claimed*
---- --------------- --------- ----------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Apr 9, 1998 Private 6,850 $41,100 Section 4(2)
placement agent
warrant
exercise
- ----------------------------------------------------------------------------------------------------------
Apr 28, 1998 Sellers in an 50,000 Substantially Section 4(2)
acquisition all of the
assets of the
target company
- ----------------------------------------------------------------------------------------------------------
May 22, 1998 Sellers in an 15,000 Substantially Section 4(2)
acquisition all of the
assets of the
target company
- ----------------------------------------------------------------------------------------------------------
Jul 16, 1998 Sellers in an 170,000 Substantially Section 4(2)
acquisition all of the
assets of the
target company
- ----------------------------------------------------------------------------------------------------------
Aug 1, 1998 Strategic 131,250 Services Section 4(2)
marketing (subject to Performed
services reduction based
provider on performance)
(32,812 canceled)
- ----------------------------------------------------------------------------------------------------------
Aug 3, 1998 Consultant 105,000 (30,000 Services Section 4(2)
canceled) Performed
- ----------------------------------------------------------------------------------------------------------
Sep 11, 1998 Employee 1,000 $2,000 Section 4(2)
options
- ----------------------------------------------------------------------------------------------------------
Feb 12, 1999 Sellers in an 24,925 Substantially Section 4(2)
and May 26, acquisition all of the
1999 assets of the
target company
- ----------------------------------------------------------------------------------------------------------
Mar. 17, 1999 Accredited 750,000 800,000 $20,000,000 Section 4(2)
and Mar. 31, investors and shares of Class
1999 one investor A Convertible
who retained Preferred Stock
Company
director
Michael Marocco
as Investor
Representative.
- ----------------------------------------------------------------------------------------------------------
Mar. 21, 1999 Credit facility 200,000 Extension of Section 4(2)
provider $20.0 million of
credit
- ----------------------------------------------------------------------------------------------------------
Mar. 31, 1999 Employee 20,000 $44,000 Rule 701
Options
- ----------------------------------------------------------------------------------------------------------
Apr. 19, 1999 Sellers in an 37,000 $370,000 Section 4(2)
acquisition
- ----------------------------------------------------------------------------------------------------------
Apr. 19, 1999 Employee 1,000 $2,000 Rule 701
Options
- ----------------------------------------------------------------------------------------------------------
Apr. 23, 1999 1997 Warrant 1,250 $9,375 Section 4(2)
exercise
- ----------------------------------------------------------------------------------------------------------
May 3, 1999 Employee 10,500 $33,000 Rule 701
Options
- ----------------------------------------------------------------------------------------------------------
May 18, 1999 Employee 5,000 $50,000 Rule 701
Options
- ----------------------------------------------------------------------------------------------------------
May 21, 1999 Private 591,654 $4,474,737 Section 4(2)
to June 22, placement
1999 warrant
exercises
- ----------------------------------------------------------------------------------------------------------
June 4, 1999 Employee shares 750 Signing bonus Rule 701
</TABLE>
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1++ Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
3.2++ Bylaws of Convergent Communications, Inc.
3.3+ Articles of Amendment to the Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
3.4++ 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 Convergent
Communications, Inc. 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
4.8 Warrant Agreement, dated as of June 3, 1999
5.1* Opinion of Gibson, Dunn & Crutcher LLP
10.1++ Master Lease Agreement, dated November 11, 1997, between Comdisco,
Inc. and Convergent Communications, Inc.
10.2++ Master Lease Agreement, dated November 17, 1997, between Convergent
Capital Corporation and Convergent Communications, Inc.
10.3++ Program Agreement, dated November 19, 1997, among Comdisco, Inc.,
Convergent Communications Services, Inc. and Convergent
Communications, Inc.
10.4++ Stock Purchase Agreement, dated October 31, 1996, between SONeTech and
Convergent Communications, Inc.
10.5++ Stock Purchase Agreement dated March 1, 1997, among Integrated
Communication Networks, Inc., Communications Services of Iowa, Inc.,
John Shlepphorst and Convergent Communications, Inc.
10.6++ Agreement and Plan of Merger, dated August 29, 1997, among Convergent
Communications Services, Inc., A.T.T.Ex Corporation and Convergent
Communications, Inc.
10.7++ Agreement and Plan of Merger, dated September 1, 1997, among
Convergent Communications Services, Inc., Vital Integration Solutions
and Convergent Communications, Inc.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.11++ Agreement and Plan of Merger, dated March 13, 1998, among Convergent
Communications Services, Inc., Communication Services of Colorado,
Inc., Donna Sipes and Convergent Communications, Inc.
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 Convergent Communications, Inc., as amended April 13, 1998
10.14++ Employment Agreement, dated December 15, 1996, between John R. Evans
and Convergent Communications, Inc., as amended April 13, 1998
10.15++ Employment Agreement, dated December 15, 1996, between Philip G. Allen
and Convergent Communications, Inc., as amended April 13, 1998
10.16++ Employment Agreement, dated August 7, 1997, between Martin E. Freidel
and Convergent Communications, Inc.
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.
10.22++ Employment Agreement, dated March 3, 1997, between John J. Phibbs and
Convergent Communications, Inc., 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
10.26++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Philip G. Allen, dated April 8, 1999
10.27++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Martin E. Freidel, dated April 8, 1999
10.28++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and John R. Evans, dated April 8, 1999
10.29++ Third Amendment to Employment Agreement by and between Convergent
Communications, Inc. and John J. Phibbs, dated April 8, 1999
10.30++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Keith V. Berge, dated April 8, 1999
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.31 Credit and Guaranty Agreement among Convergent Communications, Inc.,
Convergent Communications Services, Inc., Convergent Capital
Corporation, various lenders, and Goldman Sachs Credit Partners L.P.,
dated as of June 3, 1999
10.32 Pledge and Security Agreement among Convergent Communications, Inc.,
Convergent Communications Services, Inc., Convergent Capital
Corporation and Goldman Sachs Credit Partners L.P., dated as of June 3,
1999
21.1 Consent of PricewaterhouseCoopers LLP on Convergent Communications,
Inc.
21.2* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5)
21.3++ Consent of PricewaterhouseCoopers LLP on TIE Communications, Inc.
24.1++ Power of Attorney, included on signature page
27.1++ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
++ Previously filed and incorporated by reference to the Registration Statement
on Form S-4 (Reg. No. 333-5393).
+ Previously filed and incorporated by reference to the Form 10-K (SEC File
No. 333-53953)
++Previously filed and incorporated by reference to the Registration Statement
on Form S-1 filed May 14, 1999.
Item 17.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities begin registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 242(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Englewood,
State of Colorado, on June 28, 1999.
Convergent Communications, Inc.
/s/ John R. Evans
By: _________________________________
John R. Evans
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed on June 28, 1999 by the following persons in the
respective capacities indicated opposite their names.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*/s/ John R. Evans Chairman, Chief Executive June 28, 1999
______________________________________ Officer and Director
John R. Evans (Principal Executive
Officer)
*/s/ John J. Phibbs Chief Financial Officer June 28, 1999
______________________________________ and Treasurer (Principal
John J. Phibbs Financial and Principal
Accounting Officer)
*/s/ Keith V. Burge President, Chief Operating June 28, 1999
______________________________________ Officer and Director
Keith V. Burge
*/s/ Philip G. Allen Executive Vice President, June 28, 1999
______________________________________ Secretary and Director
Philip G. Allen
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*/s/ Roland E. Casati Director June 28, 1999
______________________________________
Roland E. Casati
*/s/ Richard G. Tomlinson Director June 28, 1999
______________________________________
Richard G. Tomlinson
*/s/ Spencer I. Brown Director June 28, 1999
______________________________________
Spencer I. Brown
*/s/ Michael J. Marocco Director June 28, 1999
______________________________________
Michael J. Marocco
</TABLE>
- --------
* By Power-of-Attorney
/s/ Martin E. Freidel
- ---------------------------------
Martin E. Freidel
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1++ Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
3.2++ Bylaws of Convergent Communications, Inc.
3.3+ Articles of Amendment to the Amended and Restated Articles of
Incorporation of Convergent Communications, Inc.
3.4++ 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 Convergent
Communications, Inc. 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
4.8 Warrant Agreement, dated as of June 3, 1999
5.1* Opinion of Gibson, Dunn & Crutcher LLP
10.1++ Master Lease Agreement, dated November 11, 1997, between Comdisco,
Inc. and Convergent Communications, Inc.
10.2++ Master Lease Agreement, dated November 17, 1997, between Convergent
Capital Corporation and Convergent Communications, Inc.
10.3++ Program Agreement, dated November 19, 1997, among Comdisco, Inc.,
Convergent Communications Services, Inc. and Convergent
Communications, Inc.
10.4++ Stock Purchase Agreement, dated October 31, 1996, between SONeTech and
Convergent Communications, Inc.
10.5++ Stock Purchase Agreement dated March 1, 1997, among Integrated
Communication Networks, Inc., Communications Services of Iowa, Inc.,
John Shlepphorst and Convergent Communications, Inc.
10.6++ Agreement and Plan of Merger, dated August 29, 1997, among Convergent
Communications Services, Inc., A.T.T.Ex Corporation and Convergent
Communications, Inc.
10.7++ Agreement and Plan of Merger, dated September 1, 1997, among
Convergent Communications Services, Inc., Vital Integration Solutions
and Convergent Communications, Inc.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.11++ Agreement and Plan of Merger, dated March 13, 1998, among Convergent
Communications Services, Inc., Communication Services of Colorado,
Inc., Donna Sipes and Convergent Communications, Inc.
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 Convergent Communications, Inc., as amended April 13, 1998
10.14++ Employment Agreement, dated December 15, 1996, between John R. Evans
and Convergent Communications, Inc., as amended April 13, 1998
10.15++ Employment Agreement, dated December 15, 1996, between Philip G. Allen
and Convergent Communications, Inc., as amended April 13, 1998
10.16++ Employment Agreement, dated August 7, 1997, between Martin E. Freidel
and Convergent Communications, Inc.
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.
10.22++ Employment Agreement, dated March 3, 1997, between John J. Phibbs and
Convergent Communications, Inc., 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.
10.26++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Philip G. Allen, dated April 8, 1999
10.27++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Martin E. Freidel, dated April 8, 1999
10.28++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and John R. Evans, dated April 8, 1999
10.29++ Third Amendment to Employment Agreement by and between Convergent
Communications, Inc. and John J. Phibbs, dated April 8, 1999
10.30++ Second Amendment to Employment Agreement by and between Convergent
Communications, Inc. and Keith V. Burge, dated April 8, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.31 Credit and Guaranty Agreement among Convergent Communications, Inc.,
Convergent Communications Services, Inc., Convergent Capital
Corporation, various lenders, and Goldman Sachs Credit Partners L.P.,
dated as of June 3, 1999
10.32 Pledge and Security Agreement among Convergent Communications, Inc.,
Convergent Communications Services, Inc., Convergent Capital
Corporation and Goldman Sachs Credit Partners L.P., dated as of June
3, 1999
21.1 Consent of PricewaterhouseCoopers LLP on Convergent Communications,
Inc.
21.2* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5)
21.3++ Consent of PricewaterhouseCoopers LLP on TIE Communications, Inc.
24.1++ Power of Attorney, included on signature page
27.1++ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Previously filed and incorporated by reference to the Form 10-K (SEC File
No. 333-53953)
++Previously filed and incorporated by reference to the Registration Statement
on Form S-4 (Reg. No. 333-5393).
++Previously filed and incorporated by reference to the Registration Statement
on Form S-1 filed May 14, 1999.
<PAGE>
EXHIBIT 1.1
CONVERGENT COMMUNICATIONS, INC.
Common Stock, no par value
Underwriting Agreement
----------------------
______ __, 1999
Goldman, Sachs & Co.,
J.P. Morgan & Co., Inc.
Warburg Dillon Read LLC
William Blair & Company, L.L.C.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Convergent Communicatio
ns, Inc., a Colorado corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of [_______] shares and, at the election of the
Underwriters, up to [_______] additional shares of Common Stock, no par value
("Stock") of the Company and the Shareholders of the Company named in Schedule
II hereto (the "Selling Shareholders") propose, subject to the terms and
conditions stated herein, to sell to the Underwriters an aggregate of
[_________] shares. The aggregate [______] shares to be sold by the Company and
the Selling Shareholders is herein called the "Firm Shares" and the aggregate of
[______] additional shares to be sold by the Company, at the election of the
Underwriters, is herein called the "Optional Shares". The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are herein collectively called the "Shares".
1.
(a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-[_____]) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore or hereafter delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which
<PAGE>
became effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and
no stop order suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus";
the various parts of the Initial Registration Statement
and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed
with the Commission pursuant to Rule 424(b) under the Act in accordance
with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act,
is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of
filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an 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 the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Shareholder
expressly for use in the preparation of the answers therein to Item 7 of
Form S-1;
(iii) This Agreement has been duly authorized, executed and delivered
by the Company.
(iv) The Registration Statement conforms, and the Prospectus and any
further
amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an 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 not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Shareholder expressly for use in the preparation of the
answers therein to I
tem 7 of Form S-1;
2
<PAGE>
(v) (A) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, (B) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction n
ot in the
ordinary course of business and (ii) there has not been any change in the
capital stock or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole, otherwise than as set forth
or contemplated in the Prospectus;
(vi) The Company and its subsidiaries do not own any real property
and have good and marketable title to all personal property owned by them,
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not interfere with the use made and proposed to be
made of such property by the Company and its subsidiaries; and any real
property and
buildings held under lease by the Company and its subsidiaries
are held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries;
(vii) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Colorado;
each subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and each of the Company and its subsidiaries
has the power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which
it owns
or leases properties or conducts any business so as to require such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the general affairs,
management, the current or future financial position, shareholders' equity
or results of operations of the Company and its subsidiaries, taken as a
whole (a "Material Adverse Effect");
(viii) The Company and each of its subsidiaries have all concessions,
licenses, certificates, franchises, permits, authorizations, approvals,
orders and other rights from, and has made all declarations and filings
with, all Federal, state and local authorities (including, without
limitation, the Federal Communications Commission), all self-regulatory
authorities and all courts and other tribunals (each, an "Authorization")
that are necessary to conduct their businesses as described in the
Prospectus, except as described in the P
rospectus and except insofar as the
failure to obtain any such Authorization or make such filings would not
result in a Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation, suspension or modification of any such Authorization. All such
Authorizations are valid and in full force and effect and
3
<PAGE>
the Company and its subsidiaries are in compliance in all material respects
with the terms and conditions of all such Authorizations and with the rules
and regulations of the regulatory authorities having jurisdiction with
respect thereto, except where the failure to be in full force and effect or
be in compliance would not result in a Material Adverse Effect.
(ix) The Company and its subsidiaries own or have had licensed to
them or otherwise have the benefit or use under the authority of the owners
thereof of, all patents, patent rights, inventions, trademarks, service
marks, trade names and copyrights (in each case, registered or not), know-
how (including trade secrets and other unpatented and/o
r unpatentable
proprietary or confidential information, software, systems or procedures),
computer programs, technical data and information (collectively,
"Intellectual Property Rights") that are reasonably necessary for the
conduct of the business of the Company and its subsidiaries as described in
the Prospectus, except where the failure to own, have licensed to them or
otherwise have the benefit or use of such Intellectual Property Rights
would not result in a Material Adverse Effect; and, except as set forth or
contemplated in the Prospectus, there are no unresolved assertions that the
Company or any of its subsidiaries has infringed the Intellectual Property
Rights of others, except where such assertions if resolved unfavorably
against the Company and its subsidiaries would not result in a Material
Adverse Effect;
(x) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued share
s of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the Stock contained in
the Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or claims,
other than liens securing the credit facility with NationsCredit Capital
Corp. as described in the Prospectus and the restrictions on transfer of
these shares contained in the indenture for the Company's 13% Senior Notes
due 2008;
(xi) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued
and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(xii) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Articles of Incorporation or By-
laws of the Company or any statute or any order, rule or regulation of any
court or governmental agency or
body having jurisdiction over the Company
or any of its subsidiaries or any of their properties; and no consent,
approval, authorization, order,
4
<PAGE>
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement otherwise than those which have been obtained, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(xiii) Neither the Company nor any of its subsidiaries (A) is in
violation of its Articles of Incorporation or By-laws or (B) in default in
the performance or obs
ervance of any obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound, except, in the case of
clause (B), for any such default which would not result in a Material
Adverse Effect;
(xiv) The statements set forth (A) in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the captions
"Description of Indebtedness" and "Shares Eligible for Future Sale",
insofar as they constitute summaries of legal matters or documents referred
to therein and (B) in the Registration Statement under Items 14 and 15,
insofar as such statements constitute summaries of legal matters or
documents referred to therein, in each case, are accurate, complete and
fair in all material respects
;
(xv) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect; and, to the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(xvi) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company", as such term
is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xvii) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in or contemplated by
the Prospect
us, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that might
reasonably be expected to result in a Material Adverse Effect;
(xviii) PricewaterhouseCoopers, L.L.P., who have certified certain
financial statements of the Company and its subsidiaries, are independent
public accountants as required by the Act and the rules and regulations of
the Commission thereunder;
(xix) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which
the business or operations of the Company or any of its subsidiaries will
be affected by Year 2000 issues. As a result of such review, the
5
<PAGE>
Company represents and warrants that the disclosure in the Registration
Statement relating to Year 2000 issues is accurate and complies in all
material respects with the rules and regulations under the Act. "Year 2000
issues" as used herein means Year 2000 issues described in or contemplated
by the Commission's Interpretation: Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisers, Investment
Companies, and Municipal Securities Issuers (Release No. 33-7558);
(xx) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with management's gene
ral
or specific authorizations, (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (C)
access to assets is permitted only in accordance with management's general
or specific authorization, and (D) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(b) Each of the Selling Shareholders severally represents and warrants to,
and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Shareholder of this
Agreement and the Power of Attorney and the Custody Agreement hereinafter
referred to, and for the sale and delivery of the Shares to be sold by such
Selling Shareholder here
under, have been obtained; and such Selling
Shareholder has full right, power and authority to enter into this
Agreement, the Power-of-Attorney and the Custody Agreement and to sell,
assign, transfer and deliver the Shares to be sold by such Selling
Shareholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Shareholder
hereunder and the compliance by such Selling Shareholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder is bound or to which any of the property or
assets of such Selling Sha
reholder is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Shareholder if such Selling Shareholder is a
corporation, the Partnership Agreement of such Selling Shareholder if such
Selling Shareholder is a partnership or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over such Selling Shareholder or the property of such Selling Shareholder;
(iii) Such Selling Shareholder has, and immediately prior to the
First Time of Delivery (as defined in Section 4 hereof) such Selling
Shareholder will have, good and valid title to the Shares to be sold by
such Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment
6
<PAGE>
therefor pursuant hereto, good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 180 days after the First Time of
Delivery, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder, any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option pla
ns existing on the date of
this Agreement), without your prior written consent;
(v) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Shareholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or a
re filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and 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
not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Shareholder hereunder have been placed in
custody under a Custody Agreement, in the form heretofore furnished to you
(the "Custody Agreement"), duly executed and delivered by such Selling
Shareholder to [Name of Custodian], as custodian (the "Custodian"), and
such Selling Shareholder has duly executed and delivered a Power of
Attorney, in the form heretofore furnished to you (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Shareholder, to determine the purchase price to
be paid by the Underwriters to the Selling Shareholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Shareholder hereunder and otherwise to act on behalf of such
Selling Shareholder in c
onnection with the transactions contemplated by
this Agreement and the Custody Agreement; and
7
<PAGE>
(ix) The Shares represented by the certificates held in custody for
such Selling Shareholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Shareholder for such custody, and the appointment by such Selling
Shareholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling Shareholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Shareholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a
partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Shareholder or
any such executor or trustee should die or become incapacitated, or if any
such estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Shareholders in
accordance with the terms and conditions of this Agreement and of the
Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termina
tion, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Shareholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Shareholders, at a purchase price per share of $[_____], the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Shares to be sold by the Company and each
of the Selling Shareholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling
Shareholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
thei
r election up to [_________] Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First
8
<PAGE>
Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Shareholders shall be delivered by or on
behalf of the Company and the Selling Shareho
lders to Goldman, Sachs & Co.,
[through the facilities of The Depository Trust Company ("DTC"),] for the
account of such Underwriter, against payment by or on behalf of such Underwriter
of the purchase price therefor by wire transfer of Federal (same-day) funds to
the account specified by the Company and the [Custodian][Selling Shareholders],
as their interests may appear, to Goldman, Sachs & Co. at least forty-eight
hours in advance. The Company will cause the certificates representing the
Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto [at
the office of DTC or its designated custodian] [Goldman, Sachs & Co., 85 Broad
Street, New York, New York 10004] (the "Designated Office"). The time and date
of such delivery and payment shall be, with respect to the Firm Shares, 9:30
a.m., New York City time, on __________, 1999 or such other time and date as
Goldman, Sachs & Co. and the Company and the [Custodian
][Selling Shareholders]
may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m.,
New York time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase
such Optional Shares, or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional matters reasonably requested by
the Underwriters to be included in the Company's certificate pursuant to Section
7(n) here
of, will be delivered at the offices of Shearman & Sterling, 599
Lexington Avenue, New York, NY 10022 (the "Closing Location"), and the Shares
will be delivered at the Designated Office, all at such Time of Delivery. A
meeting will be held at the Closing Location at 1:00 p.m., New York City time,
on the New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday that is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than
the Commiss
ion's close of business on the second business day following the
execution and delivery of this
9
<PAGE>
Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any supplement to
the Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof,
of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminar
y Prospectus or
prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complet
e the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 12:00 P.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New York
City in such quantities as you may reasonably request and, if the delivery
of a prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the l
ight of the circumstances under which they were made when
such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your
request to prepare and furnish without charge to each Underwriter and to
any dealer in securities such number of copies as you may from time to time
request of an amended Prospectus or a supplement to the Prospectus which
will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time
of issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3)
of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the
10
<PAGE>
Company and its subsidiaries (which need not be audited) complying with
Section 11(a) of the Act and the rules and regulations thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to an including the date 180 days after the First Time of
Delivery, not to offer, sell, contract to sell, hedge or otherwise dispose
of, except as provided hereunder, any Stock or any other securities of the
Company that are substantially similar to the Stock, including but not
limited to, any securities that are convertible into or exchangeable for,
or that represent the right to receive, Stock or any such substantially
similar securitie
s (other than pursuant to employee stock option or benefit
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, or upon the exercise of warrants
or options outstanding as of, the date of this Agreement), without your
prior written consent; notwithstanding the foregoing, the Company may issue
Stock or substantially similar securities or securities convertible into or
exchangeable for shares of Stock in connection with strategic relationships
and acquisitions of businesses, technologies or products complementary to
those other Company, so long as the recipients of such securities agree to
be bound by an equivalent lock-up agreement for the remainder of the 180-
day lock-up period;
(f) To furnish to its shareholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, shareholders' equity and cash fl
ows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to make
available to its shareholders consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you one copy of all reports or other
communications (financial or other) furnished to shareholders, and copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed, provided that any reports, financial
statements or other communications that are available by EDGAR n
eed not be
furnished; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request (such financial statements to be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ");
11
<PAGE>
(j) To file with the Commission such information on Form 10-Q or
Form 10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement, and the Company shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Shareholders covenant and
agree with one another and with the several Underwriters that (a) the Company
will pay or cause to be paid the following: (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or otherwise duplicating any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the
reasonable fees and disbursements of counsel for the Underwriters in connection
with such qualification and in connection with the Blue Sky survey; (iv) all
fees and expenses in connection with listing the Shares on the NASDAQ; (v) the
filing fees incident to, and the fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares,
which fees and expenses shall not be in excess of $________; (vi) the cost of
preparing stock certificates; the cost and charges of any transfer agent or
registrar; and all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section and (b) unless otherwise agreed between such Selling Shareholder and the
Company, such Selling Shareholder will pay or cause to be paid all costs and
expenses incident to the performance of such Selling Shareholder's obligations
hereunder which are not otherwise specifically provided for in this Section,
including (i) any fees and expenses of counsel for such Selling Shareholder,
(ii) such Selling Shareholder's pro rata share of the fees and expenses of the
Attorneys-in-Fact and the Custodian, and (iii) all expenses and taxes incident
to the sale and delivery of the Shares to be sold by such Selling Shareholder to
the Underwriters hereunder. In connection with clause (b) of the preceding
sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax,
and the Selling Shareholder agrees to reimburse Goldman, Sachs & Co. for
associated carrying costs if such tax payment is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood,
however, that, except as provided in this Section, and Sections 8 and 11 hereof,
the Underwriters will pay all of their own costs and expenses, including the
fees of their counsel, stock transfer taxes on resale of any of the Shares by
them, and any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company and of the Selling Shareholders herein are, at and as
of such Time of Delivery, true and correct, the condition that
12
<PAGE>
the Company and the Selling Shareholders shall have performed all of its and
their obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become effective
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no
stop order suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Shearman & Sterling, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to the matters covered in paragraphs (xi)(A) and (xiii) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Gibson, Dunn & Crutcher, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached
as Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Colorado with corporate power and authority to own its properties
and conduct its business as described in the Prospectus;
(ii) The Shares being delivered at such Time of Delivery
have been duly and validly authorized and issued and are fully paid
and non-assessable; and the Shares conform to the description of the
Stock contained in the Prospectus;
(iii) Based solely on certificates from government officials,
each of the Company and its subsidiaries has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of the following states: [list to be inserted
by such counsel];
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary are owned of
record, directly or indirectly, by the Company, free and clear of all
liens, encumbrances, equities or claims other than liens securing the
credit facility with NationsCredit Capital Corp. as described in the
Prospectus and the restrictions on transfer of these shares contained
in the indenture for the Company's 13% Senior Note due 2008 (such
counsel being entitled to rely in respect of the opinion
13
<PAGE>
in this clause upon certificates of government officials and, in
respect to matters of fact, upon certificates of officers of the
Company or its subsidiaries);
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(vi) The issue and sale of the Shares being delivered at
such Time of Delivery to be sold by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument
identified as a material contract and filed as a material contract as
an Exhibit to the Registration Statement, nor will such action result
in any violation of the provisions of the Articles of Incorporation or
By-laws of the Company or any Colorado statute, rule or regulation
known to such counsel to be applicable to the Company or its
subsidiaries (other than federal and state securities laws which are
addressed elsewhere herein or any federal, state, local or other
telecommunications laws, statutes, rules or regulations relating to
the area of telecommunications or the provision of telecommunications
services ("Telecommunications Law"));
(vii) To the knowledge of such counsel, no consent, approval,
authorization, order, registration or qualification of or with any
such court or governmental agency or body (other than any of such
items which would be required under any Telecommunications Laws or any
court, agency or body as a result of the Company's telecommunications
services) is required for the issue and sale of the Shares
contemplated by this Agreement, except the registration under the Act
of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(viii) To the knowledge of such counsel, neither the Company
nor any of its subsidiaries is in violation of its Articles of
Incorporation or By-laws;
(ix) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport
constitute a summary of the terms of the Stock, and under the caption
"Description of Indebtedness", insofar as such statements constitute
summaries of material provisions of documents referred to therein, are
accurate in all material respects;
(x) The Company is not an "investment company", as such
term is defined in the Investment Company Act; and
In addition, such counsel shall state in such counsel's
opinion letter or in a separate letter that such counsel has
participated in the preparation of the Registration Statement and the
Prospectus and in conferences with officers and other representatives
of the Company, the Selling Shareholders, representatives of
14
<PAGE>
the independent auditor of the Company and your representatives at
which the contents of the Registration Statement and Prospectus and
related matters were discussed. Because the purpose of such counsel's
professional engagement was not to establish or confirm factual
matters and because the scope of our examination of the affairs of the
Company and the Selling Shareholders did not permit such counsel to
verify the accuracy, completeness or fairness of the statements set
forth in the Registration Statement or Prospectus, such counsel is are
not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus, except to the extent set forth
in the last sentence of this paragraph or in clause (ix) above. On the
basis of the foregoing, and except for the financial statements and
schedules and other financial data included therein, as to which such
counsel expresses no opinion or belief, (a) such counsel is of the
opinion that the Registration Statement at the time it became
effective, and the Prospectus as of the date thereof and as of the
date of its letter, appear on their face to be appropriately
responsive in all material respects with the requirements of the Act
and the rules and regulations promulgated thereunder and (b) no facts
have come to such counsel's attention that lead such counsel to
believe that (i) the Registration Statement at the time it became
effective contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) the Prospectus as
of its date and as of the date of its letter contained or contains an
untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(d) Dickstein, Shapiro, Morin & Oshinsky, regulatory counsel to
the Company, shall have furnished to you their written opinion a draft of
such opinion is attached as Annex II(c) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) (A) the execution and delivery of the Underwriting
Agreement by the Company and the consummation of the transactions
contemplated thereby do not violate (1) the Communications Act of
1934, as amended, or any rules or regulations of the Federal
Communications Commission ("FCC") (collectively, the "Communications
Act") applicable to the Company, (2) any state telecommunications law,
rules or regulations ("State Telecommunications Law") applicable to
the Company, and (3) to the best of such counsel's knowledge, after
due inquiry of the Company, any decree from any court or tribunal, and
(B) other than those consents, approvals, authorizations or orders
which have been obtained or those filings which have been made, no
consent, approval, authorization or order of or filing with the FCC or
any state regulatory authority regulating telecommunications services
provided by the Company or any of its subsidiaries, including public
utility commissions ("State Authorities"), is necessary for the
execution and delivery of the Underwriting Agreement by the Company
except to the extent that the failure to obtain such consents,
approvals, authorizations or orders or to make filings with, the FCC
or any State Authority would not, individually or in the aggregate,
have a Material Adverse Effect;
15
<PAGE>
(ii) Convergent Communications Services, Inc. (the
"Operating Company") is a nondominant carrier authorized by the FCC to
provide interstate interexchange telecommunications services. The
Operating Company has been granted Section 214 authority by the FCC to
provide international telecommunications services through the resale
of international switched voice and private line services and the
Operating Company has on file with the FCC tariffs applicable to its
interstate and international services. No further FCC authority is
required by the Company or any of its subsidiaries to conduct its
business as described in the Prospectus;
(iii) The Operating Company is certified and/or registered to
resell intrastate interexchange telecommunications services in the
states listed in Exhibit B attached hereto and is, except to the
extent that the failure to obtain such authorization would not,
individually or in the aggregate, have a Material Adverse Effect, not
required to be certified or registered, to resell intrastate
interexchange telecommunications services in the states listed in
Exhibit C attached hereto. The Operating Company has a tariff on file
in each state in which it resells telecommunications services that
requires the filing of such a tariff. No further authority is required
from any of the State Authorities in the states listed in Exhibits B
and C by the Company or any of its subsidiaries to conduct its
business as described in the Prospectus;
(iv) (A) The Operating Company has made all reports and
filings, and paid all fees, required by the FCC and the State
Authorities, and has all certificates, orders, permits, licenses,
authorizations, consents and approvals of and from, and has made all
filings and registrations, with the FCC and the State Authorities
necessary for the Company and its subsidiaries to own, lease, license
and use their properties and assets and to conduct their respective
business in the manner described in the Prospectus, except for those
reports, filings, fees, certificates, orders, permits, licenses,
authorizations, consents and approvals the failure to obtain or file
of which would not have Material Adverse Effect; and to the best of
such counsel's knowledge after due inquiry of the Company, (B) the
Operating Company has not received any notice of proceedings relating
to the violation, revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or
the qualification or rejection of any such filing or registration, the
effect of which, singly or in the aggregate, would have a Material
Adverse Effect and (C), based upon the information contained in the
Prospectus and the reviewed filings and the pertinent representations
of the officers and employees of the Company and the Operating
Company, to our knowledge the Operating Company is not in violation
of, or in default under the Communications Act or State
Telecommunications Law, the effect of which, singly or in the
aggregate, would have a Material Adverse Effect;
(v) to the best of such counsel's knowledge after due
inquiry of the Company (A) no adverse judgment, decree or order of the
FCC or any State Authority has been issued against the Operating
Company
16
<PAGE>
before or by the FCC or any State Authority that, if decided adversely
to the interests of the Company or any of its subsidiaries would have
a Material Adverse Effect; and
(vi) the statements in the Prospectus under the captions
"Risk Factors - We Face Competition From Many Sources," "Risk
Factors - We are Subject to FCC and State Public Utility Commission
Regulations," "Business --Regulatory Environment" and "Business -
Competition" insofar as such statements constitute a summary of the
legal matters, documents or proceedings of the FCC and State
Authorities with respect to telecommunications regulation referred to
therein, fairly summarize the matters referred to therein.
(e) Martin E. Freidel, counsel for the Company, shall have
furnished to you such counsel's written opinion (a draft of such opinion is
attached as Annex II(d) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the
description of the Stock contained in the Prospectus;
(ii) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
and are owned, directly or indirectly, by the Company, free and clear
of all liens, encumbrances, equities or claims, other than liens
securing the credit facility with NationsCredit Capital Corp. as
described in the Prospectus and the restrictions on transfer of these
shares contained in the indenture for the Company's 13% Senior Notes
due 2008;
(iii) Based on certificates from government officials, each
of the Company and its subsidiaries has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of matters of fact upon
certification of officers of the Company);
(iv) The issuance, sale and delivery of the Shares by the
Company and compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries
17
<PAGE>
is subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation or By-laws of the Company
or any statute or any order, rule or regulation known to such counsel
of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties
(other than Federal or state securities or telecommunications laws as
to which such counsel need express no opinion);
(v) Any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries;
(vi) To such counsel's knowledge and except as described in
the Prospectus, the Company and each of its subsidiaries have all
Authorizations that are necessary to conduct their businesses as
described in the Prospectus, except insofar as the failure to obtain
any such Authorization would not result in a Material Adverse Effect;
and to the best of such counsel's knowledge neither the Company nor
any of its subsidiaries has received any notice of proceedings
relating to the revocation, suspension or modification of any such
Authorization. All such Authorizations are valid and in full force and
effect and the Company and its subsidiaries are in compliance in all
material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory
authorities having jurisdiction with respect thereto, except where the
failure to be in full force and effect or be in compliance would not
result in a Material Adverse Effect;
(vii) The Company and its subsidiaries own or have had
licensed to them or otherwise have the benefit or use under the
authority of the owners thereof of, all Intellectual Property Rights
that are reasonably necessary for the conduct of the business of the
Company and its subsidiaries as described in the Prospectus, except
where the failure to own, have licensed to them or otherwise have the
benefit or use under the authority of the owners thereof would not
result in a Material Adverse Effect; and, to the best knowledge of
such counsel, except as set forth or contemplated in the Prospectus,
there are no unresolved assertions that the Company or any of its
subsidiaries has infringed the Intellectual Property Rights of others,
except where such assertions if resolved unfavorably against the
Company and its subsidiaries would not result in a Material Adverse
Effect;
(viii) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in or
contemplated by the Prospectus, or to the best of such counsel's
knowledge, is imminent;
(ix) To such counsel's knowledge and other than as set forth
in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party
which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and, to such counsel's knowledge, no such proceedings
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are threatened or contemplated by governmental authorities or
threatened by others;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or By-laws or, to such
counsel's knowledge and other than as set forth in the Prospectus, in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound, except for such defaults which would not result in a Material
Adverse Effect;
(xi) The statements set forth in the Prospectus under the
caption "Shares Eligible for Future Sale" and in the Registration
Statement under Items 14 and 15 thereof, insofar as such statements
constitute summaries of legal matters, documents or proceedings
referred to therein, such statements fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein in
all material repsects; and
In addition, such counsel shall state in such counsel's opinion letter
or in a separate letter that such counsel has participated in the
preparation of the Registration Statement and the Prospectus and in
conferences with other officers and representatives of the Company, the
Selling Shareholders, representatives of the independent auditor of the
Company and your representatives at which the contents of the Registration
Statement and Prospectus and related matters were discussed. Except for the
financial statements and schedules and other financial data included
therein, as to which such counsel expresses no opinion or belief, (a) such
counsel is of the opinion that the Registration Statement at the time it
became effective, and the Prospectus as of the date thereof and as of the
date of its letter, appear on their face to be appropriately responsive in
all material respects with the requirements of the Act and the rules and
regulations promulgated thereunder and (b) no facts have come to such
counsel's attention that lead such counsel to believe that (i) the
Registration Statement at the time it became effective contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or (ii) the Prospectus as of its date and as of the date of its
letter contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and such counsel is not aware
of any contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described
as required;
(f) The respective counsel for each of the Selling Shareholders,
as described below and as more specifically indicated in Schedule II
hereto, each shall have furnished to you their written opinion with respect
to each of the Selling Shareholders for whom they
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are acting as counsel (a draft of each such opinion is attached as Annex
II(e) hereto), dated the First Time of Delivery, in form and substance
satisfactory to you, to the effect that:
[Gibson, Dunn & Crutcher will give the opinion set forth in clause
(iv) as to all shares sold by the Selling Shareholders. Arnstein &
Lehr will give the opinions in clauses (i), (ii) and (iii), for those
Selling Shareholders who are selling 15,000 (pre-split) or more shares
in the offering.]
(i) The Power-of-Attorney and the Custody Agreement have
been duly executed and delivered by each Selling Shareholder and this
Agreement has been duly executed and delivered on behalf of [such]
Selling Shareholder;
(ii) The Power-of-Attorney and Custody Agreement constitute
valid and binding agreements of each Selling Shareholder in accordance
with their terms;
(iii) [Such] Selling Shareholders has the legal right and
power to enter into this Agreement, the Power of Attorney and the
Custody Agreement and to sell, transfer and deliver the Shares to be
sold by such Selling Shareholders pursuant to this Agreement; and
(iv) [Assuming that (a) the securities to be sold by each
Selling Shareholder are not held in any securities account or by or
through a securities intermediary within the meaning of the NYUCC and
(b) the certificate or certificates representing the Shares to be sold
by the Selling Shareholders pursuant to this Agreement have been
effectively indorsed in blank in accordance with the NYUCC, then,]
upon the Underwriters' acquiring possession of such certificate or
certificates for the Shares and paying the purchase price therefor
pursuant to this Agreement, each Underwriter will be a "protected
purchaser" of the Shares to be purchased by it (within the meaning of
Section 8-303 of the NYUCC) and will acquire its interest in such
Shares (including, without limitation, all rights that the Selling
Shareholder had or has the power to transfer in such Securities) free
of any adverse claim (assuming that the Underwriters are without
notice of any adverse claim to the Shares).
(g) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date
of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery,
PricewaterhouseCoopers, LLP shall have furnished to you a letter or
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I hereto
(the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(h) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not
20
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covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, shareholders' equity,
business or results of operations of the Company and its subsidiaries,
otherwise than as set forth or contemplated in the Prospectus, the effect
of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(i) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(ii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of
any of the Company's debt securities;
(j) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(k) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(l) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from all of the executive officers and
directors of the Company and its subsidiaries and each of the holders of
Stock, options or warrants listed on Schedule III, each in the form
previously provided to you;
(m) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(n) The Company and the Selling Shareholders shall have furnished
or caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Shareholders, respectively,
satisfactory to you as to the accuracy of the representations and
warranties of the Company and of the Selling Shareholders, respectively,
herein at and as of such Time of Delivery, as to the performance by the
21
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Company and the Selling Shareholders of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, as to the
matters set forth in subsections (a) and (h) of this Section and, in the
case of the Company only, as to such other matters as you may reasonably
request.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each of the Selling Shareholders will indemnify and hold
harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by
such Selling Shareholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action
or claim as such expenses are incurred; provided, however, that such
Selling Shareholder shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the Company
and each Selling Shareholder against any losses, claims, damages or
liabilities to which the Company or such Selling Shareholder may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in any Preliminary
22
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Prospectus, the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through
Goldman, Sachs & Co. expressly for use therein; and will reimburse the
Company and each Selling Shareholder for any legal or other expenses
reasonably incurred by the Company or such Selling Shareholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to
be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party shall not be liable to such indemnified party under such subsection
for any legal expenses of other counsel or any other expenses, in each case
subsequently incurred by such indemnified party, in connection with the
defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of
any judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to
such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act,
by or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Selling Shareholders on the one hand and the Underwriters on the other
from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law or if
the indemnified party failed to give the notice required under subsection
(d) above, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault (including the failure to notify) of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions
23
<PAGE>
which resulted in such losses, claims, damages or liabilities (or actions
in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The 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 the
Company or the Selling Shareholders on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company, each of the Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Shareholders under
this Section 8 shall be in addition to any liability which the Company and
the respective Selling Shareholders may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon
the same terms and conditions, to each officer and director of the Company
[(including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company)] and
to each person, if any, who controls the Company or any Selling Shareholder
within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within thirty-
six hours after such default by any Underwriter you do not arrange for the
purchase of such Shares, then the Company and the Selling Shareholders shall be
entitled to a further period of thirty-six hours within which to procure another
party or other parties reasonably satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Company and the Selling Shareholders that you have so
24
<PAGE>
arranged for the purchase of such Shares, or the Company or the Selling
Shareholders notifies you that it has so arranged for the purchase of such
Shares, you or the Company and the Selling Shareholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your reasonable opinion may
thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you
and the Company and the Selling Shareholders as provided in subsection (a)
above, the aggregate number of such Shares which remains unpurchased does
not exceed one-eleventh of the aggregate number of all the Shares to be
purchased at such Time of Delivery, then the Company and the Selling
Shareholders shall have the right to require each non-defaulting
Underwriter to purchase the number of shares which such Underwriter agreed
to purchase hereunder at such Time of Delivery and, in addition, to require
each non-defaulting Underwriter to purchase its pro rata share (based on
the number of Shares which such Underwriter agreed to purchase hereunder)
of the Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you
and the Company and the Selling Shareholders as provided in subsection (a)
above, the aggregate number of such Shares which remains unpurchased
exceeds one-eleventh of the aggregate number of all the Shares to be
purchased at such Time of Delivery, or if the Company and the Selling
Shareholders shall not exercise the right described in subsection (b) above
to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the
Second Time of Delivery, the obligations of the Underwriters to purchase
and of the Company to sell the Optional Shares) shall thereupon terminate,
without liability on the part of any non-defaulting Underwriter or the
Company, except for the expenses to be borne by the Company and the
Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall
relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements,
representations, warranties and other statements of the Company, the Selling
Shareholders and the several Underwriters, as set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by or on behalf of any Underwriter or
any controlling person of any Underwriter, or the Company, or any Selling
Shareholder or, any officer or director or controlling person of the Company, or
any controlling person of any Selling Shareholder and shall survive delivery of
and payment for the Shares.
11. (a) If this Agreement shall be terminated pursuant to
Section 9 hereof, neither the Company nor the Selling Shareholders shall then be
under any liability to any Underwriter except as provided in Sections 6 and 8
hereof; but, if for any other reason, any Shares are not delivered by or on
behalf of the Company and the Selling Shareholders as provided herein,
25
<PAGE>
the Company and each of the Selling Shareholders pro rata (based on the number
of Shares to be sold by the Company and the Selling Shareholders hereunder) will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Shareholders shall then be under no further liability to any Underwriter in
respect of the shares not so delivered except as provided in Sections 6 and 8
hereof. Notwithstanding the foregoing, in the event that certain Selling
Shareholders fail to deliver their Shares to the Underwriters in accordance with
this Agreement, the Company shall be obligated to cure such failure and issue
and deliver additional Shares to cover such non-delivered Shares at the same
purchase price described in Section 2 hereof.
(b) In addition, with respect to the Shares that are being
delivered by those Selling Shareholders for whom the opinions of counsel
described in clauses (i), (ii) and (iii) of Section 7(f) are not being
given pursuant to this agreement because such Selling Shareholders are not
selling an amount of Shares above the threshold amount described in Section
7(f), and the sale of such Shares ("Invalid Shares") by any such Selling
Shareholder pursuant to this Agreement is not valid because (A) the Power-
of-Attorney or the Custody Agreement was not duly executed and delivered by
such Selling Shareholder, or this Agreement was not duly executed and
delivered on behalf of such Selling Shareholder, (B) the Power-of-Attorney
or the Custody Agreement did not a constitute valid and binding agreement
of such Selling Shareholder or (C) such Selling Shareholder did not have
the legal right and power to enter into this Agreement, the Power-of-
Attorney or the Custody Agreement, the Company shall issue and deliver to
the Underwriters a number of additional Shares ("Replacement Shares") equal
to the number of Invalid Shares upon receipt of same day funds in an amount
equal to the purchase price of the Invalid Shares paid by the Underwriters
to such Shareholders pursuant to this Agreement. At the time of delivery of
any Replacement Shares to the Underwriters, the Company shall make the
representations and warranties set forth in clauses (vii) and (xi) of
Section 1 of this Agreement and shall deliver an opinion of counsel to the
effect of the opinions described in clauses (i) and (ii) of Section 6(c) of
this Agreement.
12. In all dealings hereunder, you shall act on behalf of
each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of
you as the Representatives; and in all dealings with any Selling Shareholder
hereunder, you and the Company shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of such Selling Shareholder
made or given by any or all of the Attorneys-in-Fact for such Selling
Shareholder.
All statements, requests, notices and agreements hereunder
shall be in writing, and if to the Underwriters shall be delivered or sent by
mail, telex or facsimile transmission to you as the representatives in care of
Goldman, Sachs & Co., 32 Old Slip, 9/th/ Floor, New York, New York 10005,
Attention: Registration Department; if to any Selling Shareholder shall be
delivered or sent by mail, telex or facsimile transmission to counsel for such
Selling Shareholder at its address set forth in Schedule II hereto; and if to
the Company shall be delivered or sent by mail to the address of the Company set
forth in the Registration Statement, Attention: General Counsel; provided,
however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its
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Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely
to the benefit of, the Underwriters, the Company and the Selling Shareholders
and, to the extent provided in Sections 8 and 10 hereof, the officers and
directors of the Company and each person who controls the Company, any Selling
Shareholders or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, except in Section 4 hereof, the term "business day" shall mean any day
when the Commission's office in Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
16. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
If the foregoing is in accordance with your understanding,
please sign and return to us one for the Company and each of the Representatives
plus one for each counsel and the Custodian, if any, counterparts hereof, and
upon the acceptance hereof by you, on behalf of each of the Underwriters, this
letter and such acceptance hereof shall constitute a binding agreement between
each of the Underwriters, the Company and each of the Selling Shareholders. It
is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company and the
Selling Shareholders for examination upon request, but without warranty on your
part as to the authority of the signers thereof.
27
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for a
Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
Convergent Communications, Inc.
By:
--------------------------------------
Name:
Title:
[Names of Selling Shareholders]
By:
--------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Shareholders named
in Schedule II to this Agreement.
Accepted as of the date hereof:
Goldman, Sachs & Co.
J.P. Morgan & Co. Inc.
Warburg Dillon Read LLC
William Blair & Company, L.L.C.
By:
--------------------------------
(Gold, Sachs & Co.)
On behalf of each of the Underwriters
28
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co..................
J. P. Morgan & Co., Inc..............
Warburg Dillon Reade LLC.............
William Blair & Company, L.L.C.......
[Names of other Underwriters]
Total................................
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Sold if
Firm Shares Maximum Option
to be Sold Exercised
<S> <C> <C>
The Company...................................................
The Selling Shareholder(s):..............................
[Name of Selling Shareholder](a)....................
[Name of Selling Shareholder](b)....................
[Name of Selling Shareholder](c)....................
[Name of Selling Shareholder](d)....................
[Name of Selling Shareholder](e)....................
Total....................................................
</TABLE>
(a) This Selling Shareholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(b) This Selling Shareholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(c) This Selling Shareholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(d) This Selling Shareholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(e) This Selling Shareholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
An. I-2
<PAGE>
SCHEDULE III
Parties to Lock-Up Agreements
(to be supplied by Company)
<TABLE>
<CAPTION>
No. of Warrants,
Options or Other No. of Shares of
Securities Stock represented by
Convertible into Warrants, Options or
Security Holder: No. of Shares of Stock Stock other Securities
- ---------------- ---------------------- ---------------- --------------------
<S> <C> <C> <C>
Executive Officers:
Directors:
Other Holders:
</TABLE>
An. I-3
<PAGE>
ANNEX I
DESCRIPTION OF COMFORT LETTER
Pursuant to Section 7(g) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
[separately] furnished to the representatives of the Underwriters (the
"Representatives")[and are attached hereto];
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which [have been
separately furnished to the Representatives] [and are attached hereto] and
on the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention
that cause them to believe that the unaudited condensed consolidated
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the [___] fiscal years included in the Prospectus agrees with
the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
An. I-4
<PAGE>
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements
from which such data and items were derived, and any such unaudited
data and items were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in
the Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other
An.I-5
<PAGE>
than issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in consolidated net
current assets or shareholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case
for changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
An. I-6
<PAGE>
ANNEX II(a)
Form of Opinion of Shearman & Sterling
____________________________________________________________________________
ANNEX II(b)
Form of Opinion of Gibson, Dunn & Crutcher
____________________________________________________________________________
ANNEX II(c)
Form of Opinion of Regulatory Counsel
___________________________________________________________________________
ANNEX II(d)
Form of Opinion of General Counsel
___________________________________________________________________________
ANNEX II(e)
Form of Opinion of Counsel for Selling Shareholders
An. I-7
<PAGE>
EXHIBIT 4.8
WARRANT
-------
- --------------------------------------------------------------------------------
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS AND MAY NOT BE OFFERED OR SOLD, UNLESS THEY HAVE BEEN REGISTERED UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
- --------------------------------------------------------------------------------
CONVERGENT COMMUNICATIONS, INC.
Warrant for the Purchase of Common Stock
----------------------------------------
Warrant No. 1
FOR VALUE RECEIVED, Convergent Communications, Inc. (the "Company"), a
corporation organized under the laws of Colorado, hereby certifies that Goldman,
Sachs & Co. or each of its registered assigns (any such Person, a "Holder") is
entitled, subject to the provisions of this Warrant, to purchase from the
Company, at any time or from time to time during the Exercise Period (as
hereinafter defined), subject to the terms and conditions set forth below, up to
750,000 Warrant Shares (as hereinafter defined), at a price per share equal to
the Exercise Price (as hereinafter defined). The number of Warrant Shares to be
received upon the exercise of this Warrant is subject to adjustment from time to
time as hereinafter set forth.
Section 1. Definitions Unless otherwise defined herein, the following
-----------
terms, as used herein, have the following respective meanings:
<PAGE>
"Additional Shares" means any shares of Common Stock other than (i)
Common Stock issued upon the exercise of any Warrant, (ii) Common Stock issued
pursuant to any security convertible into, or exchangeable or exercisable for,
shares of Common Stock outstanding as of the date hereof, (iii) Common Stock
issued upon the conversion, exchange or exercise of any convertible security as
to which the issuance thereof has previously been the subject of any required
adjustment pursuant to this Warrant, and (iv) Common Stock issued upon the
conversion, exchange or exercise of convertible, exchangeable or exercisable
securities of the Company outstanding on the date hereof (to the extent in
accordance with the terms of such securities as in effect on such date).
"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing. For purposes of this definition the following
persons shall, in any event, be deemed Affiliates of the Company: (i) any person
owning or controlling more than 5% of the Common Stock (or Convertible
Securities convertible or exchangeable into 5% of such Common Stock) of the
Company, (ii) any member of the Board of Directors of the Company and any
officer of the Company.
"Appraiser" has the meaning set forth in Section 7(d)(iii).
"Business Day" means any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
"Change of Control" has the meaning set forth in Section 1.01 of the
Indenture. The definition of such term, together with the definition of all
capitalized terms used herein that are also defined in the Indenture, are
incorporated herein by reference.
"Commencement Date" means the earliest of (i) 180/th/ day after the
effective date of an Initial Public Offering, (ii) the date an effective demand
for registration of Common Stock or convertible securities of the Company is
made by any person and (iii) March 17, 2001.
"Commission" means the United States Securities and Exchange
Commission or any other federal agency administering the Securities Act and
other federal securities laws.
2
<PAGE>
"Common Stock" means the authorized common stock, no par value, of the
Company, and any stock into which such common stock may thereafter be converted
or changed.
"Company" has the meaning set forth in the introductory paragraph
hereof.
"Convertible Securities" means rights to subscribe for, or any rights
or options to purchase, shares of Common Stock, or any stock or other securities
convertible into or exchangeable for shares of Common Stock other than (i) any
such rights, stock or securities established or issued pursuant to the Sandler
Documents and (ii) any other such rights, stock or securities outstanding on the
date hereof.
"Credit Agreement" means that certain Credit Agreement of even date
herewith by and among the Company, Convergent Communication Services, Inc.,
Convergent Capital Corporation, the lenders party thereto and Goldman Sachs
Credit Partners L.P., as Administrative Agent, as such agreement may be amended,
modified or supplemented from time to time in accordance with the terms thereof.
"Current Market Price" means, for shares of Common Stock, the current
market price of such Common Stock as determined in accordance with subsection
7(d).
"Exchange Act" means the United States Securities Exchange Act of
1934, as amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as shall be in effect from time to time.
"Exercise Event" means the date of the occurrence of the earliest of
(a) the consummation of an Initial Public Offering or (b) October 2, 1999.
"Exercise Period" means the period from and including the date of an
Exercise Event to and including 5:00 p.m. (New York City time) on the Expiration
Date.
"Exercise Price" means, with respect to any Warrant Share, an amount
equal to $7.50.
"Expiration Date" means the earlier of (y) the third anniversary of an
Initial Public Offering and (z) the fourth anniversary of the date hereof.
"Fully Diluted Common Stock" means, at any time, the then outstanding
Common Stock plus (without duplication) all shares of Common Stock issuable,
whether at such time or solely upon the passage of time or the occurrence of
future events (but
3
<PAGE>
excluding shares that are issuable in the future contingent upon unknown future
events), upon the exercise, conversion or exchange of all then-outstanding
rights, warrants, options, convertible securities or exchangeable securities or
indebtedness, or other rights exercisable for or convertible or exchangeable
into, directly or indirectly, Common Stock, and securities convertible or
exchangeable into Common Stock, whether at the time of issuance or solely upon
the passage of time or the occurrence of some future event (but excluding shares
that are issuable in the future contingent upon unknown future events).
"Holder" has the meaning set forth in the introductory paragraph
hereof.
"Indenture" means the Indenture, dated as of April 2, 1998 between the
Company and Norwest Bank Colorado, N.A., as in effect on the date hereof.
"Initial Public Offering" means a primary public offering (whether or
not underwritten, but excluding any offering pursuant to Form S-8 under the
Securities Act or any other publicly registered offering pursuant to the
Securities Act pertaining to an issuance of shares of Common Stock or securities
exercisable therefor under any benefit plan, employee compensation plan, or
employee or director stock purchase plan) of Common Stock pursuant to an
effective registration statement under the Securities Act.
"Majority Holders" means the Holders of Warrants exercisable for in
excess of fifty percent (50%) of the aggregate number of shares of Common Stock
then purchasable upon exercise of all Warrants (subject to any contractual
agreement entered into between Goldman, Sachs & Co. and any subsequent Holder
with respect to the retention by Goldman, Sachs & Co. of rights of Majority
Holders).
"Permitted Holders" has the meaning ascribed to such term in the
Indenture.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Registration Statement" shall mean any appropriate registration
statement of the Company filed with the Commission pursuant to the Securities
Act which covers any of the Warrant Shares pursuant to the provisions of this
Warrant and all amendments and supplements to any such Registration Statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
4
<PAGE>
"Reorganization Transaction" has the meaning set forth in Section 9
hereof.
"Sandler Documents" means (i) the Securities Purchase Agreement dated
March 17, 1999 between the Company and entities named in Exhibit A thereto, (ii)
the Warrant Agreement dated March 17, 1999 between the Company and each of the
entities named in Exhibit A thereto, and (iii) the Investors Rights Agreement
dated March 17, 1999 between the Company and each of the entities named in
Exhibit A thereof, in each case as in effect on the date hereof.
"Securities Act" means the United States Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as shall be in effect from time to time.
"Selling Holder" means a Holder who is selling Warrant Shares in
accordance with the provisions of Section 14 hereof.
"Warrant Shares" means the shares of the Common Stock of the Company
deliverable upon exercise of this Warrant, as adjusted from time to time.
"Warrants" has the meaning set forth in Section 5 hereof.
Section 2. Exercise of Warrant. (a) This Warrant may be exercised in
-------------------
whole or in part, at any time or from time to time, during the Exercise Period.
(b) In the event of an adjustment as described in Section 7 hereof,
the number of Warrant Shares for which this Warrant may be exercised shall be
revised accordingly.
(c) This Warrant shall be exercised by presentation and surrender
hereof to the Company at its principal office at the address set forth on the
signature page hereof (or at such other address as the Company may hereafter
notify the Holder in writing), together with the Purchase Form annexed hereto
duly executed and accompa nied by proper payment of that portion of the Exercise
Price represented by the number of Warrant Shares being purchased as specified
in such form. Such payment may be made, at the option of the Holder, (a) by
cash, certified or bank cashier's check or wire transfer in an amount equal to
the product of (i) the Exercise Price times (ii) the number of Warrant Shares as
to which this Warrant is being exercised, (b) by receiving from the Company the
number of Warrant Shares equal to (i) the number of Warrant Shares as to which
this Warrant is being exercised minus (ii) the number of Warrant Shares having a
value, based on the Current Market Price on the trading day immediately prior to
the
5
<PAGE>
date of such exercise, equal to the product of (x) the Exercise Price times
(y) the number of Warrant Shares as to which this Warrant is being exercised, or
(c) any combination of (a) and (b). If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and a duly executed Purchase Form, together with the applicable portion
of the Exercise Price, at the principal office of the Company, in proper form
for exercise, the Holder shall be deemed to be the holder of record of the
Warrant Shares, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such Warrant Shares shall
not then be actually delivered to the Holder. The Company shall pay any and all
documentary stamp or similar issue taxes payable in respect of the issue of the
Warrant Shares.
Section 3. Due Authorization; Reservation of Shares. (a) The Company
----------------------------------------
represents and warrants that this Warrant has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, and entitles the
Holder hereof or its assignees to purchase Warrant Shares on the terms and
conditions set forth herein and upon payment to the Company of the Exercise
Price then in effect applicable to such shares. The Company hereby agrees that
at all times there shall be reserved for issuance and delivery by the Company,
upon exercise of this Warrant, all shares of Common Stock from time to time
issuable or deliverable upon exercise of this Warrant. All such shares shall be
duly authorized (and, if newly-issued, when issued upon such exercise), shall be
validly issued, fully paid and nonassessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
(b) The Company represents and warrants that the execution and
delivery by it of this Warrant and the performance by it of its obligations
hereunder (i) do not require any action by or in respect of, or filing with, any
United States or foreign governmental body, agency or official and (ii) do not
contravene or constitute a default under or violation of (A) any provision of
applicable law or regulation, (B) the certificate of incorporation or bylaws of
the Company, or (C) any material agreement, judgment, injunction, order, decree
or other instrument binding upon the Company.
Section 4. Fractional Shares. No fractional shares or scrip
-----------------
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the Exercise Price per Warrant Share.
6
<PAGE>
Section 5. Exchange, Transfer, Assignment or Loss of Warrant. This
-------------------------------------------------
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company for other Warrants of different
denominations, entitling the Holder to purchase in the aggregate the same number
of Warrant Shares. Subject to Section 11 hereof, the Holder of this Warrant
shall be entitled to assign its interest in this Warrant in whole or in part to
any Person or Persons. Upon surrender of this Warrant to the Company, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant or Warrants in the name of the transferee specified in such instrument
of assignment and, if the Holder's entire interest is not being assigned, in the
name of the Holder, and this Warrant shall promptly be cancelled. In the event
of any assignment in part, the Exercise Price shall be apportioned between the
Warrant to be issued to the Holder with respect to that portion not transferred
and the Warrant to be issued to the transferee based on their respective
interests. This Warrant may be divided or combined with other Warrants that
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued and signed by the Holder hereof. The
terms "Warrant" or "Warrants" as used herein includes any Warrant or Warrants
into which this Warrant may be divided or for which it may be exchanged. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant (provided that an affidavit of
the Holder as to a loss, theft or destruction of this Warrant shall be deemed to
be evidence reasonably satisfactory to the Company of such loss, theft or
destruction), and upon surrender and cancellation of this Warrant, if mutilated,
the Company shall execute and deliver a new Warrant of like tenor and date.
Section 6. Rights of the Holder. The Holder shall not, by virtue
--------------------
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in this
Warrant.
Section 7. Anti-dilution Provisions and Other Adjustments; Purchase
--------------------------------------------------------
Right. The number of Warrant Shares which may be purchased upon the exercise
- -----
hereof shall be subject to change or adjustment as follows:
(a) Stock Dividends, Splits, Combinations, Reclassifications, etc. If
-------------------------------------------------------------
the Company at any time (i) shall declare a dividend or make a distribution on
its Common Stock payable in shares of its capital stock (whether shares of
Common Stock or of capital stock of any other class), (ii) shall subdivide
shares of its Common Stock into a greater number of shares, (iii) shall combine
or have combined its outstanding Common Stock into a smaller number of shares or
(iv) shall issue by reclassification of its Common Stock (including any such
reclassification in connection with a consolidation
7
<PAGE>
or merger in which the Company is the continuing corporation) other securities
of the Company, the Holder shall be entitled to purchase the aggregate number
and kind of shares of capital stock and other securities which, if this Warrant
had been exercised immediately prior to such event, such Holder would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
distribution, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) Additional Issuances. If the Company at any time shall issue (y)
--------------------
at any time prior to the consummation of an Initial Public Offering any
Additional Shares and (z) at any time on or after the date of consummation, any
Additional Shares to an Affiliate, in either case at a price less than the
Current Market Price per share of Common Stock, or any Convertible Securities
(excluding any such issuance for which the number of Warrant Shares purchasable
hereunder shall have been adjusted pursuant to subsection (a) of this Section 7)
which are exercisable or convertible for Additional Shares at an exercise or
conversion price less than the Current Market Price per share of Common Stock,
the number of Warrant Shares purchasable hereunder after such issuance shall be
determined by multiplying the number of Warrant Shares purchasable hereunder
immediately prior to such issuance by a fraction, (i) the denominator of which
shall be the number of shares of Fully Diluted Common Stock immediately prior to
such issuance plus the number of shares that the aggregate consideration for the
total number of such Additional Shares (including the issue price of any such
Convertible Securities) would purchase at the Current Market Price per share of
Common Stock, and (ii) the numerator of which shall be the number of shares of
Fully Diluted Common Stock immediately after such issuance. Shares of Common
Stock owned by or held for the account of the Company or any subsidiary of the
Company on the date of any such issuance shall not be deemed outstanding for the
purpose of any such computation. Such adjustment shall become effective
immediately after such issuance. Such adjustment shall be made successively
whenever any such event shall occur.
If the Company at any time shall issue two or more securities as a
unit and one or more of such securities shall be Additional Shares or
Convertible Securities subject to this subsection (b), the consideration
allocated to each such security shall be determined by an independent nationally
recognized investment banking firm experienced in valuing securities.
(c) Distribution of Evidences of Indebtedness or Assets. If the
---------------------------------------------------
Company at any time shall fix a record date for the making of a distribution to
all holders of its Common Stock (including any such distribution to be made in
connection with a consolidation or merger in which the Company is to be the
continuing corporation) of evidences of its indebtedness or assets (excluding
dividends paid in or distributions of
8
<PAGE>
capital stock of the Company for which the number of Warrant Shares purchasable
hereunder shall have been adjusted pursuant to subsection (a) of this Section 7
or regular cash dividends or distributions payable out of earnings or surplus
and made in the ordinary course of business), the number of Warrant Shares
purchasable hereunder after such record date shall be determined by multiplying
the number of Warrant Shares purchasable hereunder immediately prior to such
record date by a fraction, (i) the denominator of which shall be (x) the Current
Market Price per share of Common Stock on such record date less (y) the fair
market value (as determined by an independent nationally recognized investment
banking firm experienced in valuing evidences of indebtedness or assets of a
similar type and described in a statement mailed by certified mail to the
Holder) of the portion of the assets or evidences of indebtedness to be so
distributed to a holder of one share of Common Stock, and (ii) the numerator of
which shall be such Current Market Price per share of Common Stock. Such
adjustment shall become effective immediately after such record date. Such
adjustment shall be made whenever such a record date is fixed; and in the event
that such distribution is not so made, the number of Warrant Shares purchasable
hereunder shall again be adjusted to be the number that was in effect
immediately prior to such record date.
(d) Determination of Market Price. For the purpose of any
-----------------------------
computation under Section 4 or subsection (b) or (c) of this Section 7, the
Current Market Price per share of Common Stock on any date shall be the average
of the current market value, determined as set forth below, of Common Stock for
the 20 Business Days prior to such date.
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange,
the current market value for any Business Day shall be the last reported
sale price of the Common Stock on such exchange on such Business Day or if
no such sale is made on such Business Day, the mean of the closing bid and
asked prices for such Business Day on such exchange; or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value for any Business Day shall be
the mean of the last bid and asked prices reported on such Business Day (A)
by the National Association of Securities Dealers, Inc. Automatic Quotation
System or (B) if reports are unavailable under clause (A) above, by the
National Quotation Bureau Incorporated; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be such value as agreed upon by the Company and
the Majority
9
<PAGE>
Holders or, if the Company and the Majority Holders cannot otherwise agree,
the current market value shall be determined by an independent nationally
recognized investment banking firm experienced in valuing businesses (an
"Appraiser") selected by the Board of Directors of the Company and
reasonably acceptable to Majority Holders.
(e) Stock Other Than Common Stock. In the event that at any time, as
-----------------------------
a result of an adjustment made pursuant to subsection (a) of this Section 7, the
Holder shall become entitled to receive any shares of the capital stock of the
Company other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 7, and the
provisions of this Warrant with respect to the Common Stock shall apply on like
terms to any such other shares.
(f) Common Stock Defined. Whenever reference is made in this Section
--------------------
7 to the issuance of shares of Common Stock, the term "Common Stock" shall
include any equity securities of any class of the Company hereinafter authorized
which shall not be limited to a fixed or determinable amount in respect of the
right of the holders thereof to participate in dividends or distributions of
assets upon the voluntary or involuntary liquidation, dissolution or winding-up
of the Company; provided, however, that, subject to the provisions of Section 9
-------- -------
hereof, shares issuable upon exercise hereof shall include only Warrant Shares
as of the date hereof or shares of any class or classes resulting from any
reclassification or reclassifications thereof or as a result of any corporate
reorganization as provided for in Section 9 hereof.
Section 8. Notice of Certain Actions. In the event that at any time:
-------------------------
(a) the Company shall authorize the issuance of Convertible
Securities to all holders of its Common Stock; or
(b) the Company shall authorize the distribution of evidences of its
indebtedness or assets to all holders of its Common Stock (other than dividends
paid in or distributions of capital stock of the Company for which the number of
Warrant Shares purchasable hereunder shall have been adjusted pursuant to
subsection (a) of Section 7 or regular cash dividends or distributions payable
out of earnings or surplus and made in the ordinary course of business); or
(c) the Company shall authorize (i) any capital reorganization or
reclassification of the Common Stock (other than a subdivision or combination of
the outstanding Common Stock and other than a change in par value of the Common
Stock),
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<PAGE>
(ii) any consolidation or merger to which the Company is a party and for
which approval of any stockholders of the Company is required (other than a
consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or change of the Common Stock
outstanding), or (iii) the conveyance or transfer of the properties and assets
of the Company substantially as an entirety; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(e) the Company shall take any other action that would require any
adjustment greater than 1% of the number of Warrant Shares purchasable hereunder
pursuant to Section 7; or
(f) the Company shall receive an effective notice from any person
other than a Holder with respect to the exercise of a demand registration rights
applicable to equity securities of the Company.
then the Company shall or shall cause to be mailed by certified mail to the
Holder, (y) except in the case of clauses (e) and (f) above at least 20 days
prior to the applicable record or effective date hereinafter specified and (z)
in the case of clauses (e) and (f) above promptly after the effectiveness or
occurrence of any such event, a notice describing such issuance, distribution,
reorganization, reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation, winding-up or other action and stating (x) the date as
of which the holders of Common Stock of record entitled to receive any such
Convertible Securities or distributions are to be determined or (y) the date on
which any such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, convey ance, transfer, dissolution,
liquidation or winding-up.
Section 9. Officers' Certificate. Whenever the number of Warrant
---------------------
Shares purchasable hereunder shall be adjusted as required by the provisions of
Section 7, the Company shall forthwith file in the custody of its Secretary or
an Assistant Secretary at its principal office an officer's certificate showing
the adjusted number of Warrant Shares purchasable hereunder determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the Chairman, President or Chief Financial Officer of the
Company and by the Secretary or any Assistant Secretary of the Company. Each
such officer's certificate shall be made available at all reasonable times for
11
<PAGE>
inspection by the Holder or any holder of a Warrant executed and delivered
pursuant to Section 5 hereof and the Company shall, forthwith after each such
adjustment, mail a copy, by certified mail, of such certificate to the Holder or
any such holder.
Section 10. Reclassification, Reorganization, Consolidation or Merger.
---------------------------------------------------------
In case of any Reorganization Transaction (as hereinafter defined), the Company
shall, as a condition precedent to such transaction, cause effective provisions
to be made so that the Holder shall have the right thereafter, by exercising
this Warrant, to purchase the kind and amount of shares of stock and other
securities and property receivable upon such Reorganization Transaction by a
holder of the number of shares of Common Stock that might have been received
upon exercise of this Warrant immediately prior to such Reorganization
Transaction. Any such provision shall include provision for adjustments in
respect of such shares of stock and other securities and property that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Warrant. The foregoing provisions of this Section 10 shall similarly apply
to successive Reorganization Transactions. For purposes of this Section 10,
"Reorganization Transaction" shall mean (excluding any transaction covered by
Section 7) any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or any consolidation or merger of the Company with or
into another corporation (other than a merger with a subsidiary in which merger
the Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or any
sale, lease, transfer or conveyance to another corporation of all or
substantially all of the assets of the Company.
Section 11. Transfer Restrictions. The Holder by its acceptance
---------------------
hereof, represents and warrants that it is acquiring this Warrant and any
Warrant Shares for its own account and not with an intent to sell or distribute
this Warrant or any Warrant Shares except in compliance with applicable United
States federal and state securities laws in a manner which would not result in
the issuance of this Warrant or any Warrant Shares being treated as a public
offering. Neither this Warrant nor any of the Warrant Shares, nor any interest
in either, may be sold, assigned, pledged, hypothecated, encumbered or in any
other manner transferred or disposed of, in whole or in part, except in
compliance with applicable United States federal and state securities laws.
Section 12. Listing on Securities Exchanges. The Company shall use all
-------------------------------
reasonable efforts to list on each national securities exchange on which any
Common Stock may at any time be listed, subject to official notice of issuance
upon the exercise of this Warrant, and shall use its reasonable best efforts to
maintain such listing, so long
12
<PAGE>
as any other shares of its Common Stock shall be so listed, all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall use its reasonable best efforts to so list on each national
securities exchange, and shall use all reasonable efforts to maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of capital stock of the
same class shall be listed on such national securities exchange by the Company.
Any such listing shall be at the Company's expense.
Section 13. Availability of Information. (a) the Company shall comply
---------------------------
with the reporting requirements of Sections 13 and 15(d) of the Exchange Act to
the extent it is required to do so under the Exchange Act. The Company shall
also provide each Holder of any Warrants and each holder of any Warrant Shares
promptly upon their becoming available, copies of (i) all financial statements,
reports, notices and proxy statements sent or made available generally by the
Company to its securityholders or creditors acting in such capacity or by any
subsidiary of the Company to its securityholders or creditors other than the
Company or another subsidiary of the Company, (ii) all regular and periodic
reports and all registration statements (other than on Form S-8 or a similar
form) and prospectuses, if any, filed by the Company or any of its subsidiaries
with any securities exchange or with the Commission or any governmental or
private regulatory authority, and (iii) all press releases and other statements
made available generally by the Company or any of its subsidiaries to the public
concerning material developments in the business of the Company or any of its
subsidiaries. The provisions of this Section 13 shall survive termination of
this Warrant, whether upon exercise of this Warrant in full or otherwise.
(b) If at any time the Company is not subject to the requirements of
Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish at
its expense, upon request, for the benefit of Holders from time to time of
Warrants and holders from time to time of Warrant Shares, to Holders of
Warrants, holders of Warrant Shares and prospective purchasers of Warrants and
Warrant Shares information satisfying the requirements of subsection (d)(4)(i)
of Rule 144A under the Securities Act.
Section 14. Registration Rights.
-------------------
(a) Demand Registration. (i) At any time on or after the
-------------------
Commencement Date, but prior to the Expiration Date, the Holders of a number of
Warrants or the holders of Warrant Shares equivalent to at least a majority of
the total of (1) all Warrant Shares then subject to purchase upon exercise of
the Warrants pursuant to Section 2(a) hereof, and (2) all Warrant Shares then
outstanding have the right hereunder to make a written request to the Company to
effect one registration (a
13
<PAGE>
"Demand Registration") under the Securities Act of the Warrant Shares. Within 20
days after the receipt of such written request for a Demand Registration, the
Company shall notify the Holders of all Warrants and the holders of all Warrant
Shares that a Demand Registration has been requested. In addition, the Company
shall (1) prepare, file with the Commission and use its best efforts to cause to
become effective under the Securities Act within 150 days of such demand a
Registration Statement with respect to such Warrant Shares, and to prepare and
file with the Commission such amendments and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary to
keep such Registration Statement effective and to comply with the provisions of
the Securities Act with respect to the sale or other disposition of all
securities covered by such Registration Statement and (2) keep such Registration
Statement continuously effective until the earlier to occur of (A) the date that
is 60 days after such effectiveness (the "Effectiveness Period") and (B) such
period of time as all of the Warrant Shares included in such Registration
Statement shall have been sold thereunder. Any such request will specify the
number of Warrant Shares proposed to be sold and will also specify the intended
method of disposition thereof. Within 30 days after receipt by any Holder of
Warrants or holder of Warrant Shares of such notice from the Company, such
Holder or holder may request in writing that such Holder's or holder's Warrant
Shares be included in such Registration Statement and the Company shall include
in such Registration Statement the Warrant Shares of any such Holder or holder
requested to be so included, provided that, with respect to any Holder of
Warrants, such Warrants are duly and timely exercised with respect to the
Warrant Shares requested to be registered (the "Included Shares"). Each such
request by such other Holders or holders shall specify the number of Included
Shares proposed to be sold and the intended method of disposition thereof.
(ii) If such a requested registration occurs during the "lock up" or
"black out" period (not to exceed 180 days) imposed on the Company pursuant to
or in connection with any underwriting or purchase agreement relating to an
underwritten Rule 144A or registered public offering of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock, the
Company shall not be required to so notify holders of Warrants and Warrant
Shares and file such Demand Registration Statement prior to the end of such
"lock up" or "black out" period, in which event the Company will use its best
efforts to cause such Demand Registration Statement to become effective no later
than the later of (1) 150 days after such demand or (2) 30 days after the end of
such "lock up" or "black out" period. In the event of any "lock up" or "black
out" period or any underwriting or other purchase agreement, the Company shall
so notify the holders of Warrants and Warrant Shares.
(iii) A Registration Statement shall not be deemed to have been
effected as a Demand Registration Statement unless it shall have been declared
effective by the
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<PAGE>
Commission, no later than the later of (1) 150 days after the request for a
Demand Registration or (2) 30 days after the end of any "lock up" or "black out"
period described in the preceding paragraph, and the Company has complied in all
material respects with all of its obligations under this Warrant with respect
thereto; provided, however, that if, after such Registration Statement has
become effective, the offering of Warrant Shares pursuant to such Registration
Statement is or becomes the subject of any stop order, injunction or other order
or requirement of the Commission or any other governmental, judicial or
administrative order or requirement that prevents, restrains or otherwise limits
the sale of the Warrant Shares pursuant to such Registration Statement for any
reason not attributable to any Selling Holder participating in such
registration, and such Registration Statement has not become effective within a
reasonable time period thereafter, such Registration Statement shall be deemed
not to have been effected. If (1) a registration requested pursuant to this
Section 14(a) is deemed not to have been effected or (2) a Demand Registration
does not remain effective under the Securities Act until at least the earlier of
(A) an aggregate of 60 days (subject to Section 14(c) hereof) after the
effective date thereof or (B) the consummation of the distribution by the
Selling Holders of all of the Warrant Shares covered thereby, then such Demand
Registration shall not count towards determining if the Company has satisfied
its obligation to effect one Demand Registration pursuant to this Section 14(a).
For purposes of calculating the 60-day period referred to in the preceding
sentence, any period of time during which such Registration Statement was not in
effect shall be excluded. The holders of Warrant Shares shall be permitted to
withdraw all or any part of such Warrant Shares from a Demand Registration.
Notwithstanding any such withdrawal by a holder of Warrant Shares, if the
Company has complied with all of its obligations hereunder and has effected a
Demand Registration within 150 days after the request for a Demand Registration,
such withdrawal shall not require the Company to effect any additional Demand
Registrations.
(iv) Each Holder of Warrants and Warrant Shares whose Warrant Shares
are covered by a Registration Statement filed pursuant to this Section 14(a) and
are to be sold thereunder agrees, if and to the extent reasonably requested by
the managing underwriter or underwriters in an underwritten public offering of
such Warrant Shares, not to effect any public sale or distribution of Warrant
Shares or of securities of the Company of the same class as any securities
included in such Registration Statement, including a sale pursuant to Rule 144
(except as part of such underwritten offering), during the 30-day period prior
to, and during the 180-day period beginning on, the closing date of each
underwritten offering made pursuant to such Registration Statement, to the
extent timely notified in writing by the Company or such managing underwriter or
underwriters.
15
<PAGE>
The foregoing provisions of Section 14(a)(iv) shall not apply to any
Holders of Warrant Shares if such Holder is prevented by applicable statute or
regulation from entering into any such agreement; provided, however, that any
such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Warrant Shares commencing on the date of sale of such Warrant Shares unless it
has provided 45 days' prior written notice of such sale or distribution by the
managing underwriter or underwriters.
(v) If a majority of the holders of the Warrant Shares to be
registered so elect, the offering of such Warrant Shares pursuant to such Demand
Registration shall be in the form of an underwritten offering. The holders
making such Demand Registration shall select one or more nationally recognized
firms of investment bankers, who shall be reasonably acceptable to the Company,
to act as the managing underwriter or underwriters in connection with such
offering and shall select any additional investment bankers and managers to be
used in connection with the offering.
(vi) The Company will pay all Registration Expenses (as hereinafter
defined) in connection with the registration requested pursuant to Section 14(a)
hereof. Each holder of Warrant Shares being registered shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of such holder's Warrant Shares pursuant to a
Registration Statement requested pursuant to this Section 14(a).
(b) Piggy-Back Registration. (i) If at any time the Company
-----------------------
proposes to file a Registration Statement under the Securities Act with respect
to an offering by the Company for its own account or for the account of any of
its securityholders of Common Stock (other than (1) a Registration Statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the SEC) or any
other publicly registered offering pursuant to the Securities Act pertaining to
the issuance of shares of capital stock or securities exercisable therefor under
any benefit plan, employee compensation plan, or employee or director stock
purchase plan, (2) a Registration Statement filed in connection with an offer of
securities solely to the Company's existing securityholders or (3) a Demand
Registration or (4) if the registration is a "demand" registration made by (i)
the holders of warrants issued to the purchasers of Notes or (ii) the holders of
securities issued pursuant to and governed by the Sandler Documents, then the
Holders of Warrants and the holders of Warrant Shares shall not be entitled to
participate in such registration unless agreed to in writing by those holders
referenced in the foregoing clauses (i) and (ii)), then the Company shall give
written notice of such proposed filing to the holders of Warrant Shares as soon
as practicable (but in no event fewer than 15 days before the anticipated filing
date or 10 days if the Company is subject to filing reports under the Exchange
Act and able to use Form S-3 under the Securities
16
<PAGE>
Act), and such notice shall offer such holders the opportunity to register such
number of Warrant Shares as each such holder may request in writing within 12
days (or eight days if the Company is subject to filing reports under the
Exchange Act and able to use Form S-3 under the Securities Act) after receipt of
such written notice from the Company (which request shall specify the Warrant
Shares intended to be disposed of by such Selling Holder and the intended method
of distribution thereof) (a "Piggy-Back Registration"). The Company shall use
its best efforts to keep such Piggy-Back Registration continuously effective
under the Securities Act in the qualifying jurisdic tions until at least the
earlier of (A) 60 days after the effective date thereof or (B) the consummation
of the distribution by the Selling Holders of all of the Warrant Shares covered
thereby. The Company shall use its best efforts to cause the managing
underwriter or underwriters, if any, of such proposed offering to permit the
Warrant Shares requested to be included in a Piggy-Back Registration to be
included on the same terms and conditions as any similar securities of the
Company or any other securityholder included therein and to permit the sale or
other disposition of such Warrant Shares in accordance with the intended method
of distribution thereof. Any Selling Holder shall have the right to withdraw its
request for inclusion of its Warrant Shares in any Registration Statement
pursuant to this Section 14(b) by giving written notice to the Company of its
request to withdraw. The Company may withdraw a Piggy-Back Registration at any
time prior to the time it becomes effective or the Company may elect to delay
the registration; provided, however, that the Company shall give prompt written
notice thereof to participating Selling Holders. The Company will pay all
Registration Expenses in connection with each registration of Warrant Shares
requested pursuant to this Section 14(b), and each holder of Warrant Shares
shall pay all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Selling Holder's Warrant Shares
pursuant to a Registration Statement effected pursuant to this Section 14(b).
No registration effected under this Section 14(b), and no failure to
effect a registration under this Section 14(b), shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Warrants and
holders of Warrant Shares pursuant to Section 14(a) hereof, and no failure to
effect a registration under this Section 14(b) and to complete the sale of
securities registered thereunder in connection therewith shall relieve the
Company of any other obligation under this Warrant.
(ii) In a registration pursuant to Section 14(b) hereof involving an
underwritten offering, if the managing underwriter or underwriters of such
underwritten offering have informed, in writing, the Company and the Selling
Holders requesting inclusion in such offering that in such underwriter's or
underwriters' reasonable opinion the total number of securities which the
Company, the Selling Holders and any other Persons desiring to participate in
such registration intend to include in such offering is
17
<PAGE>
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 is so advised should be included in such registration. In such event: (x) in
cases only involving the registration for sale of securities for the Company's
own account (which may include securities included pursuant to the exercise of
piggy-back rights herein and in other contractual commit ments of the Company),
securities shall be registered in such offering in the following order of
priority: (i) first, the securities which the Company proposes to register and
(ii) second, provided that no securities sought to be included by the Company
have been excluded from such registration, on a pro rata basis, (a) the Warrant
Shares which have been requested to be included in such registration by the
holders of Warrant Shares pursuant to this Warrant (such Warrant Shares for the
account of such holders to be allocated among the holders pro rata based on the
amount of Warrant Shares sought to be registered by the holder), together with
(b) the securities of other Persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments of the Company (pro rata
based on the amount of securities sought to be registered by such Persons); and
(y) in cases not involving the registration for sale of securities for the
Company's own account only, securities shall be registered in such offering in
the following order of priority: (i) first, securities to be sold for the
account of the Company and the securities of any Person whose exercise of a
"demand" registration right pursuant to a contractual commitment of the Company
is the basis for the registration (provided that if such Person is a Holder of
Warrants or holder of Warrant Shares, as among holders of Warrant Shares there
shall be no priority and Warrant Shares sought to be included by holders of
Warrant Shares shall be included pro rata based on the amount of securities
sought to be registered by such Persons) and (ii) second, provided that no
securities of the Company or such Person referred to in the immediately
preceding clause (i) have been excluded from such registration, on a pro rata
basis, (a) the securities requested to be included in such registration by the
holders of Warrant Shares pursuant to this Section 14(b) (such securities for
the account of such holders to be allocated among such holders pro rata based on
the total amount of securities sought to be registered by the holders), together
with (b) the securities of other Persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments (pro rata based on the
amount of securities sought to be registered by such Persons).
If, as a result of the provisions of this Section 14(b), any Selling
Holder shall not be entitled to include all Warrant Shares in a Piggy-Back
Registration that such Selling Holder has requested be included, such Selling
Holder may elect to withdraw his request to include Warrant Shares in such
registration.
18
<PAGE>
(iii) Each Holder of Warrants and Warrant Shares whose Warrant Shares
are covered by a Registration Statement filed pursuant to this Section 14(b) and
are to be sold thereunder agrees, if and to the extent reasonably requested by
the managing underwriter or underwriters in an underwritten public offering of
such Warrant Shares, not to effect any public sale or distribution of Warrant
Shares or of securities of the Company of the same class as any securities
included in such Registration Statement, including a sale pursuant to Rule 144
(except as part of such underwritten offering), during the 30-day period prior
to, and during the 180-day period beginning on, the closing date of each
underwritten offering made pursuant to such Registration Statement, to the
extent timely notified in writing by the Company or such managing underwriter or
underwriters.
The foregoing provisions of Section 14(b) shall not apply to any
Holders of Warrants and Warrant Shares if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, however,
that any such holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Warrant Shares commencing on the date of sale of such Warrant Shares unless it
has provided 45 days' prior written notice of such sale or distribution to the
managing underwriter or underwriters.
(iv) Notwithstanding the foregoing provisions of this Section 14(b):
(A) the Holders may not require a Piggyback Registration in
connection with an Initial Public Offering unless such offering
consists or includes a secondary offering of securities by any
Person other than holders of Existing Registration Rights (as
defined in the Sandler Documents) who are not Insiders (as
defined in the Sandler Documents);
(B) the Holders may not require a Piggyback Registration on the
first registered offering of Common Stock by the Company which is
made after the Initial Public Offering pursuant to a Registration
Statement that becomes effective within six months after the
Initial Public Offering 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
19
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(c) Limitations, Conditions and Qualifications to Obligations
---------------------------------------------------------
Under Registration Covenants. The obligations of the Company set forth in
- ----------------------------
Sections 14(a), 14(b) and 14(f) hereof are subject to each of the following
limitations, conditions and qualifications:
(i) Subject to the next sentence of this paragraph, the Company shall
be entitled to postpone, for a reasonable period of time, the filing of, or
suspend the effectiveness of, any Registration Statement or amendment
thereto, or suspend the use of any prospectus and shall not be required to
amend or supplement the Registration Statement, any related prospectus or
any document incorporated therein by reference (other than an effective
Registration Statement being used for an underwritten offering); provided
that the duration of such postponement or suspension (a "Suspension
Period") may not exceed an aggregate of 90 days after the event or
circumstance giving rise to such Suspension Period and the duration of such
Suspension Period shall be excluded from the calculation of the 60-day
period described in Section 14(b) hereof. Such Suspension Period may be
effected only if (1) an event or circumstance occurs and is continuing as a
result of which the Registration Statement, any related prospectus or any
document incorporated therein by reference as then amended or supplemented
or proposed to be filed would, in the Company's good faith judgment,
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and (2) (A) the
Company determines in its good faith judgment that the disclosure of such
an event at such time would have a material adverse effect on the business,
operations or prospects of the Company or (B) the disclosure otherwise
relates to a material business transaction which has not yet been publicly
disclosed; provided, that the Effectiveness Period shall be extended by the
number of days in any Suspension Period; provided further that the Company
may suspend the effectiveness for a period not in excess of five Business
Days to allow for the updating of the financial statements included in a
Registration Statement to the extent required by law, not to exceed 45 days
in aggregate in any 12-month period. If the Company shall so postpone the
filing of a Registration Statement it shall, as promptly as possible,
deliver a certificate signed by the chief executive officer of the Company
to the Selling Holders as to such determination, and the Selling Holders
shall (1) have the right, in the case of a postponement of the filing or
effectiveness of a Registration Statement, upon the affirmative vote of the
holders of not less than a majority of the Warrant Shares to be included in
such Registration Statement, to withdraw the request for registration by
giving written notice to the Company within 10 days after receipt of such
notice or (2) in the case of a suspension of the right to make sales,
receive an extension of the
20
<PAGE>
registration period equal to the number of days of the suspension. Any
Demand Registration as to which the withdrawal election referred to in the
preceding sentence has been effected shall not be counted for purposes of
the Demand Registration the Company is required to effect pursuant to
Section 14(a) hereof.
(ii) The Company's obligations shall be subject to the obligations of
the Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be
required under applicable federal and state securities laws and regulations
to permit the Company to comply with all applicable requirements of the
Commission, if applicable, and to obtain any acceleration of the effective
date of such Registration Statement.
(d) Restrictions on Sale by the Company and Others. The Company
----------------------------------------------
covenants and agrees that (i) it shall not, and that it shall not cause or
permit any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Warrant Shares or any securities
convertible into or exchange able or exercisable for such securities (or any
option or other right for such securities) during the 90-day period beginning on
the commencement of any underwritten offering of Warrant Shares pursuant to a
Demand Registration which has been requested pursuant to this Warrant, prior to
the Company or any of its subsidiaries publicly announcing its intention to
effect any such public sale or distribution; (ii) except as permitted herein,
the Company will not, and the Company will not cause or permit any subsidiary of
the Company to, after the date hereof, enter into any agreement or contract that
conflicts with or limits or prohibits the full and timely exercise by the
Holders of Warrants or holders of Warrant Shares of the rights herein to request
a Demand Registration or to join in any Piggy-Back Registration subject to the
other terms and provisions hereof; and (iii) upon request of the holders of not
less than a majority of the Warrant Shares to be included in such Registration
Statement or any underwriter, it shall use its reasonable best efforts to secure
the written agreement of each of its officers and directors to not effect any
public sale or distribution of any securities of the same class as the Warrant
Shares (or any securities convertible into or exchangeable or exercisable for an
such shares), or any option or right for such shares during the period described
in clause (i) of this Section 14(d).
(e) Rule 144 and Rule 144A. The Company covenants that it will
----------------------
file the reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder
in a timely manner and, if at any time the Company is not required to file such
reports, it will, upon the request of any Holder or beneficial owner of Warrants
or holder of Warrant Shares, make available such information necessary to permit
sales pursuant to Rule 144A under the
21
<PAGE>
Securities Act. The Company further covenants that it will take such further
action as any Holder of Warrants or holder of Warrant Shares may reasonably
request, all to the extent required from time to time to enable such holder to
sell Warrant Shares without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the
Securities Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the Commission. Upon the request
of any Holder of Warrants or holder of Warrant Shares, the Company will in a
timely manner deliver to such holder a written statement as to whether it has
complied with such information requirements.
(f) Underwritten Registrations. If any of the Warrant Shares
--------------------------
covered by any Demand Registration Statement are to be sold in an underwritten
public offering, the investment banker or investment bankers and manager or
managers that will administer the offering will be selected by the holders of
not less than a majority of the Warrant Shares to be sold thereunder and will be
reasonably acceptable to the Company.
No holder of Warrant Shares may participate in any underwritten
registration pursuant to a Registration Statement filed under this Warrant
unless such holder (a) agrees to (i) sell such holder's Warrant Shares on the
basis provided in and in compliance with any underwriting arrangements approved
by the holders of not less than a majority of the Warrant Shares to be sold
thereunder and (ii) comply with Rules 101, 102 and 104 of Regulation M under the
Exchange Act and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
If the Company has complied with all of its obligations under this
Warrant with respect to a Demand Registration or a Piggy-Back Registration
relating to an underwritten public offering of Warrant Shares, all holders of
Warrants or holders of Warrant Shares upon request of the lead managing
underwriter with respect to such offering, will be required not to sell or
otherwise distribute any Warrant Shares owned by them for a period not to exceed
180 days after the consummation of such offering.
(g) Registration Procedures. If the Company is required by the
-----------------------
provisions of this Section 14 to use its best efforts to effect the registration
of any of its securities under the Securities Act, the Company will (in addition
to taking any other actions required by law or this Warrant), as expeditiously
as possible:
(i) furnish to such Selling Holders such number of copies of a
summary prospectus or other prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
docu ments, as such Selling Holders may reasonably request;
22
<PAGE>
(ii) use its best efforts to register or qualify the securities
covered by such Registration Statement under such other securities or blue
sky laws of such jurisdictions within the United States and Puerto Rico as
each holder of such securities shall request (provided, however, that the
Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then
qualified or to file any general consent to service or process), and do
such other reasonable acts and things as may be required of it to enable
such Selling Holder to consummate the disposition in such jurisdiction of
the securities covered by such Registration Statement;
(iii) furnish, at the request of any Holder of Warrants or holder
of Warrant Shares requesting registration of Warrant Shares pursuant to
Section 14, on the date that such Warrant Shares are delivered to the
underwriters for sale pursuant to such registration or, if such Warrant
Shares are not being sold through underwriters, on the date that the
Registration Statement with respect to such Warrant Shares becomes
effective, (A) an opinion, dated such date, of the independent counsel
representing the Company for the purposes of such registration, addressed
to the underwriters, if any, and if such Warrant Shares are not being sold
through underwriters, then to the holders making such request, in customary
form and covering matters of the type customarily covered in such legal
opinions; and (B) a comfort letter dated such date, from the independent
certified public accountants of the Company, addressed to the underwriters,
if any, and if such Warrant Shares are not being sold through underwriters,
then to the holders making such request and, if such accountants refuse to
deliver such letter to such holders, then to the Company in a customary
form and covering matters of the type customarily covered by such comfort
letters as the underwrit ers or such holders shall reasonably request.
Such opinion of counsel shall additionally cover such other legal matters
with respect to the registration in respect of which such opinion is being
given as such holders holding a majority of the Warrant Shares being so
registered may reasonably request. Such letter from the independent
certified public accountants shall additionally cover such other financial
matters (including information as to the period ending not more than three
(3) Business Days prior to the date of such letter) with respect to the
registration in respect of which such letter is being given as the holders
holding a majority of the Warrant Shares being so registered may reasonably
request;
(iv) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
securities; and
23
<PAGE>
(v) cause the appropriate officers of the Company to meet with
prospective investors and to otherwise participate in "road shows" and to
take such other actions as are usual and customary in connection with an
underwritten offering of equity securities; and
(vi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission.
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Section 14 in respect of the securities which
are to be registered at the request of any Holder of Warrants or holder of
Warrant Shares that such Holder or holder shall furnish to the Company such
information regarding the securities held by such Holder or holder and the
intended method of disposition thereof as the Company shall reasonably request
and as shall be required in connection with the action taken by the Company.
(h) Expenses. Except as provided in Section 14(a), all expenses
--------
incurred in complying with this Section 14, including, without limitation, all
registration and filing fees (including all expenses incident to filing with the
National Association of Securities Dealers, Inc.), printing expenses, fees and
disbursements of counsel for the Company, the reasonable fees and expenses of a
single firm of legal counsel for the Selling Holders (up to $75,000 in
connection with a Demand Registration; $25,000 in connection with a Piggy-Back
Registration) and expenses of any special audits incident to or required by any
such registration and expenses of complying with the securities or blue sky laws
of any jurisdiction (collectively, "Registration Expenses"), shall be paid by
the Company, except that the Company shall not be liable for any fees, discounts
or commissions to any underwriter or any fees or disbursements of counsel for
any underwriter.
(i) Indemnification and Contribution. (i) In the event of any
--------------------------------
registration of any of the Warrant Shares under the Securities Act pursuant to
this Section 14, the Company shall indemnify and hold harmless the holder of
such Warrant Shares, such holder's directors and officers, and each other Person
(including each underwriter) who participated in the offering of such Warrant
Shares and each other Person, if any, who controls such holder or such
participating Person within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such holder
or any such director or officer or participating Person or controlling Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (A) any untrue statement or
alleged untrue statement of any material fact contained, on the effective date
thereof, in any Registration Statement
24
<PAGE>
under which such securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto, or (B) any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse such holder or such
director, officer or participating Person or controlling Person for any legal or
any other expenses reasonably incurred by such holder or such director, officer
or participating Person or controlling Person in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is based
upon any alleged untrue statement or alleged omission made in such Registration
Statement, preliminary prospectus, prospectus or amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such holder specifically for use therein or (in the case of any
registration pursuant to Section 14(a)) so furnished for such purposes by any
underwriter. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such holder or such director, officer
or participating Person or controlling Person, and shall survive the transfer of
such securities by such holder.
(ii) In the event of any registration of any of the Warrant Shares
under the Securities Act pursuant to this Section 14, each holder of any Warrant
Shares, by acceptance thereof, agrees to indemnify and hold harmless the
Company, its directors and officers, and each other Person (including each
underwriter) who participated in the offering of such Warrant Shares and each
other Person, if any, who controls the Company or such participating Person
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which the Company or any such director or
officer or participating Person or controlling Person may become subject under
the Securities Act or any other statute or at common law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (A) any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any Registration
Statement under which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or (B) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by or on behalf of such holder of Warrant Shares specifically for use
therein, and shall reimburse the Company or such director, officer or
participating Person or controlling Person for any legal or any other expenses
reasonably incurred by the Company or such director, officer or participating
Person or controlling Person in connection with
25
<PAGE>
investigating or defending any such loss, claim, damage, liability or action.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or such director, officer or
participating Person or controlling Person, and shall survive the transfer of
such securities by such holder.
(iii) If the indemnification provided for in this Section 14(i) from
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
such indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 14(i)(iii) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
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.
Section 15. Transfer Generally. All Warrants and Warrant Shares at any
------------------
time and from time to time outstanding shall be held subject to the conditions
and restrictions set forth in Sections 16 and 17 below. Each Holder of Warrants
by executing this Warrant and by accepting a certificate representing Warrant
Shares or other indicia of ownership therefor from the Company agrees with the
Company and with each other securityholder to such conditions and restrictions.
Section 16. Tag-Along Rights. (a) Prior to an Initial Public Offering,
----------------
each of the holders of Warrants or Warrant Shares shall have the right (the
"Tag-Along
26
<PAGE>
Right") to require the Proposed Purchaser (as defined below) to purchase
from each of them all Warrants and Warrant Shares owned by such holder in the
event of any proposed direct or indirect sale or other disposition
(collectively, a "Transfer") of Common Stock or Convertible Securities (whether
now or hereafter issued) to any Person or Persons (such other Person or Persons
being hereinafter referred to as the "Proposed Purchaser") by any Permitted
Holders or any of their Affiliates in any transaction or a series of related
transactions resulting in a Change of Control.
(b) Any Warrants or Warrant Shares purchased from the Participating
Holders (as defined below) pursuant to this Section 16 shall be paid for in the
same type of consideration and at the same price per share of Common Stock and
upon the same terms and conditions of such proposed Transfer of Common Stock by
any Permitted Holder or any of its Affiliates (net, in the case of any Warrants,
of an amount equal to the product of (y) the number of Warrant Shares covered by
such Warrants and (z) the Exercise Price with respect to such Warrant Shares).
(c) Each Permitted Holder shall notify, or cause to be notified, each
holder of Warrants or Warrant Shares in writing (a "Transfer Notice") of each
such proposed Transfer at least 30 days prior to the date thereof. Such notice
shall set forth: (a) the name and address of the Proposed Purchaser and the
number of shares of Common Stock and other securities, if any, proposed to be
transferred, (b) the proposed amount of consideration and terms and conditions
of payment offered by such Proposed Purchaser (if the proposed consideration is
not cash, the Transfer Notice shall describe the terms of the proposed
consideration) and (c) that either the Proposed Purchaser has been informed of
the "Tag-Along Right" and has agreed to purchase Warrants and Warrant Shares in
accordance with the terms hereof or that the Permitted Holder or any of its
Affiliates will make such purchase. The Tag-Along Right may be exercised by any
holder of Warrants or Warrant Shares by delivery of a written notice to the
Company (the "Tag-Along Notice"), within 10 days of such holder's receipt of the
Transfer Notice, indicating its election to exercise the Tag-Along Right (a
"Participating Holder"). The Tag-Along Notice shall state the amount of
Warrants or Warrant Shares that such holder proposes to include in such Transfer
to the Proposed Purchaser. Failure by any holder to provide a Tag-Along Notice
within the 10-day notice period shall be deemed to constitute an election by
such holder not to exercise its Tag-Along Right. The closing with respect to
any sale to a Proposed Purchaser pursuant to this Section 16 shall be held at
the time and place specified in the Transfer Notice but in any event within 60
days of the date such Transfer Notice is given; provided that if through the
exercise of reasonable efforts the Company is unable to cause such transaction
to close within 60 days, such period may be extended for such reasonable period
of time as may be necessary to close such transaction. Consummation of the sale
of Common Stock or Convertible Securities by any Permitted Holder or any of its
Affiliates to a Proposed Purchaser shall be
27
<PAGE>
conditioned upon consummation of the sale by each Participating Holder to such
Proposed Purchaser (or the Permitted Holder) of the Warrants or Warrant Shares
entitled to be transferred as described above, if any.
(d) If the Proposed Purchaser does not purchase the Warrants or
Warrant Shares entitled to be transferred as described in this Section 16 on the
same terms and conditions as purchased from the Permitted Holders or any of
their Affiliates, then the Permitted Holders or their Affiliates shall purchase
such Warrants or Warrant Shares if the Transfer occurs.
(e) If at the end of 60 days following the date on which a Transfer
Notice was given, or as otherwise extended pursuant to the provisions of this
Section 16, the sale of Common Stock or Convertible Securities by the Permitted
Holders or their Affiliates and the sale of the Warrants or Warrant Shares
entitled to be transferred as provided above have not been completed in
accordance with the terms of the Proposed Purchaser's offer, all certificates
representing such Warrants or Warrant Shares shall be returned to the
Participating Holders, and all the restrictions on Transfer contained in this
Agreement with respect to Common Stock or Convertible Securities owned by the
Permitted Holders and their Affiliates shall remain in effect.
Section 17. Drag-Along Rights. If at any time prior to an Initial
-----------------
Public Offering, any Permitted Holders or any of their respective Affiliates
determines to sell all of the capital stock of the Company owned by them to a
Person other than a Permitted Holder or its Affiliate in a transaction resulting
in a Change of Control, the transferring Permitted Holder (whether directly or
through an Affiliate) shall have the right (the "Drag-Along Right") to require
the holders of Warrants and Warrant Shares to sell such Warrants and Warrant
Shares to such transferee; provided that (i) the consideration to be received by
the holders of Warrant Shares shall be the same type of consideration received
by the Permitted Holders and their Affiliates and, in any event, shall be cash
or freely transferable marketable securities, and (ii) after giving effect to
such transaction, the Permitted Holders making the transfers and its Affiliates
shall not own, directly or indirectly, any capital stock or rights to purchase
capital stock of the Company. Any Warrants or Warrant Shares purchased from the
holders thereof pursuant to this Section 17 shall be paid for at the same price
per share of Common Stock and upon the same terms and conditions as such
proposed transfer of Common Stock by the Permitted Holders and their Affiliates
(net, in the case of any Warrants, of an amount equal to the product of (y) the
number of Warrant Shares covered by such Warrants and (z) the Exercise Price
with respect to such Warrant Shares).
Section 18. Certain Representations and Warranties. The Company hereby
--------------------------------------
represents and warrants to the Holder as follows:
28
<PAGE>
(a) Corporate Existence. The Company is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the State of Colorado
and has full power and authority to carry on its business.
(b) Power and Authority. The Company has full corporate power to
-------------------
execute, deliver and issue this Warrant and to carry out its obligations
hereunder and no other corporate acts or proceedings on the part of the Company
are necessary to authorize this Warrant or the Warrant Shares.
Section 19. Certain Covenants.
-----------------
(a) No Impairment. The Company shall not by any action, including,
-------------
without limitation, amending its certificate of incorporation, effecting any
reorganization, transfer or assets, consolidation, merger, 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 this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate to protect the
rights of the Holder against impairment.
(b) Acknowledgment. Upon the request of the Holder, the Company
--------------
shall, at any time during the period this Warrant is outstanding, acknowledge in
writing, in a form satisfactory to the Holder, the continued validity of this
Warrant and the Company's obligations hereunder.
Section 20. Governing Law. This Warrant and the rights and obligations
-------------
of the parties hereunder shall be construed in accordance with and governed by
the laws of the State of New York without regard to principles of conflicts of
laws.
Section 21. Notice. Except as otherwise specified herein, any notice
------
pursuant to this Warrant by the Company or the Holder shall be in writing and
shall be mailed by certified mail, return receipt requested, (a) to the Company
at its principal office at the address set forth on the signature page hereof,
or (b) to the Holder at Goldman, Sachs & Co., 85 Broad Street, 6/th/ Floor, New
York, New York, 10004, Attention: John Makrinos. Either party may from time to
time change the address to which notices to it are to be delivered or mailed
under this Warrant by notice in writing to the other party.
Section 22. Limitation of Liability. No provision hereof, in the
-----------------------
absence of affirmative action by the Holder to purchase shares of Common Stock,
and no
29
<PAGE>
enumeration herein of the rights or privileges of the Holder, shall give rise to
any liability of the Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
Section 23. Remedies. Each Holder of Warrants and each holder of
--------
Warrant Shares, in addition to being entitled to exercise all rights granted by
law, including recovery of damages, will be entitled to specific performance of
their rights under this Warrant. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Warrant and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
Section 24. No-Piggy-Back on Demand Registrations. The Company shall
-------------------------------------
not grant to any of its securityholders (other than the Holders in such capacity
and persons who hold such rights pursuant to agreements in effect on the date
hereof) the right to include any of their securities in any Registration
Statement filed pursuant to a Demand Registration.
Section 25. Successors and Assigns. This Warrant and the rights
----------------------
evidenced hereby shall inure to the benefit of an be binding upon the successors
of the Company and the successors and assigns of the Holder. The provisions of
this Warrant are intended to be for the benefit of all Holders from time to time
of this Warrant and, with respect to Section 14, holders of Warrant Shares, and
shall be enforceable by any such Holder or holder of Warrant Shares.
Section 26. Headings. The Section headings herein have been inserted
--------
for convenience only and shall have no substantive effect.
30
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
executed by and attested by its duly authorized officers and to be dated as of
June 3, 1999.
CONVERGENT COMMUNICATIONS, INC.
By /s/ MARTIN E. FREIDEL By /s/ JOHN R. EVANS
--------------------- ----------------------
Attest: Martin E. Freidel Name: John R. Evans
Title: Assistant Secretary Title: CEO
31
<PAGE>
PURCHASE FORM
_____________
Dated ____________, ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing ______ shares of Common Stock and hereby
makes payment of ________ in payment of the exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
______________________________________
Name____________________________________________________________
(please typewrite or print in block letters)
Address__________________________________________________________
Signature___________________________________________________
____________________
32
<PAGE>
ASSIGNMENT FORM
__________ ____
FOR VALUE RECEIVED, _____________________ hereby sells, assigns and
transfers unto
Name____________________________________________________________
(please typewrite or print in block letters)
Address__________________________________________________________
its right to purchase _____________ shares of Common Stock represented by this
Warrant and does hereby irrevocably constitute and appoint ___________ Attorney,
to transfer the same on the books of the Company, with full power of
substitution in the premises.
Date________________, _____
Signature____________________
33
<PAGE>
EXHIBIT 10.31
CREDIT AND GUARANTY AGREEMENT
dated as of June 3, 1999
among
CONVERGENT COMMUNICATIONS, INC.,
CONVERGENT COMMUNICATIONS SERVICES, INC.,
CONVERGENT CAPITAL CORPORATION,
VARIOUS LENDERS,
and
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Administrative Agent
________________________________________________________
$10,000,000 SENIOR SECURED CREDIT FACILITY
________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
<S> <C>
SECTION 1. DEFINITIONS AND INTERPRETATION......................................1
1.1. Definitions.........................................................1
1.2. Accounting Terms...................................................24
1.3. Interpretation, etc................................................24
SECTION 2. LOANS..............................................................24
2.1. Loans..............................................................24
2.2. Pro Rata Shares; Availability of Funds.............................25
2.3. Use of Proceeds....................................................26
2.4. Evidence of Debt; Register; Lenders' Books and Records; Notes......26
2.5. Interest Payments..................................................27
2.6. Default Interest.........................................................27
2.7. Commitment Fees....................................................28
2.8. Other Fees.........................................................28
2.9. Voluntary Prepayments/Reductions...................................28
2.10. Mandatory Prepayments/Reductions...................................29
2.11. General Provisions Regarding Payments....................................30
2.12. Ratable Sharing....................................................31
2.13. Making or Maintaining Eurodollar Rate Loans..............................31
2.14. Increased Costs; Capital Adequacy........................................32
2.15. Taxes; Withholding, Etc............................................33
2.16. Obligation to Mitigate.............................................35
2.17. Joint and Several Liability........................................35
SECTION 3. CONDITIONS PRECEDENT...............................................37
3.1. Closing Date.......................................................37
3.2. Conditions to Each Credit Extension................................39
SECTION 4. REPRESENTATIONS AND WARRANTIES.....................................40
4.1. Organization; Powers; Qualification................................40
4.2. Authorization of Credit Documents; No Conflict.....................40
4.3. Governmental Consents..............................................41
4.4. Binding Obligation.................................................41
4.5. Historical Financial Statements; Projections.......................41
4.6. No Material Adverse Change; No Restricted Junior Payments..........42
4.7. Adverse Proceedings, Etc...........................................42
4.8. Payment of Taxes...................................................42
4.9. Title to Properties................................................42
4.10. Collateral.........................................................42
4.11. Environmental......................................................43
4.12. No Defaults........................................................44
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.13. Governmental Regulation.............................................44
4.14. Margin Stock........................................................44
4.15. Employee Matters....................................................44
4.16. Employee Benefit Plans..............................................44
4.17. Certain Fees........................................................45
4.18. Solvency............................................................45
4.19. Related Agreements..................................................45
4.20. Year 2000 Issues....................................................45
4.21. Disclosure..........................................................45
SECTION 5. AFFIRMATIVE COVENANTS...............................................46
5.1. Financial Statements and Other Reports..............................46
5.2. Existence...........................................................48
5.3. Payment of Taxes and Claims.........................................49
5.4. Maintenance of Properties...........................................49
5.5. Insurance...........................................................49
5.6. Inspections; Audits of Inventory and Accounts; Lenders Meetings.....50
5.7. Compliance with Laws................................................50
5.8. Subsidiaries........................................................50
5.9. Year 2000 Issues....................................................50
5.10. Cash Management Arrangements........................................51
SECTION 6. NEGATIVE COVENANTS..................................................51
6.1. Indebtedness.........................................................51
6.2. Liens................................................................53
6.3. Equitable Lien; No Further Negative Pledges..........................55
6.4. Restricted Payments; Restrictions on Subsidiary Distributions........55
6.5. Investments..........................................................57
6.6. Financial Covenants..................................................58
6.7. Fundamental Changes; Disposition of Assets; Acquisitions.............60
6.8. Disposal of Subsidiary Interests.....................................61
6.9. Transactions with Shareholders and Affiliates........................61
6.10. Conduct of Business..................................................61
6.11. Amendments or Waivers of Related Agreements..........................62
6.12. Fiscal Year..........................................................62
SECTION 7. GUARANTY.............................................................62
7.1. Guaranty of the Obligations..........................................62
7.2. Contribution by Guarantors...........................................62
7.3. Payment by Guarantors................................................63
7.4. Liability of Guarantors Absolute.....................................63
7.5. Waivers by Guarantors................................................65
7.6. Guarantors' Rights of Subrogation, Contribution, Etc.................66
7.7. Subordination of Other Obligations...................................66
7.8. Continuing Guaranty..................................................67
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.9. Authority of Guarantors or either Borrower...........................67
7.10. Financial Condition of either Borrower..............................67
7.11. Bankruptcy, Etc.....................................................67
7.12. Notice of Events....................................................68
7.13. Discharge of Guaranty Upon Sale of Guarantor........................68
SECTION 8. EVENTS OF DEFAULT...................................................68
8.1. Events of Default...................................................68
SECTION 9. ADMINISTRATIVE AGENTS...............................................71
9.1. Appointment of Administrative Agent.................................71
9.2. Powers and Duties...................................................71
9.3. General Immunity....................................................72
9.4. Administrative Agent Entitled to Act as Lender......................72
9.5. Lenders' Representations and Warranties.............................73
9.6. Right to Indemnity..................................................73
9.7. Successor Administrative Agent......................................74
9.8. Collateral Documents and Guaranties.................................74
SECTION 10. MISCELLANEOUS......................................................75
10.1. Notices............................................................75
10.2. Expenses...........................................................76
10.3. Indemnity..........................................................76
10.4. Set-Off............................................................77
10.5. Amendments and Waivers.............................................77
10.6. Successors and Assigns; Participations.............................79
10.7. Independence of Covenants..........................................81
10.8. Survival of Representations, Warranties and Agreements.............81
10.9. No Waiver; Remedies Cumulative.....................................81
10.10. Marshalling; Payments Set Aide....................................82
10.11. Severability......................................................82
10.12. Obligations Several; Independent Nature of Lenders' Rights........82
10.13. Headings..........................................................82
10.14. APPLICABLE LAW....................................................82
10.15. CONSENT TO JURISDICTION...........................................83
10.16. WAIVER OF JURY TRIAL..............................................83
10.17. Confidentiality...................................................84
10.18. Usury Savings Clause..............................................84
10.19. Counterparts; Effectiveness.......................................85
APPENDICES: A Loan Commitments
B Notice Addresses
SCHEDULES: 4.1 Organization, Etc.
</TABLE>
(iii)
<PAGE>
6.1 Certain Indebtedness
6.2 Certain Liens
6.3 Equitable Lien; No Further Negative Pledges
6.4 Restricted Payments
6.5 Certain Investments
6.9 Certain Affiliate Transactions
EXHIBITS: A Funding Notice
B Note
C Compliance Certificate
D Opinions of Counsel
E Assignment Agreement
F Certificate Re Non-Bank Status
G Closing Date Certificate
H Counterpart Agreement
I Pledge and Security Agreement
(iv)
<PAGE>
CREDIT AND GUARANTY AGREEMENT
This CREDIT AND GUARANTY AGREEMENT, dated as of June 3, 1999, is entered
into by and among CONVERGENT COMMUNICATIONS, INC., a Colorado corporation
("Holdings"), CONVERGENT COMMUNICATIONS SERVICES, INC., a Colorado corporation
("CCSI" or a "Borrower"), CONVERGENT CAPITAL CORPORATION, a Colorado corporation
("C/3/"or a "Borrower"; and together with CCSI, "Borrowers"), the Lenders party
hereto from time to time, and GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as
Administrative Agent (together with its permitted successors, in such
capacity,"Administrative Agent").
RECITALS:
WHEREAS, Lenders have agreed to extend certain Loans to Borrowers, as joint
and several obligors, in an aggregate principal amount not exceeding
$10,000,000, the proceeds of which will be used for working capital and other
general corporate purposes of Borrowers;
WHEREAS, Borrowers have agreed to secure their obligations hereunder by
granting to Administrative Agent, on behalf of Lenders, a First Priority Lien on
certain of their respective personal property; and
WHEREAS, Guarantors have agreed to guarantee the obligations of Borrowers
hereunder and to secure their respective obligations hereunder by granting to
Administrative Agent, on behalf of Lenders, a First Priority Lien on certain of
their respective personal property.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrowers, Guarantors, Lenders and
Administrative Agent agree as follows:
SECTION 1. DEFINITIONS AND INTERPRETATION
1.1. Definitions. The following terms used herein, including the preamble,
recitals, exhibits and schedules hereto, shall have the following meanings:
"Accounts" means all of each Borrower's accounts receivable, whether now or
hereafter existing, arising in the ordinary course of business from sales or
leases of goods or the rendition of services made by such Borrower.
"Acknowledgment of Pledge" as defined in the Pledge and Security Agreement.
"Acquired Indebtedness" means Indebtedness assumed by Holdings or any of
its Subsidiaries in connection with a Permitted Acquisition or with respect to
which a Person acquired pursuant to a Permitted Acquisition is obligated
immediately prior to the consummation of such
<PAGE>
Permitted Acquisition; provided, such Indebtedness was not incurred in
--------
connection with or in contemplation of such Permitted Acquisition and such
Indebtedness, if secured, is only secured by Liens encumbering the assets
acquired (or the assets of such Persons acquired) by Holdings and its
Subsidiaries in connection with such Permitted Acquisition.
"Adjusted Eurodollar Rate" means, for any Interest Rate Determination Date
with respect to an Interest Period for a Loan that bears interest based upon the
Adjusted Eurodollar Rate, the rate per annum obtained by dividing (i) (a) the
rate per annum (carried out to the fifth decimal place) equal to the rate
determined by Administrative Agent to be the offered rate which appears on the
page of the Telerate Screen which displays an average British Bankers
Association Interest Settlement Rate (such page currently being page number 3740
or 3750, as applicable) for deposits (for delivery on the first day of such
period) with a term equivalent to such period in Dollars, determined as of
approximately 11:00 a.m. (London, England time) on such Interest Rate
Determination Date, or (b) in the event the rate referenced in the preceding
clause (a) does not appear on such page or service or if such page or service
shall cease to be available, the rate per annum (carried out to the fifth
decimal place) equal to the rate determined by Administrative Agent to be the
offered rate on such other page or other service which displays an average
British Bankers Association Interest Settlement Rate for deposits (for delivery
on the first day of such period) with a term equivalent to such period in
Dollars, determined as of approximately 11:00 a.m. (London, England time) on
such Interest Rate Determination Date, by (ii) amount equal to (a) one minus (b)
-----
the Applicable Reserve Requirement.
"Administrative Agent" as defined in the preamble hereto.
"Adverse Proceeding" means any action, suit, proceeding (whether
administrative, judicial or otherwise), governmental investigation or
arbitration (whether or not purportedly on behalf of Holdings or any of its
Subsidiaries) at law or in equity, or before or by any Governmental Authority,
domestic or foreign (including any Environmental Claims), whether pending or, to
the knowledge of any Authorized Officer of Holdings or any of its Subsidiaries,
threatened against or affecting Holdings or any of its Subsidiaries or any
property of Holdings or any of its Subsidiaries.
"Affiliate", as applied to any Person, means any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities or
by contract or otherwise.
"Aggregate Amounts Due" as defined in Section 2.12.
"Aggregate Payments" as defined in Section 7.2.
"Agreement" means this Credit and Guaranty Agreement dated as of June 3,
1999, as it may be amended, supplemented or otherwise modified from time to
time.
2
<PAGE>
"Applicable Reserve Requirement" means, at any time any Loan bears interest
based upon the Adjusted Eurodollar Rate, the maximum rate at which reserves
(including, without limitation, any marginal, special, supplemental or emergency
reserves) are required to be maintained with respect thereto by a member of the
Federal Reserve System against "Eurocurrency liabilities" (as such term is
defined in Regulation D) under regulations issued from time to time by the Board
of Governors of the Federal Reserve System or other applicable banking
regulator. Without limiting the effect of the foregoing, the Applicable Reserve
Requirement shall reflect any other reserves required to be maintained by such
member banks with respect to (i) any category of liabilities which includes
deposits by reference to which the applicable interest rate of a Loan is to be
determined, or (ii) any category of extensions of credit or other assets which
include Loans that bear interest based upon the Adjusted Eurodollar Rate. A
Loan that bears interest based upon the Adjusted Eurodollar Rate shall be deemed
to constitute Eurocurrency liabilities and as such shall be deemed subject to
reserve requirements without benefits of credit for proration, exceptions or
offsets that may be available from time to time to the applicable Lender. The
rate of interest on Loans that bear interest based upon the Adjusted Eurodollar
Rate shall be adjusted automatically on and as of the effective date of any
change in the Applicable Reserve Requirement.
"Asset Sale" means a sale, lease or sub-lease (as lessor or sublessor),
transference or disposition to any Person other than a Borrower or its
Subsidiary, in one transaction or a series of transactions, of all or any part
of Holdings' or any of its Subsidiaries' businesses, properties or assets,
whether now owned or hereafter acquired, other than (i) inventory sold or leased
or leased receivables discounted in the ordinary course of business, (ii)
disposals of obsolete, worn out or surplus property, (iii) licenses and
development arrangements pertaining to Intellectual Property entered into in the
ordinary course of its business and (iii) sales of assets not in excess of
$1,000,000 in the aggregate with respect to any transaction or series of
transactions.
"Assignment Agreement" means an Assignment Agreement in the form of Exhibit
E (with such amendments or modifications as may be approved by Administrative
Agent).
"Authorized Officer" means, as applied to any Person, any individual
holding the position of chairman of the board (if an officer), president or vice
president (or the equivalent thereof), chief financial officer, treasurer or
general counsel or equivalent legal officer.
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"Beneficiary" means Administrative Agent, each Lender and each Lender
Counterparty.
"Borrower" as defined in the preamble hereto.
"Business Day" means any day excluding Saturday, Sunday and any day which
is a legal holiday under the laws of the State of New York or Colorado or is a
day on which banking institutions located in either such state are authorized or
required by law or other governmental action to close, and with respect to all
notices, determinations, fundings and payments in connection
3
<PAGE>
with the Adjusted Eurodollar Rate, that is also a day for trading by and between
banks in Dollar deposits in the London interbank market.
"Capitalization" shall mean, as of any date of determination, funded equity
and warrant contributions and all funded Indebtedness determined on a
consolidated basis for Holdings and its Subsidiaries in accordance with GAAP
(provided that such amount shall total $160,000,000 at all times with respect to
the Senior Notes, less the amount of restricted Cash held in collateral accounts
for the benefit of creditors (other than the Administrative Agent and Lenders)
to secure payments of principal or interest on Indebtedness).
"Capital Lease" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee that, in conformity
with GAAP, is accounted for as a capital lease on the balance sheet of that
Person.
"Cash" means money, currency or a credit balance in any demand or deposit
account.
"Cash Equivalents" means (i) any evidence of Indebtedness issued or
directly and fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the United
--------
States is pledged in support thereof or such Indebtedness constitutes a general
obligation of such country); (ii) deposits, certificates of deposit or
acceptances of any financial institution that is a member of the Federal Reserve
System, in each case having combined capital and surplus and undivided profits
(or any similar capital concept) of not less than $500.0 million and whose
senior unsecured debt is rated at least "A-l" by S&P or "P-l" by Moody's; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
(other than an Affiliate of the Company) organized under the laws of the United
States or any State thereof and rated at least "A-l" by S&P or "P-l" by Moody's;
(iv) repurchase agreements and reverse repurchase agreements relating to
marketable direct obligations issued or unconditionally guaranteed by the United
States Government or issued by any agency thereof and backed by the full faith
and credit of the United States Government maturing within 365 days from the
date of acquisition and (v) money market funds which invest substantially all of
their assets in securities described in the preceding clauses (i) through (iv).
"CCSI" as defined in the preamble hereto.
"Certificate re Non-Bank Status" means a certificate in the form of
Exhibit F.
"Change of Control" means the occurrence of any of the following events:
(a) Permitted Holders, collectively, shall cease to own and control at least 10%
of the voting stock of Holdings or (b) any "Change of Control" as defined in the
Senior Notes shall occur or any change of control or similar event shall occur
under any other Material Contract of Holdings or either Borrower which gives
rise to any payment obligation or obligation to repurchase Indebtedness
thereunder in either case in an individual amount of $1,000,000 or $2,000,000 in
the aggregate.
"Closing Date" means the date on which the conditions set forth in Section
3.1 are satisfied.
4
<PAGE>
"Closing Date Certificate" means a certificate in the form of Exhibit G.
"Collateral" means, collectively, the personal property (including capital
stock and other equity Securities) in which Liens are purported to be granted
pursuant to the Collateral Documents as security for the Obligations.
"Collateral Documents" means the Pledge and Security Agreement and all
other instruments, documents and agreements delivered by any Credit Party
pursuant to this Agreement or any of the other Credit Documents in order to
grant to Administrative Agent, on behalf of Lenders, a Lien on any property of
that Credit Party as security for the Obligations.
"Collateral Warranties" means the representations and warranties made with
respect to the Collateral pursuant to Section 4.10 of this Agreement and
Sections 5 and 8.6 of the Pledge and Security Agreement.
"Comdisco Agreement" means the Program Agreement dated November 19, 1997 by
and among Comdisco, Inc., each Borrower and Holdings, as such agreement may be
amended from time to time to the extent permitted pursuant to Section 6.11.
"Compliance Certificate" means a certificate in the form of Exhibit C.
"Consolidated Adjusted EBITDA" means, for any period, an amount determined
for Holdings and its Subsidiaries on a consolidated basis equal (i) to the sum
of the amounts for such period, without duplication, of (a) Consolidated Net
Income, (b) Consolidated Interest Expense, (c) provisions for taxes based on
income, (d) total depreciation expense, (e) total amortization expense, and (f)
other non-cash items reducing Consolidated Net Income (excluding any such non-
cash item to the extent that it represents an accrual or reserve for potential
cash items in any future period or amortization of a prepaid cash item that was
paid in a prior period), minus (ii) other non-cash items increasing Consolidated
Net Income (excluding any such non-cash item to the extent it represents the
reversal of an accrual or reserve for potential cash items in any prior period).
"Consolidated Capital Expenditures" means, for any period, the aggregate of
all expenditures of Holdings and its Subsidiaries during such period determined
on a consolidated basis that, in accordance with GAAP, are or should be included
in "purchase of property and equipment" or similar items reflected in the
consolidated statement of cash flows of Holdings and its Subsidiaries but
excluding (i) Permitted Acquisitions (ii) the amount of other such expenditures
financed with Indebtedness incurred pursuant to Section 6.1(i) and (iii) amounts
constituting Net Asset Sale Proceeds and Net Insurance/Condemnation Proceeds
that are reinvested in the business of Holdings and its Subsidiaries in
accordance with Section 2.10.
"Consolidated Interest Expense" means, for any period, total interest
expense (including that portion attributable to Capital Leases in accordance
with GAAP, amortization of debt discount and capitalized interest) of Holdings
and its Subsidiaries on a consolidated basis with respect to all outstanding
Indebtedness of Holdings and its Subsidiaries, including all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and
5
<PAGE>
net costs under Interest Rate Agreements (including amortization of discounts),
but excluding, however, any amounts referred to in Section 2.8 payable on or
before the Closing Date.
"Consolidated Net Income" means, for any period, (i) the net income (or
loss) of Holdings and its Subsidiaries on a consolidated basis for such period
taken as a single accounting period determined in conformity with GAAP, minus
-----
(ii) (a) the income of any Person (other than a Subsidiary of Holdings) in which
any other Person (other than Holdings or any of its Subsidiaries) has a joint
interest, except to the extent of the amount of dividends or other distributions
actually paid to Holdings or any of its Subsidiaries by such Person during such
period, (b) the income (or loss) of any Person accrued prior to the date it
becomes a Subsidiary of Holdings or is merged into or consolidated with Holdings
or any of its Subsidiaries or that Person's assets are acquired by Holdings or
any of its Subsidiaries, (c) the income of any Subsidiary of Borrower to the
extent that the declaration or payment of dividends or similar distributions by
that Subsidiary of that income is not at the time permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary, (d) any
after-tax gains or losses attributable to Asset Sales or returned surplus assets
of any Pension Plan, and (e) (to the extent not included in clauses (a) through
(d) above) any net extraordinary gains or y) prior to the consummation of an
IPO, net non-cash extraordinary losses and z) after the consummation of any IPO,
net extraordinary losses.
"Consolidated Total Debt" means, as at any date of determination, the
aggregate stated balance sheet amount of all Indebtedness of Holdings and its
Subsidiaries determined on a consolidated basis in accordance with GAAP.
"Contractual Obligation" means, as applied to any Person, any provision of
any Security issued by that Person or of any material indenture, mortgage, deed
of trust, contract, undertaking, agreement or other instrument to which that
Person is a party or by which it or any of its properties is bound or to which
it or any of its properties is subject.
"Counterpart Agreement" means a counterpart agreement in the form of
Exhibit H.
"Contributing Guarantors" as defined in Section 7.2.
"Credit Date" means the date of a Credit Extension.
"Credit Document" means any of this Agreement, the Notes, if any, the
Collateral Documents, the Warrant, and all other documents, instruments or
agreements executed and delivered by a Credit Party for the benefit of
Administrative Agent or any Lender in connection herewith.
"Credit Extension" means the making of a Loan.
"Credit Party" means each Person (other than any Agent or any Lender or any
other representative thereof) from time to time party to a Credit Document.
"C/3/" as defined in the preamble hereto.
6
<PAGE>
"Currency Agreement" means any foreign exchange contract, currency swap
agreement, futures contract, option contract, synthetic cap or other similar
agreement or arrangement, each of which is for the purpose of hedging the
foreign currency risk associated with Holdings' and its Subsidiaries'
operations.
"Default" means a condition or event that, after notice or lapse of time or
both, would constitute an Event of Default.
"Deposit Account" means a demand, time, savings, passbook or like account
with a bank, savings and loan association, credit union or like organization,
other than an account evidenced by a negotiable certificate of deposit.
"Dollars" and the sign "$" mean the lawful money of the United States of
America.
"Eligible Accounts Receivable" means the aggregate face amount of Accounts,
as reflected on the books and records of Borrowers in accordance with GAAP,
payable in Dollars, that conform to the warranties contained in this definition
and to the Collateral Warranties. Unless otherwise approved in writing by
Administrative Agent, no Account shall be deemed to be an Eligible Account
Receivable if:
(i) the Account is unpaid 90 days or more from the original
invoice date or more than 60 days from the original due date specified in
such invoice; or
(ii) such Account is from the same account debtor (or any affiliate
thereof) and fifty percent (50%) or more, in face amount, of other Accounts
from such account debtor (or any affiliate thereof) are ineligible under
the provisions of clause (i) above; or
(iii) the Account, when aggregated with all other Accounts of such
account debtor, exceeds ten percent (10%) in face value of all consolidated
Accounts then outstanding, to the extent of such excess; except that an
Account of any account debtor listed on Schedule A shall be deemed to be an
Eligible Account Receivable if such Account, when aggregated with all other
Accounts of such account debtor, does not exceed, in face value of all
consolidated Accounts then outstanding, the percentage set forth opposite
the name of such account debtor on Schedule A; or
(iv)(A) the account debtor has disputed its liability on, or the
account debtor has made any claim with respect to, such Account or any
other Account due from such account debtor to a Borrower, which has not
been resolved, to the extent of such dispute or (B) the Account otherwise
is or may become subject to any right of setoff by the account debtor, to
the extent of the amount of such setoff provided, that any Account deemed
ineligible pursuant to this clause (iv) shall only be ineligible to the
extent of the amount owed by such Borrower to the account debtor, the
amount of such dispute, claim or defense, or the maximum amount at any time
of such right of set-off, as applicable; or
7
<PAGE>
(v) to the knowledge of any Credit Party, the account debtor has
commenced a voluntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or made an assignment for the benefit of
creditors, or if a decree or order for relief has been entered by a court
having jurisdiction in the premises in respect to the account debtor in an
involuntary case under the federal bankruptcy laws, as now constituted or
hereafter amended, or if any other petition or other application for relief
under the federal bankruptcy laws has been filed by or against the account
debtor, or if the account debtor has failed, suspended business, ceased to
be solvent, or consented to or suffered a receiver, trustee, liquidator or
custodian to be appointed for it or for all or a significant portion of its
assets or affairs; or
(vi) the sale is to an account debtor outside the continental
United States, unless the sale is (a) on letter of credit, guaranty or
acceptance terms, in each case acceptable to Administrative Agent in its
sole discretion, or (b) otherwise approved by and acceptable to
Administrative Agent in its reasonable discretion; or
(vii) the sale to the account debtor is on a bill-and-hold,
guaranteed sale, sale-and-return, sale on approval or consignment basis or
made pursuant to any other written agreement providing for repurchase or
return except in accordance with ordinary course of business dealings or
customary practice including customary quality warranties or the general
right to return goods provided by the Borrowers; or
(viii) the account debtor is the United States of America or any
department, agency or instrumentality thereof, unless the applicable
account holder duly and effectively assigns its rights to payment of such
Account to Administrative Agent pursuant to the Assignment of Claims Act of
1940, as amended (31 U.S.C. Section 3727 et seq.); or
-- ----
(ix) the goods giving rise to such Account have not been shipped
and delivered to and accepted by the account debtor or the services giving
rise to such Account have not been performed by a Borrower and accepted by
the account debtor or the Account otherwise does not represent a final sale
provided, that an Account may constitute a final sale notwithstanding that
further services or goods are to be provided to the account debtor under
the contract giving rise to the Account, so long as all necessary
conditions to payment of the Account under the contract have been satisfied
for the goods and services therefor provided; or
(x) the Account is not subject to a valid, enforceable and First
Priority perfected Lien in favor of Administrative Agent or is subject to
any Lien other than the Lien granted pursuant to the Collateral Documents
and other Liens contemplated by Section 10.5(e); or
(xi) the Account is associated with a lease in the form of an ENS
Service Agreement; or
(xii) the Account is associated with a lease in the form of an
agreement which does not separate accounts receivable for the sale or lease
of goods and accounts receivable for the rendition of services; or
8
<PAGE>
(xiii) the Account is associated with a non-recourse sale of lease
receivables at a discount where the purchaser has recourse only to the
lease receivables.
"Eligible Assignee" means (i) any Lender, any Affiliate of any Lender and
any Related Fund (any two or more Related Funds being treated as a single
Eligible Assignee for all purposes hereof) which is also a commercial bank
and/or other financial institution typically party to commercial loans and (ii)
any commercial bank, insurance company, investment or mutual fund or other
entity that is an "accredited investor" (as defined in Regulation D under the
Securities Act), which extends credit or buys loans as one of its businesses and
which is also a commercial bank and/or other financial institution typically a
party to commercial loans; provided, no Affiliate of Holdings shall be an
Eligible Assignee.
"Employee Benefit Plan" means any "employee benefit plan" as defined in
Section 3(3) of ERISA which is or was maintained or contributed to by Holdings,
any of its Subsidiaries or any of their respective ERISA Affiliates.
"Employment Agreement" means each of (i) the Employment Agreement dated
December 15, 1996 (as amended through the Closing Date) between Holdings and
John R. Evans, in the form provided to Administrative Agent on the Closing Date,
(ii) the Employment Agreement dated December 15, 1996 (as amended through the
Closing Date) between Holdings and Keith V. Burge, in the form provided to
Administrative Agent on the Closing Date, and (iii) the Employment Agreement
dated December 15, 1996 (as amended through the Closing Date) between Holdings
and Philip G. Allen, in each case in the form provided to Administrative Agent
on the Closing Date, in each case as such Employment Agreement may be amended
from time to time to the extent permitted pursuant to Section 6.11.
"ENS Service Agreement" means an enterprise network service agreement in
substantially the form typically used by either Borrower as of the date of this
Agreement.
"Environmental Claim" means any investigation, notice, notice of violation,
claim, action, suit, proceeding, demand, abatement order or other order or
directive (conditional or otherwise), by any governmental authority or any other
Person, arising (i) pursuant to or in connection with any actual or alleged
violation of any Environmental Law; (ii) in connection with any Hazardous
Material or any actual or alleged Hazardous Materials Activity; or (iii) in
connection with any actual or alleged damage, injury, threat or harm to health,
safety, natural resources or the environment.
"Environmental Laws" means any and all current or future foreign or
domestic, federal or state (or any subdivision of either of them), statutes,
ordinances, orders, rules, regulations, guidance documents, judgments,
Governmental Authorizations, or any other requirements of governmental
authorities relating to (i) environmental matters, including those relating to
any Hazardous Materials Activity; (ii) the generation, use, storage,
transportation or disposal of Hazardous Materials; or (iii) occupational safety
and health, industrial hygiene, land use or the protection of human, plant or
animal health or welfare, in any manner applicable to Holdings or any of its
Subsidiaries or any Facility.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor thereto.
"ERISA Affiliate" means, as applied to any Person, (i) any corporation
which is a member of a controlled group of corporations within the meaning of
Section 414(b) of the Internal Revenue Code of which that Person is a member;
(ii) any trade or business (whether or not incorporated) which is a member of a
group of trades or businesses under common control within the meaning of Section
414(c) of the Internal Revenue Code of which that Person is a member; and (iii)
any member of an affiliated service group within the meaning of Section 414(m)
or (o) of the Internal Revenue Code of which that Person, any corporation
described in clause (i) above or any trade or business described in clause (ii)
above is a member. Any former ERISA Affiliate of Holdings or any of its
Subsidiaries shall continue to be considered an ERISA Affiliate of Holdings or
such Subsidiary within the meaning of this definition with respect to the period
such entity was an ERISA Affiliate of Holdings or such Subsidiary and with
respect to liabilities arising after such period for which Holdings or such
Subsidiary could be liable under the Internal Revenue Code or ERISA.
"ERISA Event" means (i) a "reportable event" within the meaning of Section
4043 of ERISA and the regulations issued thereunder with respect to any Pension
Plan (excluding those for which the provision for 30-day notice to the PBGC has
been waived by regulation); (ii) the failure to meet the minimum funding
standard of Section 412 of the Internal Revenue Code with respect to any Pension
Plan (whether or not waived in accordance with Section 412(d) of the Internal
Revenue Code) or the failure to make by its due date a required installment
under Section 412(m) of the Internal Revenue Code with respect to any Pension
Plan or the failure to make any required contribution to a Multiemployer Plan;
(iii) the provision by the administrator of any Pension Plan pursuant to Section
4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress
termination described in Section 4041(c) of ERISA; (iv) the withdrawal by
Holdings, any of its Subsidiaries or any of their respective ERISA Affiliates
from any Pension Plan with two or more contributing sponsors or the termination
of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064
of ERISA; (v) the institution by the PBGC of proceedings to terminate any
Pension Plan pursuant to Section 4042 of ERISA, or the occurrence of any event
or condition which would constitute grounds under Section 4042(c)(i) or (ii) of
ERISA for the termination of, or the appointment of a trustee to administer, any
Pension Plan; (vi) the imposition of liability on Holdings, any of its
Subsidiaries or any of their respective ERISA Affiliates pursuant to Section
4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of
ERISA; (vii) the withdrawal of Holdings, any of its Subsidiaries or any of their
respective ERISA Affiliates in a complete or partial withdrawal (within the
meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there
is any potential liability therefor, or the receipt by Holdings, any of its
Subsidiaries or any of their respective ERISA Affiliates of notice from any
Multiemployer Plan that it is in reorganization or insolvency pursuant to
Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated
under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or
omission which could give rise to the imposition on Holdings, any of its
Subsidiaries or any of their respective ERISA Affiliates of fines, penalties,
taxes or related charges under Chapter 43 of the Internal Revenue Code or under
Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of
any Employee Benefit Plan; (ix) the assertion of a material claim (other than
routine claims for benefits) against any Employee Benefit Plan other than a
Multiemployer Plan or the assets
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thereof, or against Holdings, any of its Subsidiaries or any of their respective
ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from
the Internal Revenue Service of notice of the failure of any Pension Plan (or
any other Employee Benefit Plan intended to be qualified under Section 401(a) of
the Internal Revenue Code) to qualify under Section 401(a) of the Internal
Revenue Code, or the failure of any trust forming part of any Pension Plan to
qualify for exemption from taxation under Section 501(a) of the Internal Revenue
Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n)
of the Internal Revenue Code or pursuant to ERISA with respect to any Pension
Plan.
"Event of Default" means each of the events set forth in Section 8.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor statute.
"Facility" means any real property (including all buildings, fixtures or
other improvements located thereon) now, hereafter or heretofore owned, leased,
operated or used by Holdings or any of its Subsidiaries or any of their
respective predecessors or Affiliates.
"Fair Share" as defined in Section 7.2.
"Fair Share Contribution Amount" as defined in Section 7.2.
"Fair Share Shortfall" as defined in Section 7.2.
"Financial Officer Certification" means, with respect to the financial
statements or other financial information for which such certification is
required, the certification of the chief financial officer of Holdings that such
financial statements fairly present, in all material respects, the financial
condition of Holdings and its Subsidiaries as at the dates indicated and the
results of their operations and their cash flows for the periods indicated,
subject to changes resulting from audit and normal year-end adjustments.
"Financial Plan" as defined in Section 5.1(i).
"First Priority" means, with respect to any Lien purported to be created in
any Collateral pursuant to any Collateral Document, that such Lien is the only
Lien to which such Collateral is subject, other than Permitted Liens.
"Fiscal Quarter" means a fiscal quarter of any Fiscal Year.
"Fiscal Year" means the fiscal year of Holdings and its Subsidiaries ending
on December 31 of each calendar year.
"Funding Guarantors" as defined in Section 7.2.
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"Funding Notice" means a notice in the form of Exhibit A; provided, for any
Loan made on the Closing Date, the Funding Notice with respect thereto shall be
the Closing Date Certificate. A certificate indicating compliance with the
Minimum Receivables Ratio as of the last day of the most recently ended month
shall be attached to the Closing Date Certificate and each such Funding Notice.
"GAAP" means United States generally accepted accounting principles in
effect as of the date of determination thereof.
"Governmental Acts" means any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
governmental authority.
"Governmental Authority" means any federal, state, municipal, national or
other governmental department, commission, board, bureau, court, agency or
instrumentality or political subdivision thereof or any entity or officer
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government or any court, in each case whether
associated with a state of the United States, the United States, or a foreign
entity or government.
"Governmental Authorization" means any permit, license, authorization,
plan, directive, consent order or consent decree of or from any Governmental
Authority.
"Guarantor" means each of Holdings and each Subsidiary of Holdings (other
than a Borrower).
"Guarantor Subsidiary" means each Subsidiary of Holdings that is a
Guarantor.
"Guaranty" means the guaranty of each Guarantor set forth in Section 7.
"Hazardous Materials" means any chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental authority or
which may or could pose a hazard to the health and safety of the owners,
occupants or any Persons in the vicinity of any Facility or to the indoor or
outdoor environment.
"Hazardous Materials Activity" means any past, current, proposed or
threatened activity, event or occurrence involving any Hazardous Materials,
including the use, manufacture, possession, storage, holding, presence,
existence, location, Release, threatened Release, discharge, placement,
generation, transportation, processing, construction, treatment, abatement,
removal, remediation, disposal, disposition or handling of any Hazardous
Materials, and any corrective action or response action with respect to any of
the foregoing.
"Hedge Agreement" means an Interest Rate Agreement or a Currency Agreement
entered into in the ordinary course of Holdings' or any of its Subsidiaries'
businesses and not for speculative purposes.
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"Highest Lawful Rate" means the maximum lawful interest rate, if any, that
at any time or from time to time may be contracted for, charged, or received
under the laws applicable to any Lender which are presently in effect or, to the
extent allowed by law, under such applicable laws which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
"Historical Financial Statements" means as of the Closing Date, (i) the
audited financial statements of Holdings and its Subsidiaries, for the
immediately preceding three Fiscal Years, consisting of balance sheets and the
related consolidated statements of income, stockholders' equity and cash flows
for such Fiscal Years, and (ii) the unaudited financial statements of Holdings
and its Subsidiaries as at the most recently ended Fiscal Quarter, consisting of
a balance sheet and the related consolidated statements of income, stockholders'
equity and cash flows for the three-, six-or nine-month period, as applicable,
ending on such date, and, in the case of clause (ii), certified by the chief
financial officer of Holdings as fairly presenting, in all material respects,
the financial condition of Holdings and its Subsidiaries as at the dates
indicated and the results of their operations and their cash flows for the
periods indicated, subject to changes resulting from audit and normal year-end
adjustments.
"Holdings" as defined in the preamble hereto.
"HVAC" means heating, ventilation and air conditioning.
"Immaterial Subsidiary" means one or more Subsidiaries of the Borrower
designated in writing to the Administrative Agent as an Immaterial Subsidiary
and which subsidiaries, collectively, do not account for more than 5% of the
gross revenues of Holdings and its Subsidiaries.
"Indebtedness", as applied to any Person, means, without duplication, (i)
all indebtedness for borrowed money; (ii) that portion of obligations with
respect to Capital Leases that is properly classified as a liability on a
balance sheet in conformity with GAAP; (iii) notes payable and drafts accepted
representing extensions of credit whether or not representing obligations for
borrowed money; (iv) any obligation owed for all or any part of the deferred
purchase price of property or services (excluding any such obligations incurred
under ERISA and ordinary course trade payables), which purchase price is (a) due
more than six months from the date of incurrence of the obligation in respect
thereof or (b) evidenced by a note or similar written instrument; (v) all
indebtedness secured by any Lien on any property or asset owned or held by that
Person regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is nonrecourse to the credit of that Person; (vi) the
face amount of any letter of credit issued for the account of that Person or as
to which that Person is otherwise liable for reimbursement of drawings; (vii)
the direct or indirect guaranty, endorsement (otherwise than for collection or
deposit in the ordinary course of business), co-making, discounting with
recourse or sale with recourse by such Person of the obligation of another;
(viii) any obligation of such Person the primary purpose or intent of which is
to provide assurance to an obligee that the obligation of the obligor thereof
will be paid or discharged, or any agreement relating thereto will be complied
with, or the holders thereof will be protected (in whole or in part) against
loss in respect thereof; and (ix) any liability of such Person for the
obligation of another through any agreement (contingent or otherwise) (a) to
purchase, repurchase or otherwise
13
<PAGE>
acquire such obligation or any security therefor, or to provide funds for the
payment or discharge of such obligation (whether in the form of loans, advances,
stock purchases, capital contributions or otherwise) or (b) to maintain the
solvency or any balance sheet item, level of income or financial condition of
another if, in the case of any agreement described under subclauses (a) or (b)
of this clause (ix), the primary purpose or intent thereof is as described in
clause (viii) above; and (x) Obligations under Hedge Agreements.
"Indemnified Liabilities" means, collectively, any and all liabilities,
obligations, losses, damages (including natural resource damages), penalties,
actions, judgments, suits, claims (including Environmental Claims), costs
(including the costs of any investigation, study, sampling, testing, abatement,
cleanup, removal, remediation or other response action necessary to remove,
remediate, clean up or abate any Hazardous Materials Activity), expenses and
disbursements of any kind or nature whatsoever (including the reasonable fees
and disbursements of counsel for Indemnitees in connection with any
investigative, administrative or judicial proceeding commenced or threatened by
any Person, whether or not any such Indemnitee shall be designated as a party or
a potential party thereto, and any fees or expenses incurred by Indemnitees in
enforcing this indemnity), whether direct, indirect or consequential and whether
based on any federal, state or foreign laws, statutes, rules or regulations
(including securities and commercial laws, statutes, rules or regulations and
Environmental Laws), on common law or equitable cause or on contract or
otherwise, that may be imposed on, incurred by, or asserted against any such
Indemnitee, in any manner relating to or arising out of (i) this Agreement or
the other Credit Documents or the transactions contemplated hereby or thereby
(including Lenders' agreement to make Credit Extensions or the use or intended
use of the proceeds thereof, or any enforcement of any of the Credit Documents
(including any sale of, collection from, or other realization upon any of the
Collateral or the enforcement of the Guaranty)); (ii) the statements contained
in the commitment letter delivered by any Lender to Holdings or either Borrower
with respect thereto; or (iii) any Environmental Claim or any Hazardous
Materials Activity relating to or arising from, directly or indirectly, any past
or present activity, operation, land ownership, or practice of Holdings or any
of its Subsidiaries.
"Indemnitee" as defined in Section 10.3.
"Intellectual Property" means "Intellectual Property" as such term is
defined in the Pledge and Security Agreement.
"Intellectual Property Collateral" means as all of the Intellectual
Property subject to the Lien of the Pledge and Security Agreement.
"Interest Payment Date" means the first Business Day of each month,
commencing on July 1, 1999.
"Interest Period" means, with respect to any Loan bearing interest based
upon the Adjusted Eurodollar Rate, an interest period of one month, the first
such Interest Period to commence on the Closing Date and each subsequent
Interest Period to commence on the day on which the immediately preceding
Interest Period expires; provided, (a) if an Interest Period would otherwise
--------
expire on a day that is not a Business Day, such Interest Period shall expire on
the next succeeding Business Day
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<PAGE>
unless no further Business Day occurs in such month, in which case such Interest
Period shall expire on the immediately preceding Business Day; (b) any Interest
Period that begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall, subject to clauses (c) and (d), of this
definition, end on the last Business Day of a calendar month; and (c) no
Interest Period with respect to any portion of any Loans shall extend beyond the
Loan Maturity Date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement, each of which is for the purpose of hedging the interest rate
exposure associated with Holdings's and/or its Subsidiaries' operations.
"Interest Rate Determination Date" means, with respect to any Interest
Period, the date that is two Business Days prior to the first day of such
Interest Period.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
to the date hereof and from time to time hereafter, and any successor statute.
"Investment" means (i) any direct or indirect purchase or other acquisition
by Holdings or any of its Subsidiaries of, or of a beneficial interest in, any
of the Securities of any other Person (other than a Borrower or a Guarantor
Subsidiary); (ii) any direct or indirect redemption, retirement, purchase or
other acquisition for value, by any Subsidiary of Holdings from any Person
(other than Holdings, a Borrower, or any Guarantor Subsidiary), of any equity
Securities of such Subsidiary; and (iii) any direct or indirect loan, advance
(other than advances to employees for moving, entertainment and travel expenses,
drawing accounts and similar expenditures in the ordinary course of business) or
capital contribution by Holdings or any of its Subsidiaries to any other Person
(other than a Borrower or any Guarantor Subsidiary), including all indebtedness
and accounts receivable from that other Person that are not current assets or
did not arise from sales to that other Person in the ordinary course of
business. The amount of any Investment shall be the original cost of such
Investment plus the cost of all additions thereto, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment.
"Investment Property" as defined in the Pledge and Security Agreement.
"IPO" means one or more public offerings of common stock of Holdings
providing aggregate gross proceeds to Holdings of not less than $50,000,000.
"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided, in
no event shall any corporate Subsidiary of any Person be considered to be a
Joint Venture to which such Person is a party.
"Lender" means each financial institution listed on the signature pages
hereto as a Lender, together with each such institution's successors and
permitted assigns.
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"Lender Counterparty" means each Lender or any Affiliate thereof
counterparty to a Hedge Agreement.
"Lien" means any lien, mortgage, pledge, assignment, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest) and any option, trust or other preferential arrangement
having the practical effect of any of the foregoing.
"Loan" means a Loan made by a Lender to Borrowers pursuant to Section 2.1.
"Loan Commitment" means the Loan Commitment of a Lender to make or
otherwise fund Loans. The amount of each Lender's Loan Commitment is set forth
on Appendix A or in the applicable Assignment Agreement, subject to any
adjustment or reduction pursuant to the terms and conditions hereof.
"Loan Commitment Period" means the period from the Closing Date to but
excluding the earliest of (i) the date on which the aggregate outstanding
principal amount of all the Loans equals the aggregate principal amount of all
the Loan Commitments then in effect, (ii) the Loan Maturity Date (which shall
include the date of the termination of the Loan Commitments pursuant to Section
8.1) and (iii) the date the Loan Commitments are permanently reduced to zero
pursuant to Section 2.9 or 2.10.
"Loan Exposure" means, with respect to any Lender as of any date of
determination, (i) prior to the termination of the Loan Commitments, such
Lender's Loan Commitment; and (ii) after the termination of the Loan
Commitments, the aggregate outstanding principal amount of the Loans of such
Lender.
"Loan Maturity Date" means the earlier to occur of (i) June 1, 2002 and
(ii) the date that all Loans shall become due and payable in full hereunder,
whether by acceleration or otherwise.
"Margin Stock" as defined in Regulation U of the Board of Governors of the
Federal Reserve System as in effect from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business, operations, properties, assets, condition (financial or otherwise) or
prospects of Holdings and its Subsidiaries on a consolidated basis or (ii) the
ability of any Agent or any Lender to enforce any of their rights or to collect
any of the Obligations then due and payable.
"Material Contract" means any contract or other arrangement to which any
Credit Party is a party (other than the Credit Documents) for which breach,
nonperformance, cancellation or failure to renew could reasonably be expected to
have a Material Adverse Effect.
"Moody's" means Moody's Investor Services, Inc.
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"Multiemployer Plan" means any Employee Benefit Plan which is a
"multiemployer plan" as defined in Section 3(37) of ERISA.
"NAIC" means The National Association of Insurance Commissioners, and any
successor thereto.
"Narrative Report" means, with respect to the financial statements for
which such narrative report is required, at the option of Holdings either (y) a
narrative report describing the operations of Holdings and its Subsidiaries in
the form prepared for presentation to senior management thereof for the
applicable Fiscal Quarter or Fiscal Year and for the period from the beginning
of the then current Fiscal Year to the end of such period to which such
financial statements relate or (z) at any time Holdings is a reporting company
for purposes of the Exchange Act (including pursuant to the Indenture for the
Senior Notes), the report filed with the Securities and Exchange Commission with
respect to such financial statements.
"Net Asset Sale Proceeds" means, with respect to any Asset Sale, an amount
equal to: (i) Cash payments (including any Cash received by way of deferred
payment pursuant to, or by monetization of, a note receivable or otherwise, but
only as and when so received) received from such Asset Sale, minus (ii) any bona
-----
fide direct costs incurred in connection with such Asset Sale, including (a)
income or gains taxes actually payable as a result of any gain recognized in
connection with such Asset Sale and (b) payment of the outstanding principal
amount of, premium or penalty, if any, and interest on any Indebtedness (other
than the Loans) that is secured by a Lien on the stock or assets in question and
that is required to be repaid under the terms thereof as a result of such Asset
Sale.
"Net Insurance/Condemnation Proceeds" means an amount equal to: (i) any
Cash payments or proceeds received by Holdings or any of its Subsidiaries with
respect to any of the Collateral (a) under any property insurance policy in
respect of a covered loss thereunder or (b) as a result of the taking of any
assets of Holdings or any of its Subsidiaries by any Person pursuant to the
power of eminent domain, condemnation or otherwise, or pursuant to a sale of any
such assets to a purchaser with such power under threat of such a taking, minus
------
(ii) (a) any actual and reasonable documented costs incurred by Holdings or any
of its Subsidiaries in connection with the adjustment or settlement of any
claims of Holdings or such Subsidiary in respect thereof, and (b) any bona fide
direct costs incurred in connection with any sale of such assets as referred to
in clause (i)(b) of this definition, including income taxes reasonably
estimated to be actually payable as a result of any gain recognized in
connection therewith.
"Non-US Lender" as defined in Section 2.15(c).
"Note" means a promissory note in the form of Exhibit B, as it may be
amended, supplemented or otherwise modified from time to time.
"Notice" means a Funding Notice.
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"Obligations" means, with respect to any Credit Party, obligations of such
Credit Party, whether now existing or hereafter made, incurred or created,
whether absolute or contingent, liquidated or unliquidated, whether due or not
due, and however arising under or in connection herewith and any other Credit
Document and any Hedge Agreement with a Lender Counterparty, including those
arising under successive borrowing transactions hereunder which shall either
continue the Obligations of such Credit Party from time to time or renew them
after they have been satisfied and including interest which, but for the filing
of a petition in bankruptcy with respect to such Credit Party, would have
accrued on any Obligation, whether or not a claim is allowed against such Credit
Party for such interest in the related bankruptcy proceeding.
"Obligee Guarantor" as defined in Section 7.7.
"Organizational Documents" means (i) with respect to any corporation, its
certificate or articles of incorporation, as amended, and its by-laws, as
amended, (ii) with respect to any limited partnership, its certificate of
limited partnership, as amended, and its partnership agreement, as amended,
(iii) with respect to any general partnership, its partnership agreement, as
amended, and (iv) with respect to any limited liability company, its articles of
organization, as amended, and its operating agreement, as amended. In the event
any term or condition of this Agreement or any other Credit Document requires
any Organizational Document to be certified by a secretary of state or similar
governmental official, the reference to any such "Organizational Document" shall
only be to a document of a type customarily certified by such governmental
official.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer
Plan, which is subject to Section 412 of the Internal Revenue Code or Section
302 of ERISA.
"Permitted Acquisition" means any acquisition, whether by purchase, merger
or otherwise, of all or any substantial portion of the assets of, all of the
equity Securities of, or a business line or a division of, any Person; provided,
(i) immediately prior to, and after giving effect thereto, no Default or Event
of Default shall have occurred and be continuing or would result therefrom, (ii)
all transactions in connection therewith shall be consummated in accordance with
all applicable laws and in conformity with all applicable Governmental
Authorizations, (iii) the equity Securities (except for any such Securities in
the nature of directors qualifying shares required pursuant to applicable law)
acquired or otherwise issued by such Person or any newly formed Subsidiary of
Holdings in connection with such acquisition shall be owned 100% by Holdings or
a Guarantor Subsidiary thereof, and Holdings shall have taken, or caused to be
taken, as of the date such Person becomes a Subsidiary of Holdings, each of the
actions set forth in Section 5.8, (iv) Holdings and its Subsidiaries shall be in
compliance with, immediately before and after giving pro forma effect to such
acquisition, Section 6.6 (other than subdivision (d) of Section 6.6), (v)
Holdings shall have delivered to Administrative Agent a certificate in the form
of a Compliance Certificate evidencing such compliance with Section 6.6 (other
than subdivision (d) of Section 6.6), together with all relevant financial
information for such acquired assets, (vi) any Person or assets or division as
acquired in accordance herewith shall be in similar or related lines of business
in which Holdings and/or its Subsidiaries are engaged as of the Closing Date,
and (vii) the aggregate cash consideration
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<PAGE>
paid by Holdings or its Subsidiaries in connection with all such acquisitions
(other than cash consideration representing the proceeds of equity offerings by
Holdings issued in connection with such acquisition) shall not exceed (y)
$10,000,000 prior to the consummation of an IPO; provided that in the event any
--------
Acquired Indebtedness (other than Purchase Money Indebtedness) is assumed by
Holdings or any of its Subsidiaries in connection with one or more Permitted
Acquisitions prior to the consummation of an IPO, the aggregate cash
consideration paid by Holdings and its Subsidiaries with respect to such
Permitted Acquisitions shall not exceed $2,000,000 in the aggregate and (z)
$30,000,000 after the consummation of an IPO; provided that in the event any
--------
Acquired Indebtedness (other than Purchase Money Indebtedness) is assumed by
Holdings or any of its Subsidiaries in connection with one or more Permitted
Acquisitions after the consummation of an IPO, the aggregate cash consideration
paid by Holdings and its Subsidiaries with respect to such Permitted
Acquisitions shall not exceed $15,000,000 in the aggregate.
"Permitted Holders" means (i) John R. Evans, Keith V. Burge and Philip G.
Allen and their spouses, issue or other members of their immediate families (the
"Evans Family," the "Burge Family" and the "Allen Family," respectively), (ii)
trusts or other entities created for the benefit of any member of the Evans
Family, the Burge Family or the Allen Family, (iii) entities controlled by any
of the Evans Family, the Burge Family or the Allen Family, and (iv) in the event
of the death of any member of the Evans Family, the Burge Family or the Allen
Family, the heirs or testamentary legatees of such member of the Evans Family,
the Burge Family or the Allen Family.
"Permitted Liens" means each of the Liens permitted pursuant to
Section 6.2.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, Joint Ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments (whether federal,
state or local, domestic or foreign, and including political subdivisions
thereof) and agencies or other administrative or regulatory bodies thereof.
"Plan of Correction" as defined in Section 4.20.
"Pledge and Security Agreement" means the Pledge and Security Agreement in
the form of Exhibit I, as it may be amended, supplemented or otherwise modified
from time to time.
"Principal Office" means Administrative Agent's or its designee "Principal
Office" as set forth on Appendix B, or such other office as Administrative Agent
or its designee may from time to time designate in writing to Borrowers and each
Lender.
"Projections" as defined in Section 4.5.
"Pro Rata Share" means with respect to all payments, computations and other
matters relating to the Loan of any Lender, the percentage obtained by dividing
(i) the Loan Exposure of that Lender by (ii) the aggregate Loan Exposure of all
Lenders.
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"Purchase Money Indebtedness" has the meaning assigned to that term in
Section 6.1(i).
"Qualifying Receivables" means, at any date of determination, the aggregate
value of Eligible Accounts Receivable, less the sum of without duplication (a)
----
the amount of any reserves established by a Borrower, relating to Eligible
Account Receivables in accordance with the higher of (i) historical practices in
effect as of the Closing Date with respect to Accounts and (ii) actual reserves
taken and (b) the amount of Eligible Accounts Receivable equal to a dilution
estimate (expressed as a percentage of total Eligible Accounts Receivable)
prepared by Holdings in good faith and consistent with recent historical
performance.
"Qualifying Receivables Ratio" means, as of any date of determination the
ratio of y) Qualifying Receivables to z) the aggregate principal amount of
outstanding Loans.
"Register" as defined in Section 2.4(b).
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Related Agreement" means the Senior Notes, the Senior Note Indenture, the
Comdisco Agreement, the Employment Agreements; the Sandler Agreements, the
Senior Notes Warrant Registration Rights Agreement, and the Senior Notes
Warrant Agreement.
"Related Fund" means, with respect to any Lender that is an investment
fund, any other investment fund that invests in commercial loans and that is
managed or advised by the same investment advisor as such Lender or by an
Affiliate of such investment advisor.
"Release" means any release, spill, emission, leaking, pumping, pouring,
injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching
or migration of any Hazardous Material into the indoor or outdoor environment
(including the abandonment or disposal of any barrels, containers or other
closed receptacles containing any Hazardous Material), including the movement of
any Hazardous Material through the air, soil, surface water or groundwater.
"Requisite Lenders" means one or more Lenders having or holding Loan
Exposure representing more than 50% of the sum of the aggregate Loan Exposure of
all Lenders; provided that for purposes of determining Requisite Lenders, the
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Loan Exposure of any Lender shall give effect to any reservation of voting
rights by GSCP contractually agreed to by GSCP and any assignee of any of the
Loans or Loan Commitments.
"Restricted Junior Payment" means (i) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Holdings
or either Borrower now or hereafter outstanding, except a dividend payable
solely in shares of that class of stock to the holders of that class, (ii) any
redemption, retirement, sinking fund or similar payment, purchase or other
acquisition for value, direct or indirect, of any shares of any class of stock
of Holdings or either Borrower now or hereafter outstanding, (iii) any payment
made to retire, or to obtain the surrender of, any outstanding warrants, options
or other rights to acquire shares of any class of stock of
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Holdings or either Borrower now or hereafter outstanding, and (iv) any payment
or prepayment of principal of, premium, if any, or interest on, or redemption,
purchase, retirement, defeasance (including in-substance or legal defeasance),
sinking fund or similar payment with respect to, the Senior Notes and other
Indebtedness incurred by Holdings pursuant to Section 6.1(j).
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw Hill
Corporation.
"Sandler Agreements" means the Securities Purchase Agreement dated March
17, 1999 among Sandler Capital Partners IV, L.P., Sandler Capital Partners IV,
FTE, L.P., the investors named therein and Holdings, and the documents delivered
pursuant thereto, as such agreements may be amended from time to time to the
extent permitted pursuant to Section 6.11.
"Securities" means any stock, shares, partnership interests, voting trust
certificates, certificates of interest or participation in any profit-sharing
agreement or arrangement, options, warrants, bonds, debentures, notes, or other
evidences of indebtedness, secured or unsecured, convertible, subordinated or
otherwise, or in general any instruments commonly known as "securities" or any
certificates of interest, shares or participations in temporary or interim
certificates for the purchase or acquisition of, or any right to subscribe to,
purchase or acquire, any of the foregoing.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, and any successor statute.
"Senior Debt" means, as at any date of determination, the aggregate stated
balance sheet amount of all Indebtedness of Holdings and its Subsidiaries
determined on a consolidated basis in accordance with GAAP, less the aggregate
----
principal amount of the outstanding Senior Notes and other Indebtedness of
Holdings outstanding pursuant to Section 6.1(j).
"Senior Note Indenture" means the indenture pursuant to which the Senior
Notes are issued, as such indenture may be amended from time to time to the
extent permitted pursuant to Section 6.11.
"Senior Notes" means the $160,000,000 in aggregate principal amount of 13%
Senior Notes due 2008 of Holdings issued pursuant to the Senior Note Indenture.
"Senior Notes Warrant Registration Rights Agreement" means the Warrant
Registration Rights Agreement dated as of April 2, 1998, among Holdings and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear,
Stearns & Co. Inc. and BT Alex. Brown Incorporated as such agreement may be
amended from time to time to the extent permitted pursuant to Section 6.11.
"Senior Notes Warrant Agreement" means the Warrant Agreement dated as of
April 2, 1998, by and between Holdings and American Stock Transfer & Trust
Company, as Warrant Agent
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as such agreement may be amended from time to time to the extent permitted
pursuant to Section 6.11.
"Senior Ratio A" means the ratio, as of the last day of any Fiscal Quarter,
of (i) Senior Debt as of such day to (ii) Capitalization as of such day.
"Senior Ratio B" means the ratio, as of the last day of any Fiscal Quarter,
of (i) Senior Debt as of such day to (ii) Consolidated Adjusted EBITDA for the
Fiscal Quarter most recently ended times 4.
"Solvent" means, with respect to any Person, that as of the date of
determination both (i) (a) the then fair saleable value of the property of such
Person is (1) greater than the total amount of liabilities (including contingent
liabilities) of such Person and (2) not less than the amount that will be
required to pay the probable liabilities on such Person's then existing debts as
they become absolute and matured considering all financing alternatives and
potential asset sales reasonably available to such Person; (b) such Person's
capital is not unreasonably small in relation to its business or any
contemplated or undertaken transaction; and (c) such Person does not intend to
incur, or believe (nor should it reasonably believe) that it will incur, debts
beyond its ability to pay such debts as they become due; and (ii) such Person is
"solvent" within the meaning given that term and similar terms under applicable
laws relating to fraudulent transfers and conveyances. For purposes of this
definition, the amount of any contingent liability at any time shall be computed
as the amount that, in light of all of the facts and circumstances existing at
such time, represents the amount that can reasonably be expected to become an
actual or matured liability.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, limited liability company, association, joint venture or other
business entity of which more than 50% of the total voting power of shares of
stock or other ownership interests entitled (without regard to the occurrence of
any contingency) to vote in the election of the Person or Persons (whether
directors, managers, trustees or other Persons performing similar functions)
having the power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof; provided, in determining the percentage of ownership interests of any
Person controlled by another Person, no ownership interest in the nature of a
"qualifying share" of the former Person shall be deemed to be outstanding.
"Supplemental Collateral Agent" as defined in Section 9.8(c).
"Systems" means any of the hardware, firmware or software systems
associated with information processing and delivery, operations or services
(e.g., security and alarms, elevators, communications, and HVAC) operated by,
provided to or otherwise reasonably necessary to the business or operations of
Holdings and its Subsidiaries.
"Tax" means any present or future tax, levy, impost, duty, charge, fee,
deduction or withholding of any nature and whatever called, by whomsoever, on
whomsoever and wherever imposed, levied, collected, withheld or assessed;
provided, "Tax on the overall net income" of a
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Person shall be construed as a reference to a tax imposed by the jurisdiction in
which that Person is organized or in which that Person's principal office
(and/or, in the case of a Lender, its lending office) is located or in which
that Person (and/or, in the case of a Lender, its lending office) is deemed to
be doing business on all or part of the net income, profits or gains (whether
worldwide, or only insofar as such income, profits or gains are considered to
arise in or to relate to a particular jurisdiction, or otherwise) of that Person
(and/or, in the case of a Lender, its lending office).
"Total Utilization of Loan Commitments" means, as at any date of
determination, the aggregate principal amount of all outstanding Loans.
"UCC" means the Uniform Commercial Code (or any similar or equivalent
legislation) as in effect in any applicable jurisdiction.
"Warrant" means the Warrant, of even date herewith, issued by Holdings for
the benefit of Goldman, Sachs & Co. or its registered assigns.
"Year 2000 Issues" means limitations in the capacity or readiness to handle
date information for the years beginning January 1, 2000 of any of the Systems.
1.2. Accounting Terms. Except as otherwise expressly provided herein, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP. Financial statements and other information
required to be delivered by Holdings to Lenders pursuant to Section 5.1(a) and
5.1(b) shall be prepared in accordance with GAAP as in effect at the time of
such preparation (and delivered together with the reconciliation statements
provided for in Section 5.1(d), if applicable). Subject to the foregoing,
calculations in connection with the definitions, covenants and other provisions
hereof shall utilize accounting principles and policies in conformity with those
used to prepare the Historical Financial statements.
1.3. Interpretation, etc. Any of the terms defined herein may, unless the
context otherwise requires, be used in the singular or the plural, depending on
the reference. References herein to any Section, Appendix, Schedule or Exhibit
shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may
be, hereof unless otherwise specifically provided. The use herein of the word
"include" or "including", when following any general statement, term or matter,
shall not be construed to limit such statement, term or matter to the specific
items or matters set forth immediately following such word or to similar items
or matters, whether or not nonlimiting language (such as "without limitation" or
"but not limited to" or words of similar import) is used with reference thereto,
but rather shall be deemed to refer to all other items or matters that fall
within the broadest possible scope of such general statement, term or matter.
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SECTION 2. LOANS
2.1. Loans. (a) During the Loan Commitment Period, subject to the terms
and conditions hereof, each Lender holding a Loan Commitment agrees to make
Loans to Borrowers, as joint and several obligors, in an aggregate amount up to
but not exceeding such Lender's Loan Commitment; provided, after giving effect
to the making of any Loans in no event shall the Total Utilization of Loan
Commitments exceed the Loan Commitments then in effect. Amounts borrowed
pursuant to this Section 2.1(a) and repaid may not be reborrowed. Each Lender's
Loan Commitment shall expire on the Loan Maturity Date. All Loans and all other
amounts owed hereunder with respect to the Loans and the Loan Commitments shall
be paid in full no later than the Loan Maturity Date.
(b) Notwithstanding anything in this Agreement or in any other Credit
Document to the contrary, the Obligations of Borrowers hereunder and under each
other Credit Document are joint and several obligations of Borrowers.
(c) Loans shall be made in an aggregate minimum amounts of $5,000,000 and
integral multiples of $1,000,000 in excess of that amount.
(d) Whenever Borrowers desire that Lenders make Loans, Borrowers shall
deliver to Administrative Agent a fully executed and delivered Funding Notice no
later than 10:00 a.m. (New York City time) at least five Business Days in
advance of the proposed Credit Date (or such shorter time period as may be
acceptable to Administrative Agent). During the period following delivery of
the Funding Notice, authorized representatives of Administrative Agent shall be
permitted to perform inspections and reviews as described in Section 5.6(a).
Except as otherwise provided herein, a Funding Notice for a Loan shall be
irrevocable and the Borrowers shall be bound to make a borrowing in accordance
therewith.
(e) Notice of receipt of each Funding Notice, together with the amount of
each Lender's Pro Rata Share thereof, shall be provided by Administrative Agent
to each Lender by telefacsimile with reasonable promptness, but (provided
Administrative Agent shall have received such notice by 11:00 a.m. (New York
City time)), not later than 2:00 p.m. (New York City time) on the same day as
Administrative Agent's receipt of such Funding Notice from the Borrowers.
(f) Each Lender shall make the amount of its Loan available to
Administrative Agent not later than 12:00 Noon (New York City time) on the
applicable Credit Date by wire transfer of same day funds in Dollars, at the
Administrative Agent's Principal Office. Except as provided herein, upon
satisfaction or waiver of the conditions precedent specified herein,
Administrative Agent shall make the proceeds of such Loans available to the
Borrowers on the applicable Credit Date by causing an amount of same day funds
in Dollars equal to the proceeds of all such Loans received by Administrative
Agent from Lenders to be credited to the account of the Borrowers at the
Administrative Agent's Principal Office or such other account as may be
designated in writing to Administrative Agent by Borrowers.
2.2. Pro Rata Shares; Availability of Funds. (a) All Loans shall be made
by Lenders simultaneously and proportionately to their respective Pro Rata
Shares, it being understood that no
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Lender shall be responsible for any default by any other Lender in such other
Lender's obligation to make a Loan requested hereunder or purchase a
participation required hereby nor shall the Loan Commitment of any Lender be
increased or decreased as a result of a default by any other Lender in such
other Lender's obligation to make a Loan requested hereunder or purchase a
participation required hereby.
(b) Unless Administrative Agent shall have been notified by a Lender
prior to the applicable Credit Date that such Lender does not intend to make
available to Administrative Agent the amount of such Lender's Loan requested on
such Credit Date, Administrative Agent may assume that such Lender has made such
amount available to Administrative Agent on such Credit Date and Administrative
Agent may, in its sole discretion, but shall not be obligated to, make available
to the applicable Borrower a corresponding amount on such Credit Date. If such
corresponding amount is not in fact made available to Administrative Agent by
such Lender, Administrative Agent shall be entitled to recover such
corresponding amount on demand from such Lender together with interest thereon,
for each day from such Credit Date until the date such amount is paid to
Administrative Agent, at the customary rate set by Administrative Agent for the
correction of errors among banks for three Business Days and thereafter at the
interest rate payable hereunder on the Loans. If such Lender does not pay such
corresponding amount forthwith upon Administrative Agent's demand therefor,
Administrative Agent shall promptly notify the applicable Borrower and such
Borrower shall immediately pay such corresponding amount to Administrative Agent
together with interest thereon, for each day from such Credit Date until the
date such amount is paid to Administrative Agent, at the interest rate payable
hereunder on the Loans. Nothing in this Section 2.2(b) shall be deemed to
relieve any Lender from its obligation to fulfill its Loan Commitments hereunder
or to prejudice any rights that either Borrower may have against any Lender as a
result of any default by such Lender hereunder.
2.3. Use of Proceeds. The proceeds of the Loans shall be applied by
Borrowers to finance the working capital and general corporate needs of
Borrowers and their respective Subsidiaries. No portion of the proceeds of any
Credit Extension shall be used by a Borrower, or any of its Subsidiaries in any
manner that might cause such Credit Extension or the application of such
proceeds to violate Regulation T, Regulation U or Regulation X of the Board of
Governors of the Federal Reserve System or any other regulation thereof or to
violate the Exchange Act, in each case as in effect on the date or dates of such
Credit Extension and such use of proceeds.
2.4. Evidence of Debt; Register; Lenders' Books and Records; Notes. (a)
Each Lender shall maintain on its internal records an account or accounts
evidencing the indebtedness of Borrowers to such Lender, including the amounts
of the Loans made by it and each repayment and prepayment in respect thereof.
Any such recordation shall be conclusive and binding on the Borrowers, absent
manifest error; provided, failure to make any such recordation, or any error in
such recordation, shall not affect any Lender's Loan Commitments or Borrowers'
Obligations in respect of any Loans; and provided further, in the event of any
inconsistency between the Register and any Lender's records, the recordations in
the Register shall govern.
(b) Administrative Agent shall maintain at its Principal Office a register
for the recordation of the names and addresses of Lenders and the Loan
Commitments and Loans of each
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Lender from time to time (the "Register"). The Register shall be available for
inspection by Borrowers or any Lender at any reasonable time and from time to
time upon reasonable prior notice. Administrative Agent shall record in the
Register the Loan Commitments and the Loans, and each repayment or prepayment in
respect of the principal amount of the Loans, and any such recordation shall be
conclusive and binding on Borrowers and each Lender, absent manifest error;
provided, failure to make any such recordation, or any error in such
recordation, shall not affect any Lender's Loan Commitments or Borrowers'
Obligations in respect of any Loan. Borrowers hereby designate Administrative
Agent to serve as Borrower's agent solely for purposes of maintaining the
Register as provided in this Section 2.4, and Borrowers hereby agree that, to
the extent Administrative Agent serves in such capacity, Administrative Agent
and its officers, directors, partners, employees, agents and affiliates shall
constitute "Indemnitees".
(c) If so requested by any Lender by written notice to a Borrower (with a
copy to Administrative Agent) at least two Business Days prior to the Closing
Date, or at any time thereafter, the Borrowers shall execute and deliver to such
Lender (and/or, if applicable and if so specified in such notice, to any Person
who is an assignee of such Lender pursuant to Section 10.6) on the Closing Date
(or, if such notice is delivered after the Closing Date, promptly after such
Borrower's receipt of such notice) a Note to evidence such Lender's Loans.
2.5. Interest Payments. (a) Except as otherwise set forth herein, each
Loan shall bear interest on the unpaid principal amount thereof on each day
outstanding, from the date made through the date of repayment, at the higher of:
(1) 13.0% per annum; and (2) the Adjusted Eurodollar Rate plus 6% per annum, the
determination of the highest applicable rate to be made by Administrative Agent
as of 11:00 a.m. (New York City time) on each Business Day and apply until 11:00
a.m. (New York City time) on the next succeeding Business Day.
(b) Interest payable pursuant to Section 2.5(a) shall be computed on the
basis of a 360-day year, in each case for the actual number of days elapsed in
the period during which it accrues. In computing interest on any Loan, the date
of the making of such Loan and the date of payment of such Loan shall be
excluded; provided, if a Loan is repaid on the same day on which it is made, one
day's interest shall be paid on that Loan.
(c) Except as otherwise set forth herein, interest on each Loan shall be
payable in arrears on and to (i) each Interest Payment Date; (ii) the date of
any prepayment of that Loan, whether voluntary or mandatory, to the extent
accrued on the amount being prepaid; and (iii) at final maturity.
2.6. Default Interest. Upon the occurrence and during the continuance of
an Event of Default, the principal amount of all Loans and, to the extent
permitted by applicable law, any interest payments on the Loans or any fees or
other amounts owed hereunder not paid when due, in each case whether at stated
maturity, by notice of prepayment, by acceleration or otherwise, shall
thereafter bear interest (including post-petition interest in any proceeding
under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand
at a rate that is 3% per annum in excess of the interest rate otherwise payable
hereunder with respect to the Loans. Payment or acceptance of the increased
rates of interest provided for in this Section 2.6 is not a permitted
alternative to timely
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payment and shall not constitute a waiver of any Event of Default or otherwise
prejudice or limit any rights or remedies of Administrative Agent or any Lender.
2.7. Commitment Fees. Borrowers agree jointly and severally to pay to
Lenders commitment fees equal to (i) the average of the daily excess of the Loan
Commitments over the sum of the aggregate principal amount of outstanding Loans,
times (ii) 1.0% per annum. All such fees shall be paid to Administrative Agent
at its Principal Office and upon receipt, Administrative Agent shall promptly
distribute to each Lender its Pro Rata Share thereof, and all such fees shall be
calculated on the basis of a 360-day year and the actual number of days elapsed
and shall be payable monthly in arrears on each Interest Payment Date during the
Loan Commitment Period, commencing on the first such date to occur after the
Closing Date, and on the Loan Commitment Termination Date.
2.8. Other Fees. In addition to the foregoing fees, Holdings and Borrowers
agree to pay to Administrative Agent such other fees and other compensation in
the amounts and at the times described in that certain outline of proposed terms
dated April 15, 1999 provided by GSCP Holdings.
2.9. Voluntary Prepayments/Reductions. (a) Any time and from time to time,
Borrowers may prepay any Loans on any Business Day in whole or in part, in an
aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in
excess of that amount; provided that, the number of prepayments allowed pursuant
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to this Section 2.9(a) shall not exceed four (4) during the term of this
Agreement. All such prepayments shall be made upon not less than three Business
Days' prior written or telephonic notice, given to Administrative Agent by 12:00
noon (New York City time) on the date required and, if given by telephone,
promptly confirmed in writing to Administrative Agent (and Administrative Agent
will promptly transmit such telephonic or original notice for by telefacsimile
or telephone to each Lender). Upon the giving of any such notice, the principal
amount of the Loans specified in such notice shall become due and payable on the
prepayment date specified therein.
(b) Borrowers may, upon not less than three Business Days' prior written
or telephonic notice confirmed in writing to Administrative Agent (which
original written or telephonic notice Administrative Agent will promptly
transmit by telefacsimile or telephone to each applicable Lender), at any time
and from time to time terminate in whole or permanently reduce in part, without
premium or penalty, the Loan Commitments in an amount up to the amount by which
the Loan Commitments exceed the Total Utilization of Loan Commitments at the
time of such proposed termination or reduction; provided, any such partial
reduction of the Loan Commitments shall be in an aggregate minimum amount of
$1,000,000 and integral multiples of $500,000 in excess of that amount; provided
that, the number of reductions allowed pursuant to this Section 2.9(b) shall not
exceed four (4) during the term of this Agreement. Borrowers' notice to
Administrative Agent shall designate the date (which shall be a Business Day) of
such termination or reduction and the amount of any partial reduction, and such
termination or reduction of the Loan Commitments shall be effective on the date
specified in Borrowers' notice and shall reduce the Loan Commitment of each
Lender proportionately to its Pro Rata Share thereof.
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2.10. Mandatory Prepayments/Reductions. (a) No later than the first
Business Day following the date of receipt by Holdings or any of its
Subsidiaries of any Net Asset Sale Proceeds, Borrowers shall prepay the Loans
(and, to the extent such Net Asset Sale Proceeds exceed the principal amount of
Loans outstanding, reduce the Loan Commitments by such excess) in an aggregate
amount equal to such Net Asset Sale Proceeds; provided, (i) so long as no
Default or Event of Default shall have occurred and be continuing, and (ii) to
the extent that aggregate Net Asset Sale Proceeds from the Closing Date through
the applicable date of determination do not exceed $10,000,000, Borrowers shall
have the option, directly or through one or more of its Subsidiaries, to invest
such Net Asset Sale Proceeds within one hundred eighty (180) days of receipt
thereof in productive assets of the general type used in the business of
Holdings and its Subsidiaries.
(b) No later than the first Business Day following the date of receipt by
Holdings or any of its Subsidiaries, or Administrative Agent as loss payee, of
any Net Insurance/Condemnation Proceeds, Borrowers shall pre-pay the Loans (and,
to the extent such Net Insurance/Condemnation Proceeds exceed the principal
amount of Loans outstanding, reduce the Loan Commitments by such excess) in an
aggregate amount equal to such Net Insurance/Condemnation Proceeds; provided,
(i) so long as no Default or Event of Default shall have occurred and be
continuing, and (ii) to the extent that aggregate Net Insurance/Condemnation
Proceeds from the Closing Date through the applicable date of determination do
not exceed $10,000,000, (or such greater amounts so long as Borrowers in their
reasonable judgment conclude that such greater amounts can be practicably
reinvested in long term productive assets within 180 days of receipt thereof
without giving rise to a Material Adverse Effect) Borrowers shall have the
option, directly or through one or more of their respective Subsidiaries to
invest such Net Insurance/Condemnation Proceeds within one hundred eighty (180)
days of receipt thereof in long term productive assets of the general type used
in the business of Holdings and its Subsidiaries, which investment may include
the repair, restoration or replacement of the applicable assets of Holdings or
its Subsidiaries.
(c) No later than the first Business Day following the day on which
Holdings, on a stand-alone basis, receives, from any source, (other than a
Restricted Junior Payment made by a Borrower or an intercompany loan made to
Holdings pursuant to Section 6.1), aggregate Cash or Cash Equivalents of greater
than $5,000,000 but less than or equal to $15,000,000 (such Cash or Cash
Equivalents being referred to herein as the "Controlled Cash Amount"), such
Controlled Cash Amount shall be used to pre-pay the Loans (and, to the extent
such Controlled Cash Amount exceeds the principal amount of Loans outstanding,
reduce the Loan Commitments by such excess) unless such Controlled Cash Amount
is otherwise (i) invested as a capital contribution in either Borrower, or (ii)
used to cash collateralize the Loans under arrangements reasonably acceptable to
Administrative Agent.
(d) Concurrently with any prepayment of the Loans and/or reduction of the
Loan Commitments pursuant to Sections 2.9(a) or 2.9(b), Holdings shall deliver
to Administrative Agent a certificate of an Authorized Officer demonstrating the
calculation of the amount of the applicable net proceeds. In the event that
Holdings or either Borrower shall subsequently determine that the actual amount
received exceeded the amount set forth in such certificate, Borrowers shall
promptly make an additional prepayment of the Loans (and/or the Loan Commitments
shall be permanently reduced) in an amount equal to such excess, and Holdings
shall concurrently therewith deliver to
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Administrative Agent a certificate of an Authorized Officer demonstrating the
derivation such excess.
2.11. General Provisions Regarding Payments. (a) All payments by Borrowers
of principal, interest, fees and other Obligations shall be made in Dollars in
same day funds, without defense, setoff or counterclaim, free of any restriction
or condition, and delivered to Administrative Agent not later than 12:00 Noon
(New York City time) on the date due at the Administrative Agent's Principal
Office for the account of Lenders; funds received by Administrative Agent after
that time on such due date shall be deemed to have been paid by Borrowers on the
next succeeding Business Day.
(b) All payments in respect of the principal amount of any Loan shall
include payment of accrued interest on the principal amount being repaid or
prepaid, and all such payments (and, in any event, any payments in respect of
any Loan on a date when interest is due and payable with respect to such Loan)
shall be applied to the payment of interest before application to principal.
(c) Administrative Agent shall promptly distribute to each Lender at such
address as such Lender shall indicate in writing, such Lender's applicable Pro
Rata Share of all payments and prepayments of principal and interest due
hereunder, together with all other amounts due thereto, including, without
limitation, all commitment fees payable with respect thereto, to the extent
received by Administrative Agent.
(d) Whenever any payment to be made hereunder shall be stated to be due
on a day that is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest hereunder or of the Loan Commitment fees
hereunder, as the case may be.
(e) Each Borrowers hereby authorize Administrative Agent to charge such
Borrower's accounts with Administrative Agent in order to cause timely payment
to be made to Administrative Agent of all principal, interest, fees and expenses
due hereunder (subject to sufficient funds being available in its accounts for
that purpose).
(f) Administrative Agent shall deem any payment by or on behalf of either
Borrower hereunder that is not made in same day funds prior to 12:00 noon (New
York City time) to be a non-conforming payment. Any such payment shall not be
deemed to have been received by Administrative Agent until the later of (i) the
time such funds become available funds, and (ii) the applicable next Business
Day. Administrative Agent shall give prompt telephonic notice to Borrowers and
each Lender (confirmed in writing) if any payment is non-conforming. Any non-
conforming payment may constitute or become a Default or Event of Default in
accordance with the terms of Section 8.1(a). Interest shall continue to accrue
on any principal as to which a non-conforming payment is made until such funds
become available funds (but in no event less than the period from the date of
such payment to the next succeeding applicable Business Day) at the rate
determined pursuant to Section 2.6 from the date such amount was due and payable
until the date such amount is paid in full.
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2.12. Ratable Sharing. Lenders hereby agree among themselves that if any of
them shall, whether by voluntary payment (other than a voluntary prepayment of
Loans made and applied in accordance with the terms hereof), by realization upon
security, through the exercise of any right of set-off or banker's lien, by
counterclaim or cross action or by the enforcement of any right under the Credit
Documents or otherwise, or as adequate protection of a deposit treated as cash
collateral under the Bankruptcy Code, receive payment or reduction of a
proportion of the aggregate amount of principal, interest, fees and other
amounts then due and owing to such Lender hereunder or under the other Credit
Documents (collectively, the "Aggregate Amounts Due" to such Lender) which is
greater than the proportion received by any other Lender in respect of the
Aggregate Amounts Due to such other Lender, then the Lender receiving such
proportionately greater payment shall (a) notify Administrative Agent and each
other Lender of the receipt of such payment and (b) apply a portion of such
payment to purchase participations (which it shall be deemed to have purchased
from each seller of a participation simultaneously upon the receipt by such
seller of its portion of such payment) in the Aggregate Amounts Due to the other
Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by
all Lenders in proportion to the Aggregate Amounts Due to them; provided, if all
or part of such proportionately greater payment received by such purchasing
Lender is thereafter recovered from such Lender upon the bankruptcy or
reorganization of either Borrower or otherwise, those purchases shall be
rescinded and the purchase prices paid for such participations shall be returned
to such purchasing Lender ratably to the extent of such recovery, but without
interest. Borrowers expressly consent to the foregoing arrangement and agree
that any holder of a participation so purchased may exercise any and all rights
of banker's lien, set-off or counterclaim with respect to any and all monies
owing by either Borrower to that holder with respect thereto as fully as if that
holder were owed the amount of the participation held by that holder.
2.13. Making or Maintaining Eurodollar Rate Loans. (a) In the event that
Administrative Agent shall have determined (which determination shall be final
and conclusive and binding upon all parties hereto), on any Interest Rate
Determination Date when Loans would, pursuant to Section 2.5(a) bear interest
based upon the Adjusted Eurodollar Rate, that by reason of circum stances
affecting the London interbank market adequate and fair means do not exist for
ascertaining the interest rate applicable to such Loans on such basis, the Loans
shall bear interest at 13.0% per annum.
(b) In the event that on any date any Lender shall have determined
(which determination shall be final and conclusive and binding upon all parties
hereto but shall be made only after consultation with Borrower and
Administrative Agent) that the making, maintaining or continuation of its Loans
bearing interest based upon the Adjusted Eurodollar Rate has become unlawful as
a result of compliance by such Lender in good faith with any law, treaty,
governmental rule, regulation, guideline or order (or would conflict with any
such treaty, governmental rule, regulation, guideline or order not having the
force of law even though the failure to comply therewith would not be unlawful),
or has become impracticable, as a result of contingencies occurring after the
date hereof which materially and adversely affect the London interbank market or
the position of such Lender in that market, then, and in any such event, such
Lender shall on that day give notice (by telefacsimile or by telephone confirmed
in writing) to Borrower and Administrative Agent of such determination (which
notice Administrative Agent shall promptly transmit to each other Lender).
Thereafter the Loans of the Affected Lender shall bear interest at 13.0% per
annum.
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2.14.Increased Costs; Capital Adequacy. (a) Subject to the provisions of
Section 2.15 (which shall be controlling with respect to the matters covered
thereby), in the event that any Lender shall determine (which determination
shall, absent manifest error, be final and conclusive and binding upon all
parties hereto) that any law, treaty or governmental rule, regulation or order,
or any change therein or in the interpretation, administration or application
thereof (including the introduction of any new law, treaty or governmental rule,
regulation or order), or any determination of a court or governmental authority,
in each case that becomes effective after the date hereof, or compliance by such
Lender with any guideline, request or directive issued or made after the date
hereof by any central bank or other governmental or quasi-governmental authority
(whether or not having the force of law): (i) subjects such Lender (or its
applicable lending office) to any additional Tax (other than any Tax on the
overall net income of such Lender) with respect to this Agreement or any of its
obligations hereunder or any payments to such Lender (or its applicable lending
office) of principal, interest, fees or any other amount payable hereunder; (ii)
imposes, modifies or holds applicable any reserve (including any marginal,
emergency, supplemental, special or other reserve), special deposit, compulsory
loan, FDIC insurance or similar requirement against assets held by, or deposits
or other liabilities in or for the account of, or advances or loans by, or other
credit extended by, or any other acquisition of funds by, any office of such
Lender (other than any such reserve or other requirements with respect to Loans
bearing interest based upon the Adjusted Eurodollar Rate that are reflected in
the definition of Adjusted Eurodollar Rate); or (iii) imposes any other
condition (other than with respect to a Tax matter) on or affecting such Lender
(or its applicable lending office) or its obligations hereunder or the London
interbank market; and the result of any of the foregoing is to increase the cost
to such Lender of agreeing to make, making or maintaining Loans hereunder or to
reduce any amount received or receivable by such Lender (or its applicable
lending office) with respect thereto; then, in any such case, Borrowers shall
promptly pay to such Lender, upon receipt of the statement referred to in the
next sentence, such additional amount or amounts (in the form of an increased
rate of, or a different method of calculating, interest or otherwise as such
Lender in its sole discretion shall determine) as may be necessary to compensate
such Lender for any such increased cost or reduction in amounts received or
receivable hereunder. Such Lender shall deliver to Borrowers (with a copy to
Administrative Agent) a written statement, setting forth in reasonable detail
the basis for calculating the additional amounts owed to such Lender under this
Section 2.14(a), which statement shall be conclusive and binding upon all
parties hereto absent manifest error.
(b) In the event that any Lender shall have determined that the adoption,
effectiveness, phase-in or applicability after the date hereof of any law, rule
or regulation (or any provision thereof) regarding capital adequacy, or any
change therein or in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender (or its
applicable lending office) with any guideline, request or directive regarding
capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank or comparable agency, has or would have the
effect of reduces the rate of return on the capital of such Lender or any
corporation controlling such Lender as a consequence of, or with reference to,
such Lender's Loans or Loan Commitments or other obligations hereunder with
respect to the Loans to a level below that which such Lender or such controlling
corporation could have achieved but for such adoption, effectiveness, phase-in,
applicability, change or compliance (taking into consideration the policies of
such Lender or such
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controlling corporation with regard to capital adequacy), then from time to
time, within five Business Days after receipt by Borrowers from such Lender of
the statement referred to in the next sentence, such Borrower shall pay to such
Lender such additional amount or amounts as will compensate such Lender or such
controlling corporation on an after-tax basis for such reduction. Such Lender
shall deliver to Borrowers (with a copy to Administrative Agent) a written
statement, setting forth in reasonable detail the basis of the calculation of
such additional amounts, which statement shall be conclusive and binding upon
all parties hereto absent manifest error.
2.15. Taxes; Withholding, Etc. (a) All sums payable by any Credit Party
hereunder and the other Credit Documents shall (except to the extent required by
law) be paid free and clear of, and without any deduction or withholding on
account of, any Tax (other than a Tax on the overall net income of any Lender)
imposed, levied, collected, withheld or assessed by or within the United States
of America or any political subdivision in or of the United States of America or
any other jurisdiction from or to which a payment is made by or on behalf of any
Credit Party or by any federation or organization of which the United States of
America or any such jurisdiction is a member at the time of payment.
(b) If any Credit Party or any other Person is required by law to make any
deduction or withholding on account of any such Tax from any sum paid or payable
by any Credit Party to Administrative Agent or any Lender under any of the
Credit Documents: (i) Borrowers shall notify Administrative Agent of any such
requirement or any change in any such requirement as soon as either Borrower
becomes aware of it; (ii) such Borrower shall pay any such Tax before the date
on which penalties attach thereto, such payment to be made (if the liability to
pay is imposed on any Credit Party) for its own account or (if that liability is
imposed on Administrative Agent or such Lender, as the case may be) on behalf of
and in the name of Administrative Agent or such Lender; (iii) the sum payable by
such Credit Party in respect of which the relevant deduction, withholding or
payment is required shall be increased to the extent necessary to ensure that,
after the making of that deduction, withholding or payment, Administrative Agent
or such Lender, as the case may be, receives on the due date a net sum equal to
what it would have received had no such deduction, withholding or payment been
required or made; and (iv) within thirty (30) days after paying any sum from
which it is required by law to make any deduction or withholding, and within
thirty (30) days after the due date of payment of any Tax which it is required
by clause (ii) above to pay, Borrowers shall deliver to Administrative Agent
evidence satisfactory to the other affected parties of such deduction,
withholding or payment and of the remittance thereof to the relevant taxing or
other authority; provided, no such additional amount shall be required to be
paid to any Lender under clause (iii) above except to the extent that any change
after the date hereof (in the case of each Lender listed on the signature pages
hereof on the Closing Date) or after the effective date of the Assignment
Agreement pursuant to which such Lender became a Lender (in the case of each
other Lender) in any such requirement for a deduction, withholding or payment as
is mentioned therein shall result in an increase in the rate of such deduction,
withholding or payment from that in effect at the date hereof or at the date of
such Assignment Agreement, as the case may be, in respect of payments to such
Lender.
(c) Each Lender that is organized under the laws of any jurisdiction other
than the United States or any state or other political subdivision thereof (a
"Non-US Lender") shall deliver to
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Administrative Agent for transmission to Borrowers, on or prior to the Closing
Date (in the case of each Lender listed on the signature pages hereof on the
Closing Date) or on or prior to the date of the Assignment Agreement pursuant to
which it becomes a Lender (in the case of each other Lender), and at such other
times as may be necessary in the determination of either Borrower or
Administrative Agent (each in the reasonable exercise of its discretion), (i)
two original copies of Internal Revenue Service Form 1001 or 4224 (or any
successor forms), properly completed and duly executed by such Lender, together
with any other certificate or statement of exemption required under the Internal
Revenue Code or the regulations issued thereunder to establish that such Lender
is not subject to deduction or withholding of United States federal income tax
with respect to any payments to such Lender of principal, interest, fees or
other amounts payable under any of the Credit Documents, or (ii) if such Lender
is not a "bank" or other Person described in Section 881(c)(3) of the Internal
Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or
4224 pursuant to clause (i) above, a Certificate re Non-Bank Status together
with two original copies of Internal Revenue Service Form W-8 (or any successor
form), properly completed and duly executed by such Lender, together with any
other certificate or statement of exemption required under the Internal Revenue
Code or the regulations issued thereunder to establish that such Lender is not
subject to deduction or withholding of United States federal income tax with
respect to any payments to such Lender of interest payable under any of the
Credit Documents. Each Lender required to deliver any forms, certificates or
other evidence with respect to United States federal income tax withholding
matters pursuant to this Section 2.15(c) hereby agrees, from time to time after
the initial delivery by such Lender of such forms, certificates or other
evidence, whenever a lapse in time or change in circumstances renders such
forms, certificates or other evidence obsolete or inaccurate in any material
respect, that such Lender shall promptly deliver to Administrative Agent for
transmission to Borrowers two new original copies of Internal Revenue Service
Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies
of Internal Revenue Service Form W-8, as the case may be, properly completed and
duly executed by such Lender, together with any other certificate or statement
of exemption required in order to confirm or establish that such Lender is not
subject to deduction or withholding of United States federal income tax with
respect to payments to such Lender under the Credit Documents, or notify
Administrative Agent and Borrowers of its inability to deliver any such forms,
certificates or other evidence. Borrowers shall not be required to pay any
additional amount under Section 2.15(b)(iii) if such Lender shall have failed
(1) to deliver the forms, certificates or other evidence referred to in the
second sentence of this Section 2.15(c), or to notify Administrative Agent and
Borrowers of its inability to deliver any such forms, certificates or other
evidence, as the case may be; provided, if such Lender shall have satisfied the
requirements of the first sentence of this Section 2.15(c) on the Closing Date
or on the date of the Assignment Agreement pursuant to which it became a Lender,
as applicable, nothing in this last sentence of Section 2.15(c) shall relieve
Borrowers of their obligation to pay any additional amounts pursuant to Section
2.14(a) in the event that, as a result of any change in any applicable law,
treaty or governmental rule, regulation or order, or any change in the
interpretation, administration or application thereof, such Lender is no longer
properly entitled to deliver forms, certificates or other evidence at a
subsequent date establishing the fact that such Lender is not subject to
withholding as described herein.
2.16. Obligation to Mitigate. Each Lender agrees that, as promptly as
practicable after the officer of such Lender responsible for administering its
Loans becomes aware of the occurrence of
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an event or the existence of a condition that would cause such Lender that would
entitle such Lender to receive payments under Section 2.14, or 2.15, it will, to
the extent not inconsistent with the internal policies of such Lender and any
applicable legal or regulatory restrictions, use reasonable efforts (a) to make,
issue, fund or maintain its Credit Extensions, through another office of such
Lender, or (b) take such other measures as such Lender may deem reasonable, if
as a result thereof additional amounts which would otherwise be required to be
paid to such Lender pursuant to Section 2.14 or 2.15 would be materially reduced
and if, as determined by such Lender in its sole discretion, the making,
issuing, funding or maintaining of such Loan Commitments or Loans through such
other office or in accordance with such other measures, as the case may be,
would not otherwise materially adversely affect such Loan Commitments or Loans
or the interests of such Lender; provided, such Lender will not be obligated to
utilize such other office pursuant to this Section 2.16 unless Borrowers agree
to pay all incremental expenses incurred by such Lender as a result of utilizing
such other office as described in clause (i) above. A certificate as to the
amount of any such expenses payable by Borrowers pursuant to this Section 2.14
(setting forth in reasonable detail the basis for requesting such amount)
submitted by such Lender to Borrowers (with a copy to Administrative Agent)
shall be conclusive absent manifest error.
2.17. Joint and Several Liability
(a) Joint and Several Liability. All Obligations of Borrowers under this
Agreement and other Credit Documents shall be joint and several Obligations of
each Borrower. Anything contained in this Agreement and the other Credit
Documents to the contrary notwithstanding, the Obligations of each Borrower
hereunder shall be limited to a maximum aggregate amount equal to the largest
amount that would not render its Obligations hereunder subject to avoidance as a
fraudulent transfer or conveyance under (S) 548 of the Bankruptcy Code, 11
U.S.C. (S) 548, or any applicable provisions of comparable state law
(collectively, the "Fraudulent Transfer Laws"), in each case after giving effect
to all other liabilities of such Borrower, contingent or otherwise, that are
relevant under the Fraudulent Transfer Laws (specifically excluding, however,
any liabilities of such Borrower in respect of intercompany indebtedness to any
other Credit Party or Affiliates of any other Credit Party to the extent that
such indebtedness would be discharged in an amount equal to the amount paid by
such Credit Party hereunder) and after giving effect as assets to the value (as
determined under the applicable provisions of the Fraudulent Transfer Laws) of
any rights to subrogation or contribution of such Credit Party pursuant to (i)
applicable law or (ii) any agreement providing for an equitable allocation among
such Credit Party and other Affiliates of any Credit Party of Obligations
arising under guaranties by such parties.
(b) Subrogation. Until the Obligations shall have been paid in full in
cash, each Borrower shall withhold exercise of any right of subrogation,
contribution or any other right to enforce any remedy which it now has or may
hereafter have against the other Borrower or any other guarantor of the
Obligations. Each Borrower further agrees that, to the extent the waiver of its
rights of subrogation, contribution and remedies as set forth herein is found by
a court of competent jurisdiction to be void or voidable for any reason, any
such rights such Borrower may have against the other Borrower, any collateral or
security or any guarantor, shall be junior and subordinate to any rights
Administrative Agent or any Lender may have against any such Borrower, any such
collateral or security, and any such guarantor. Borrowers desire to allocate
among themselves, in a fair and
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equitable manner, their Obligations as Borrowers arising under this Agreement
and the other Credit Documents. Accordingly, in the event any payment or
distribution is made on any date by either Borrower under this Agreement and the
other Credit Documents (the Borrower making such payment, a "Funding Borrower")
that exceeds its Fair Share (as defined below) as of such date, that Funding
Borrower shall be entitled to a contribution from the other Borrower in the
amount of such other Borrower's Fair Share Shortfall (as defined below) as of
such date, with the result that all such contributions will cause each
Borrower's Aggregate Payments (as defined below) to equal its Fair Share as of
such date. "Fair Share" means, with respect to a Borrower as of any date of
determination, an amount equal to (i) the ratio of (X) the Fair Share
Contribution Amount (as defined below) with respect to such Borrower to (Y) the
aggregate of the Fair Share Contribution Amounts with respect to both Borrowers,
multiplied by (ii) the aggregate amount paid or distributed on or before such
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date by the Funding Borrower under this Agreement and the other Credit Documents
in respect of the Obligations guarantied. "Fair Share Shortfall" means, with
respect to a Borrower as of any date of determination, the excess, if any, of
the Fair Share of such Borrower over the Aggregate Payments of such Borrower.
"Fair Share Contribution Amount" means, with respect to a Borrower as of any
date of determination, the maximum aggregate amount of the Obligations of such
Borrower under this Agreement and the other Credit Documents that would not
render its Obligations hereunder or thereunder subject to avoidance as a
fraudulent transfer or conveyance under Section 548 of Title 11 of the United
States Code or any applicable provisions of comparable state law; provided tha
t, solely for purposes of calculating the "Fair Share Contribution Amount" with
respect to a Borrower for purposes of this provision, any assets or liabilities
of such Borrower arising by virtue of any rights to subrogation, reimbursement
or indemnification or any rights to or Obligations of contribution hereunder
shall not be considered as assets or liabilities of such Borrower. "Aggregate
Payments" means, with respect to a Borrower as of any date of determination, an
amount equal to (i) the aggregate amount of all payments and distributions made
on or before such date by such Borrower in respect of this Agreement and the
other Credit Documents (including in respect of this provision) minus (ii) the
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aggregate amount of all payments received on or before such date by such
Borrower from the other Borrower as contributions under this provision. The
amounts payable as contributions hereunder shall be determined as of the date on
which the related payment or distribution is made by the applicable Funding
Borrower. The allocation among Borrowers of their Obligations as set forth in
this provision shall not be construed in any way to limit the liability of
either Borrower under this Agreement or under any other Credit Document.
SECTION 3. CONDITIONS PRECEDENT
3.1. Closing Date. This Agreement shall become effective on the date of
the satisfaction, or waiver in accordance with Section 10.5, of the following
conditions:
(a) Credit Documents. Administrative Agent shall have received sufficient
copies of each Credit Document originally executed and delivered by each
applicable Credit Party for each Lender.
(b) Organizational Documents; Incumbency. Administrative Agent shall have
received sufficient copies of each Organizational Document originally executed
and delivered by
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each Credit Party, as applicable, and, to the extent applicable, certified as of
a recent date by the appropriate governmental official, for each Lender and its
counsel, each dated the Closing Date or a recent date prior thereto, together
with signature and incumbency certificates of the officers of such Person
executing the Credit Documents to which it is a party.
(c) Organizational and Capital Structure. The organizational structure and
the capital structure of Holdings and its Subsidiaries shall be as set forth on
Schedule 4.1.
(d) Certain Employees. Administrative Agent shall have received duly
executed copies of, and shall be satisfied with the form and substance of, the
Employment Agreements.
(e) Related Agreements. Administrative Agent shall have received complete
and correct copies of each Related Agreement and of all exhibits and schedules
thereto.
(f) Governmental Authorizations and Consents. Each Credit Party shall have
obtained all Governmental Authorizations and all consents of other Persons, in
each case that are necessary or advisable in connection with the transactions
contemplated by the Credit Documents and each of the foregoing shall be in full
force and effect. No action, request for stay, petition for review or
rehearing, reconsideration, or appeal with respect to any of the foregoing shall
be pending, and the time for any applicable agency to take action to set aside
its consent on its own motion shall have expired.
(g) Collateral. In order to create in favor of Administrative Agent, for
the benefit of Lenders, a valid and, subject to any filing and/or recording
referred to herein, perfected First Priority security interest in the
Collateral, Administrative Agent shall have received:
(i) certificates (which certificates shall be accompanied by
irrevocable undated stock powers, duly endorsed in blank and otherwise
satisfactory in form and substance to Administrative Agent) representing
all capital stock pledged pursuant to the Pledge and Security Agreement,
and Acknowledgments of Pledge from each applicable issuer of Securities
pledged pursuant to the Pledge and Security Agreement;
(ii) (1) the results of a recent search, by a Person satisfactory to
Administrative Agent, of all effective UCC financing statements and fixture
filings and all judgment and tax lien filings which may have been made with
respect to any personal or mixed property of any Credit Party, together
with copies of all such filings disclosed by such search, and (2) UCC
termination statements duly executed by all applicable Persons for filing
in all applicable jurisdictions as may be necessary to terminate any
effective UCC financing statements or fixture filings disclosed in such
search (other than any such financing statements in respect of Permitted
Liens)
(iii) UCC financing statements, duly executed by each applicable
Credit Party with respect to all personal property Collateral of such
Credit Party, for filing in all jurisdictions as may be necessary or, in
the opinion of Administrative Agent, desirable to perfect the security
interests created in such Collateral pursuant to the Collateral Documents;
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(iv) all cover sheets or other documents or instruments required to be
filed in order to create or perfect Liens in respect of any Intellectual
Property Collateral;
(v) an opinion of counsel (which counsel shall be reasonably
satisfactory to Administrative Agent) with respect to the creation and
perfection of the security interests in favor of Administrative Agent in
such Collateral and such other matters governed by the laws of each
jurisdiction in which any Credit Party or any material amount of personal
property Collateral is located as Administrative Agent may reasonably
request, in each case in form and substance reasonably satisfactory to
Administrative Agent; and
(vi) evidence that each Credit Party shall have taken or caused to be
taken any other action, executed and delivered or caused to be executed and
delivered any other agreement, document and instrument, and made or caused
to be made any other filing and recording (other than as set forth herein)
reasonably required by Administrative Agent.
(h) Financial Statements; Projections. Lenders shall have received from
Holdings the Historical Financial Statements and the Projections.
(i) Evidence of Insurance. Administrative Agent shall have received a
certificate from Borrower's insurance broker or other evidence satisfactory to
it that all insurance required to be maintained pursuant to Section 5.5 is in
full force and effect and that Administrative Agent on behalf of Lenders has
been named as additional insured and/or loss payee thereunder to the extent
required under Section 5.5.
(j) Opinions of Counsel to Credit Parties. Lenders and their respective
counsel shall have received originally executed copies of the favorable written
opinions of Gibson, Dunn & Crutcher LLP, counsel for Credit Parties, in the form
of Exhibit D and as to such other matters as Administrative Agent may reasonably
request, and otherwise in form and substance reasonably satisfactory to
Administrative Agent and its counsel, dated as of the Closing Date.
(k) Opinions of Counsel to Administrative Agent. Lenders shall have
received originally executed copies of one or more favorable written opinions of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Administrative Agent, dated
as of the Closing Date, in form and substance reasonably satisfactory to
Administrative Agent.
(l) Fees. Borrowers shall have paid to Administrative Agent, for
distribution (as appropriate) to Administrative Agent and Lenders, the fees
payable on the Closing Date referred to in Section 2.8.
(m) Completion of Proceedings. All partnership, corporate and other
proceedings taken or to be taken in connection with the transactions
contemplated hereby and all documents incidental thereto not previously found
acceptable by Administrative Agent, acting on behalf of Lenders, or counsel to
Administrative Agent, shall be satisfactory in form and substance to
Administrative Agent and such counsel, and Administrative Agent and such counsel
shall have received all such
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counterpart originals or certified copies of such documents as Administrative
Agent may reasonably request.
(n) Closing Date Certificate. Holdings and Borrowers shall have delivered
to Administrative Agent an originally executed Closing Date Certificate,
together with all attachments thereto.
3.2. Conditions to Each Credit Extension. (a) The obligation of each
Lender to make any Loan on any Credit Date, including the initial Credit
Extension, are subject to the satisfaction or waiver in accordance with Section
10.5 of the following conditions precedent:
(i) Administrative Agent shall have received a fully executed and
delivered Funding Notice;
(ii) after making the Credit Extensions requested on such Credit
Date, the Total Utilization of Loan Commitments shall not exceed the Loan
Commitments then in effect;
(iii) no injunction or other restraining order shall have been issued
and no hearing to cause an injunction or other restraining order to be
issued shall be pending or noticed with respect to any action, suit or
proceeding seeking to enjoin or otherwise prevent the consummation of, or
to recover any damages or obtain relief as a result of, the making any
Credit Extension;
(iv) as of such Credit Date, the representations and warranties
contained herein and in the other Credit Documents shall be true, correct
and complete in all material respects on and as of that Credit Date to the
same extent as though made on and as of that date, except to the extent
such representations and warranties specifically relate to an earlier date,
in which case such representations and warranties shall have been true,
correct and complete in all material respects on and as of such earlier
date; and
(v) as of such Credit Date, no event shall have occurred and be
continuing or would result from the consummation of the applicable Credit
Extension that would constitute an Event of Default or a Default.
(b) Each Funding Notice shall be executed by the chief executive officer or
the chief financial officer of each Borrower or by the executive officer thereof
designated by the chief executive officer and the chief financial officer of
each Borrower in a writing delivered to Administrative Agent. In lieu of
delivering a Funding Notice, Borrowers may give Administrative Agent telephonic
notice by the required time of any proposed borrowing; provided each such notice
shall be promptly confirmed in writing by delivery of the Funding Notice to
Administrative Agent on or before the applicable date of borrowing. Neither
Administrative Agent nor any Lender shall incur any liability to Borrowers in
acting upon any telephonic notice referred to above that Administrative Agent
believes in good faith to have been given by a duly authorized officer or other
person authorized on behalf of Borrowers or for otherwise acting in good faith.
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SECTION 4. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Agreement and to make each
Credit Extension to be made thereby, each Credit Party represents and warrants
to each Lender, on the Closing Date and on each Credit Date, that the following
statements are true, correct and complete:
4.1. Organization; Powers; Qualification. Each of Holdings and its
Subsidiaries (a) is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization as identified in Schedule 4.1, (b)
has all requisite power and authority to own and operate its properties, to
carry on its business as now conducted and as proposed to be conducted, to enter
into the Credit Documents to which it is a party and to carry out the
transactions contemplated thereby, and (c) is qualified to do business and in
good standing in every jurisdiction where its assets are located and wherever
necessary to carry out its business and operations, except in jurisdictions
where the failure to be so qualified or in good standing has not had, and could
not be reasonably expected to have, a Material Adverse Effect. Schedule 4.1
correctly sets forth the ownership interest of Holdings and each of its
Subsidiaries in their respective Subsidiaries.
4.2. Authorization of Credit Documents; No Conflict. The execution,
delivery and performance of the Credit Documents have been duly authorized by
all necessary action on the part of each Credit Party that is a party thereto.
The execution, delivery and performance by Credit Parties of the Credit
Documents to which they are parties and the consummation of the transactions
contemplated by the Credit Documents do not and will not (a) violate any
provision of any law or any governmental rule or regulation applicable to
Holdings or any of its Subsidiaries, any of the Organizational Documents of
Holdings or any of its Subsidiaries, or any order, judgment or decree of any
court or other agency of government binding on Holdings or any of its
Subsidiaries; (b) conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any Contractual Obligation of
Holdings or any of its Subsidiaries; (c) result in or require the creation or
imposition of any Lien upon any of the properties or assets of Holdings or any
of its Subsidiaries (other than any Liens created under any of the Credit
Documents in favor of Administrative Agent on behalf of Lenders); or (d) require
any approval of stockholders or any approval or consent of any Person under any
Contractual Obligation of Holdings or any of its Subsidiaries.
4.3. Governmental Consents. The execution, delivery and performance by
Credit Parties of the Credit Documents to which they are parties and the
consummation of the transactions contemplated by the Credit Documents do not and
will not require any registration with, consent or approval of, or notice to, or
other action to, with or by, any Governmental Authority, except for filings and
recordings with respect to the Collateral to be made, or otherwise delivered to
Administrative Agent, as of the Closing Date.
4.4. Binding Obligation. Each Credit Document has been duly executed and
delivered by each Credit Party that is a party thereto and is the legally valid
and binding obligation of such Credit Party, enforceable against such Credit
Party in accordance with its respective terms, except as may
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be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or limiting creditors' rights generally or by equitable principles
relating to enforceability.
4.5. Historical Financial Statements; Projections. The Historical
Financial Statements were prepared in conformity with GAAP and fairly present,
in all material respects, the financial position, on a consolidated basis, of
the Persons described in such financial statements as at the respective dates
thereof and the results of operations and cash flows, on a consolidated basis,
of the entities described therein for each of the periods then ended, subject,
in the case of any such unaudited financial statements, to changes resulting
from audit and normal year-end adjustments. Neither Holdings nor any of its
Subsidiaries has any contingent liability or liability for taxes, long-term
lease or unusual forward or long-term commitment that is not reflected in the
Historical Financial Statements or the notes thereto and which in any such case
is material in relation to the business, operations, properties, assets,
condition (financial or otherwise) or prospects of Holdings and its Subsidiaries
taken as a whole. On and as of the Closing Date, the financial projections of
Holdings and its Subsidiaries for the period commencing Fiscal Year 1999 through
and including Fiscal Year 2002 (the "Projections"), including, without
limitation, the Projections for each Fiscal Quarter through December 31, 2000,
are based on good faith estimates and assumptions made by the management of
Holdings; provided, the Projections are not to be viewed as facts and that
actual results during the period or periods covered by the Projections may
differ from such Projections and that the differences may be material; provided
further, as of the Closing Date, management of Holdings believed that the
Projections were reasonable and attainable.
4.6. No Material Adverse Change; No Restricted Junior Payments. Since
December 31, 1998, no event or change has occurred that has caused or evidences,
either in any case or in the aggregate, a Material Adverse Effect, and neither
Holdings nor any of its Subsidiaries has directly or indirectly declared,
ordered, paid or made, or set apart any sum or property for, any Restricted
Junior Payment or agreed to do so except as permitted pursuant to Section 6.4.
4.7. Adverse Proceedings, Etc. There are no Adverse Proceedings,
individually or in the aggregate, that could reasonably be expected to have a
Material Adverse Effect. Neither Holdings nor any of its Subsidiaries (a) is in
violation of any applicable laws (including Environmental Laws) that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect, or (b) is subject to or in default with respect to any
final judgments, writs, injunctions, decrees, rules or regulations of any court
or any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
4.8. Payment of Taxes. Except as otherwise permitted under Section 5.3,
all material tax returns and reports of Holdings and its Subsidiaries required
to be filed by any of them have been timely filed, and all taxes shown on such
tax returns to be due and payable and all material assessments, fees and other
governmental charges upon Holdings and its Subsidiaries and upon their
respective properties, assets, income, businesses and franchises which are due
and payable have been paid when due and payable. As of the Closing Date and
each Credit Date, Holdings knows of no proposed tax assessment against Holdings
or any of its Subsidiaries which is not being actively contested by Holdings or
such Subsidiary in good faith and by appropriate proceedings; provided,
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such reserves or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made or provided therefor.
4.9. Title to Properties. Holdings and its Subsidiaries have (a) good,
sufficient and legal title to (in the case of fee interests in real property),
(b) valid leasehold interests in (in the case of leasehold interests in real or
personal property), or (c) good title to (in the case of all other personal
property), all of their respective properties and assets reflected in the
Historical Financial Statements and in the most recent financial statements
delivered pursuant to Section 5.1, in each case except for assets disposed of
since the date of such financial statements in the ordinary course of business
or as otherwise permitted under Section 6.7. Except as permitted by this
Agreement, all such properties and assets are free and clear of Liens.
4.10. Collateral. (a) The execution and delivery of the Collateral
Documents by Credit Parties, together with the actions taken on or prior to the
date hereof pursuant to Section 3.1(g) (and filings contemplated to occur
thereafter), are effective to create in favor of Administrative Agent for the
benefit of Lenders, as security for the respective Secured Obligations (as
defined in the Pledge and Security Agreement), a valid and perfected First
Priority Lien on all of the Collateral, and all filings and other actions
necessary or desirable to perfect and maintain the perfection and First Priority
status of such Liens have been duly made or taken and remain in full force and
effect, other than the filing of any UCC financing statements delivered to
Administrative Agent for filing (but not yet filed), the periodic filing of UCC
continuation statements in respect of UCC financing statements filed by or on
behalf of Administrative Agent and filings otherwise required to be made in any
state with respect to Inventory (as defined in the Pledge and Security
Agreement) the aggregate value of which does not exceed $100,000 in such state.
(b) No authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required for
either (i) the pledge or grant by any Credit Party of the Liens purported to be
created in favor of Administrative Agent pursuant to any of the Collateral
Documents or (ii) the exercise by Administrative Agent of any rights or remedies
in respect of any Collateral (whether specifically granted or created pursuant
to any of the Collateral Documents or created or provided for by applicable
law), except for filings or recordings contemplated by Section 3.1(g) and except
as may be required, in connection with the disposition of any Investment
Property, by laws generally affecting the offering and sale of securities.
(c) Except with respect to any Permitted Lien and such as may have been
filed in favor of Administrative Agent as contemplated by Section 3.1(g), no
effective UCC financing statement, fixture filing or other instrument similar in
effect covering all or any part of the Collateral is on file in any filing or
recording office.
(d) All information supplied to Administrative Agent by or on behalf of any
Credit Party with respect to any of the Collateral (in each case taken as a
whole with respect to any particular Collateral) is accurate and complete in all
material respects.
4.11. Environmental. No Credit Party nor any of its Subsidiaries nor any
of their respective Facilities or operations are subject to any outstanding
written order, consent decree or settlement
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agreement with any Person relating to any Environmental Law, any Environmental
Claim, or any Hazardous Materials Activity that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect. As of
the Closing Date and each Credit Date, no Credit Party nor any of its
Subsidiaries has received any letter or written request from any Governmental
Authority for information under Section 104 of the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. (S) 9604) or any comparable
state law. There are and, to each Credit Party's knowledge, have been no
conditions, occurrences, or Hazardous Materials Activities which could
reasonably be expected to form the basis of an Environmental Claim against
Holdings or any of its Subsidiaries that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect. Holdings nor any
of its Subsidiaries nor, to any Credit Party's knowledge, any predecessor of
Holdings or any of its Subsidiaries has filed any notice under any Environmental
Law indicating past or present treatment of Hazardous Materials at any facility,
and none of Holdings's or any of its Subsidiaries' operations involves the
generation, transportation, treatment, storage or disposal of hazardous waste,
as defined under 40 C.F.R. Parts 260-270 or any state equivalent except for
ordinary business activities that could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect. Compliance with all
current or reasonably foreseeable future requirements pursuant to or under
Environmental Laws could not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. No event or condition has occurred or
is occurring with respect to Holdings or any of its Subsidiaries relating to any
Environmental Law, any Release of Hazardous Materials, or any Hazardous
Materials Activity which individually or in the aggregate has had, or could
reasonably be expected to have, a Material Adverse Effect.
4.12. No Defaults. No Credit Party is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any of its Contractual Obligations, and no condition exists that,
with the giving of notice or the lapse of time or both, would constitute such a
default, except where the consequences, direct or indirect, of such default or
defaults, if any, could not reasonably be expected to have a Material Adverse
Effect.
4.13. Governmental Regulation. Neither Holdings nor any of its
Subsidiaries is subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or
under any other federal or state statute or regulation which may limit its
ability to incur Indebtedness or which may otherwise render all or any portion
of the Obligations unenforceable.
4.14. Margin Stock. Neither Holdings nor any of its Subsidiaries is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any Margin Stock. The
pledge of the Investment Property pursuant the Pledge and Security Agreement
does not violate Regulation T, U or X of the Board of Governors of the Federal
Reserve System.
4.15. Employee Matters. There is no strike or work stoppage in existence
or threatened involving Holdings or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect.
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4.16. Employee Benefit Plans. Holdings, each of its Subsidiaries and each
of their respective ERISA Affiliates are in compliance in all material respects
with all applicable provisions and requirements of ERISA and the regulations and
published interpretations thereunder with respect to each Pension Plan, and have
performed all their obligations under each Employee Benefit Plan. Each Pension
Plan which is intended to qualify under Section 401(a) of the Internal Revenue
Code is so qualified. No ERISA Event with respect to any Pension Plan has
occurred or is reasonably expected to occur. As of the most recent valuation
date for any Pension Plan, the amount of unfunded benefit liabilities (as
defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for
all Pension Plans (excluding for purposes of such computation any Pension Plans
with respect to which assets exceed benefit liabilities), does not exceed
$500,000. As of the most recent valuation date for each Multiemployer Plan for
which the actuarial report is available, the potential liability of Holdings,
its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal
from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when
aggregated with such potential liability for a complete withdrawal from all
Multiemployer Plans, based on information available pursuant to Section 4221(e)
of ERISA, does not exceed $500,000.
4.17. Certain Fees. No broker's or finder's fee or commission will be
payable by Holdings or any of its Subsidiaries with respect hereto or any of the
transactions contemplated hereby.
4.18. Solvency. Each Credit Party is and, upon the incurrence of any
Obligation by such Credit Party on any date on which this representation and
warranty is made, will be, Solvent.
4.19. Related Agreements. Holdings and Borrowers have delivered to
Administrative Agent complete and correct copies of each of the Related
Agreements.
4.20. Year 2000 Issues. Holdings and its Subsidiaries have (a) engaged in a
process of assessment of the existence of the Year 2000 Issues reasonably
appropriate to the scope and complexity of their respective Systems; (b) adopted
and are successfully implementing a plan of correction ("Plan of Correction") by
September 30, 1999, which Holdings reasonably believes will result in a
substantial elimination of Year 2000 Issues before any processing failure of a
System or of Systems due to Year 2000 Issues that could reasonably be expected
to have a Material Adverse Effect; (c) adopted and are successfully implementing
validation procedures reasonably calculated to test on an ongoing basis the
sufficiency of the Plan of Correction, its implementation, and the correction of
Year 2000 Issues in any System; (d) adopted and are successfully implementing
policies and procedures requiring regular reports to, and monitoring by, senior
management of Holdings concerning the foregoing matters; and (e) provided
Administrative Agent true and correct copies of the written Plan of Correction,
and related implementation budgets, reviewed and approved by Holdings's Board of
Directors.
4.21. Disclosure. No representation or warranty of any Credit Party
contained in any Credit Document or in any other document, certificate or
written statement furnished to Lenders by or on behalf of Holdings or any of its
Subsidiaries for use in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact (known to Holdings or either Borrower, in the case of any document not
furnished by either of them) necessary in order to make the statements contained
herein or therein (when taken as a whole) not misleading
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in light of the circumstances in which the same were made. Any projections and
pro forma financial information contained in such materials are based upon good
faith estimates and assumptions believed by Holdings to be reasonable at the
time made, it being recognized by Lenders that such projections as to future
events are not to be viewed as facts and that actual results during the period
or periods covered by any such projections may differ from the projected results
and that the differences may be material. There are no facts known to any Credit
Party (other than matters of a general economic nature) that, individually or in
the aggregate, could reasonably be expected to result in a Material Adverse
Effect and that have not been disclosed herein or in such other documents,
certificates and statements furnished to Lenders for use in connection with the
transactions contemplated hereby.
SECTION 5. AFFIRMATIVE COVENANTS
Each Credit Party covenants and agrees that so long as any Loan Commitment
is in effect and until payment in full of all Obligations, each Credit Party
shall perform, and shall cause each of its Subsidiaries to perform, all
covenants in this Section 5.
5.1. Financial Statements and Other Reports. Holdings will deliver to
Administrative Agent and Lenders:
(a) as soon as available and in any event within forty five (45) days after
the end of each of the first three Fiscal Quarters of each Fiscal Year, the
consolidated balance sheet of Holdings and its Subsidiaries as at the end of
such Fiscal Quarter and the related consolidated statements of income,
stockholders' equity and cash flows of Holdings and its Subsidiaries for such
Fiscal Quarter and for the period from the beginning of the then current Fiscal
Year to the end of such Fiscal Quarter, setting forth in each case in
comparative form the corresponding figures for the corresponding periods of the
previous Fiscal Year, all in reasonable detail, together with a Financial
Officer Certification and a Narrative Report with respect thereto;
(b) as soon as available and in any event within ninety (90) days after the
end of each Fiscal Year, (i) the consolidated balance sheet of Holdings and its
Subsidiaries as at the end of such Fiscal Year and the related consolidated
statements of income, stockholders' equity and cash flows of Holdings and its
Subsidiaries for such Fiscal Year, setting forth in each case in comparative
form the corresponding figures for the previous Fiscal Year, in reasonable
detail, together with a Financial Officer Certification and a Narrative Report
with respect thereto; and (ii) in the case of such financial statements, a
report thereon of PriceWaterhouseCoopers, LLP or other independent certified
public accountants of recognized national standing selected by Holdings and in
form and substance satisfactory to Administrative Agent, which report shall be
unqualified as to the scope or breadth of audit, shall express no doubts about
the ability of Holdings to continue as a going concern, and shall state that
such consolidated financial statements fairly present, in all material respects,
the financial position of Holdings and its Subsidiaries as at the dates
indicated and the results of their operations and their cash flows for the
periods indicated in conformity with GAAP applied on a basis consistent with
prior years (except as otherwise disclosed in such financial statements) and
that the examination by such accountants in connection with such consolidated
financial statements has been made in
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accordance with generally accepted auditing standards; and (iii) a written
statement by such independent certified public accountants stating (1) that
their audit examination has included a review of the terms of this Agreement and
other Credit Documents to which any Credit Party is a party, (2) whether, in
connection therewith, any condition or event that constitutes a Default or an
Event of Default has come to their attention and, if such a condition or event
has come to their attention, specifying the nature and period of existence
thereof, and (3) that nothing has come to their attention that causes them to
believe that the information contained in any Compliance Certificate is not
correct or that the matters set forth in such Compliance Certificate are not
stated in accordance with the terms hereof; provided, that such accountants
shall not be liable by reason of any failure to obtain knowledge of any such
Event of Default or of Default that would not be disclosed in the course of
their audit examination conducted in accordance with generally accepted auditing
standards;
(c) (i) together with each delivery of financial statements of Holdings
and its Subsidiaries pursuant to Sections 5.1(a) and 5.1(b), a duly executed and
completed Compliance Certificate, and (ii) as long as any Loan is outstanding,
no later than the tenth Business Day of each month, a Financial Officer
Certification evidencing compliance with the Qualifying Receivables Ratio
requirements of Section 6.6(e) as of the last day of the month most recently
ended and certifying whether any condition or event that constitutes a Default
or Event of Default exists and, if any such condition or event exists,
specifying the nature and period of existence thereof;
(d) if, as a result of any change in accounting principles and
policies from those used in the preparation of the Historical Financial
Statements, the consolidated financial statements of Holdings and its
Subsidiaries delivered pursuant to Section 5.1(a) or 5.1(b) will differ in any
material respect from the consolidated financial statements that would have been
delivered pursuant to such subdivisions had no such change in accounting
principles and policies been made and such difference will affect calculations
under Section 6.6 of this Agreement, then together with the first delivery of
such financial statements after such change one or more a statements of
reconciliation for all such prior covenant calculations in form and substance
satisfactory to Administrative Agent;
(e) promptly upon their becoming available, copies of (i) all
financial statements, reports, notices and proxy statements sent or made
available generally by Holdings to its security holders acting in such capacity
or by any Subsidiary of Holdings to its security holders other than Holdings or
another Subsidiary of Holdings, (ii) all regular and periodic reports and all
registration statements (other than on Form S-8 or a similar form) and
prospectuses, if any, filed by Holdings or any of its Subsidiaries with any
securities exchange or with the Securities and Exchange Commission or any
governmental or private regulatory authority, and (iii) all press releases and
other statements made available generally by Holdings or any of its Subsidiaries
to the public concerning material developments in the business of Holdings or
any of its Subsidiaries;
(f) promptly upon any Authorized Officer of Holdings or either
Borrower obtaining knowledge (i) of any condition or event that constitutes a
Default or an Event of Default or that notice has been given to Holdings or
either Borrower with respect thereto; (ii) that any Person has given any notice
to Holdings or any of its Subsidiaries or taken any other action with respect to
any event or condition set forth in Section 8.1(b); (iii) of any condition or
event of a type required to be
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disclosed in a current report on Form 8-K of the Securities and Exchange
Commission; or (iv) of the occurrence of any event or change that has caused or
evidences, either in any case or in the aggregate, a Material Adverse Effect, a
certificate of its Authorized Officers specifying the nature and period of
existence of such condition, event or change, or specifying the notice given or
action taken by any such Person and the nature of such claimed Event of Default,
Default, default, event or condition, and what action either Borrower has taken,
is taking and proposes to take with respect thereto;
(g) promptly upon any Authorized Officer of Holdings or either Borrower
obtaining knowledge of (i) the institution of, or non-frivolous threat of, any
Adverse Proceeding not previously disclosed in writing by either Borrower to
Lenders, or (ii any material development in any Adverse Proceeding that, in the
case of either (i) or (ii) if adversely determined, could reasonably be expected
to have a Material Adverse Effect, or seeks to enjoin or otherwise prevent the
consummation of, or to recover any damages or obtain relief as a result of, the
transactions contemplated hereby, written notice thereof together with such
other information as may be reasonably available to Holdings or either Borrower
to enable Lenders and their counsel to evaluate such matters;
(h) (i) promptly upon becoming aware of the occurrence of or forthcoming
occurrence of any ERISA Event, a written notice specifying the nature thereof,
what action Holdings, any of its Subsidiaries or any of their respective ERISA
Affiliates has taken, is taking or proposes to take with respect thereto and,
when known, any action taken or threatened by the Internal Revenue Service, the
Department of Labor or the PBGC with respect thereto; and (ii with reasonable
promptness, copies of (1) each Schedule B (Actuarial Information) to the annual
report (Form 5500 Series) filed by Holdings, any of its Subsidiaries or any of
their respective ERISA Affiliates with the Internal Revenue Service with respect
to each Pension Plan; (2) all notices received by Holdings, any of its
Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer
Plan sponsor concerning an ERISA Event; and (3) copies of such other documents
or governmental reports or filings relating to any Employee Benefit Plan as
Administrative Agent shall reasonably request;
(i) as soon as practicable and in any event no later than thirty (30)
days after the beginning of each Fiscal Year, a consolidated plan and financial
forecast (a "Financial Plan") for such Fiscal Year and each succeeding Fiscal
Year through Fiscal Year 2002 including (i) a forecasted consolidated balance
sheet and forecasted consolidated statements of income and cash flows of
Holdings and its Subsidiaries for each such Fiscal Year, together with pro forma
Compliance Certificates for each such Fiscal Year and an explanation of the
assumptions on which such forecasts are based and (ii) forecasted consolidated
statements of income and cash flows of Holdings and its Subsidiaries for each
month of such immediately succeeding Fiscal Year, together with an explanation
of the assumptions on which such forecasts are based;
(j) promptly after the implementation thereof, any material change in the
property insurance coverage of any Credit Party; and
(k) with reasonable promptness, such other information and data with
respect to Holdings or any of its Subsidiaries as from time to time may be
reasonably requested by any Lender.
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5.2. Existence. Except as otherwise permitted under Section 6.7, each
Credit Party will, and will cause each of its Subsidiaries to, at all times
preserve and keep in full force and effect its existence and all rights and
franchises material to its business; provided, no Credit Party nor any of its
Subsidiaries shall be required to preserve any such existence, right or
franchise if such Person's Board of Directors (or similar governing body) shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of such Person, and that the loss thereof is not disadvantageous in
any material respect to such Person or Lenders.
5.3. Payment of Taxes and Claims. Each Credit Party will, and will cause
each of its Subsidiaries to, pay all taxes, assessments and other governmental
charges imposed upon it or any of its properties or assets or in respect of any
of its income, businesses or franchises before any penalty accrues thereon, and
all claims (including claims for labor, services, materials and supplies) for
sums that have become due and payable and that by law have or may become a Lien
upon any of its properties or assets, prior to the time when any penalty or fine
shall be incurred with respect thereto; provided, no such charge or claim need
be paid if it is being contested in good faith by appropriate proceedings, so
long as (a) such reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor, and (b) in the
case of a charge or claim which has or may become a Lien against any of the
Collateral, such contest proceedings conclusively operate to stay the sale of
any portion of the Collateral to satisfy such charge or claim. Holdings will
not, nor will it permit any of its Subsidiaries to, file or consent to the
filing of any consolidated income tax return with any Person (other than
Holdings or any of its Subsidiaries).
5.4. Maintenance of Properties. Each Credit Party will, and will cause
each of its Subsidiaries to, maintain or cause to be maintained in good repair,
working order and condition, ordinary wear and tear excepted, all material
properties used or useful in the business of Holdings and its Subsidiaries and
from time to time will make or cause to be made all appropriate repairs,
renewals and replacements thereof.
5.5. Insurance. Each Credit Party will maintain or cause to be
maintained, with financially sound and reputable insurers, such commercial
general liability insurance, business interruption insurance and property
insurance with respect to liabilities, losses or damage in respect of the
assets, properties and businesses of such Credit Party as may customarily be
carried or maintained under similar circumstances by Persons of established
reputation engaged in similar businesses, in each case in such amounts (giving
effect to self-insurance), with such deductibles, covering such risks and
otherwise on such terms and conditions as shall be customary for such Persons.
Without limiting the generality of the foregoing, each Credit Party will
maintain or cause to be maintained replacement value property insurance on the
Collateral under such policies of insurance, with such insurance companies, in
such amounts, with such deductibles, and covering such risks as are at all times
carried or maintained under similar circumstances by Persons of established
reputation engaged in similar businesses. Each such policy of insurance with
respect to Collateral shall (i) name Administrative Agent for the benefit of
Lenders as an additional insured thereunder as its interests may appear and (ii)
in the case of each property insurance policy, contain a loss payable clause or
endorsement, satisfactory in form and substance to Administrative Agent, that
names Administrative Agent for the benefit of Lenders as the loss payee
thereunder with respect to such Collateral (subject to the interests if any, of
Deutsche Financial Services contemplated by Section
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10.5(e)) for any covered loss in excess of $100,000 and provides for at least
ten (10) days prior written notice to Administrative Agent of any modification
or cancellation of such policy.
5.6. Inspections; Audits of Inventory and Accounts; Lenders Meetings. (a)
Each Credit Party will, and will cause each of its Subsidiaries to, permit any
authorized representatives designated by any Lender to visit and inspect any of
the properties of Holdings or of any of its Subsidiaries, to inspect, copy and
take extracts from its and their financial and accounting records, and to
discuss its and their affairs, finances and accounts with its and their officers
and independent public accountants, all upon reasonable notice and at such
reasonable times during normal business hours and as often as may reasonably be
requested.
(b) Each Borrower shall permit any authorized representatives designated
by Administrative Agent to conduct audits or reviews of its books and records
with respect to inventory and Accounts periodically after the Closing Date (and
at any time an Event of Default has occurred and is continuing) each such audit
or review to be in scope and substance reasonably satisfactory to Administrative
Agent, all upon reasonable notice and at such reasonable times during normal
business hours as may reasonably be requested.
(c) Each Credit Party will, upon the request of Administrative Agent or
Requisite Lenders, participate in a meeting of Administrative Agent and Lenders
once during each Fiscal Year to be held at Borrowers' corporate offices (or at
such other location as may be agreed to by Borrowers and Administrative Agent)
at such time as may be agreed to by Borrowers and Administrative Agent.
5.7. Compliance with Laws. Each Credit Party will comply, and shall cause
each of its Subsidiaries and all other Persons, if any, on or occupying any
Facilities to comply, with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority (including all
Environmental Laws), noncompliance with which could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect.
5.8. Subsidiaries. In the event that any Person becomes a Subsidiary of
Holdings after the Closing Date, Holdings shall (i) promptly cause such
Subsidiary to become a Guarantor hereunder and a Grantor under the Pledge and
Security Agreement by executing and delivering to Administrative Agent a
Counterpart Agreement, and (ii) take all such actions and execute and deliver,
or cause to be executed and delivered, all such documents, instruments,
agreements, and certificates similar to those described in Sections 3.1(b) and
3.1(g). With respect to each such Subsidiary, Holdings shall promptly send to
Administrative Agent written notice setting forth with respect to such Person
(i) the date on which such Person became a Subsidiary of Holdings, and (ii) all
of the data required to be set forth in Schedule 4.1 with respect to all
Subsidiaries of Holdings; provided, such written notice shall be deemed to
supplement Schedule 4.1 for all purposes hereof.
5.9. Year 2000 Issues. Holdings shall periodically report to
Administrative Agent, at such time and in such form as Administrative Agent may
reasonably request, and Administrative Agent shall promptly forward each such
report to each Lender, on the progress of Holdings and its Subsidiaries in
implementing the Plan of Correction; the budget for, and actual financial
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performance with respect to, implementation of the Plan of Correction; the
assessment of Holdings, of the adequacy of the Plan of Correction or the related
implementation budget; the implementation of the Plan of Correction, and the
conformity of actual performance with related implementation budgets.
5.10. Cash Management Arrangements. On and after the earlier to occur of
(y) an Event of Default and (z) the request of the Administrative Agent, such
request not to be made prior to April 1, 2000 (or such earlier date on or after
September 1, 1999, if at any time after September 1, 1999, the Qualifying
Receivables Ratio is less than 1.4:1.0), Borrowers will establish and maintain
cash management arrangements reasonably acceptable to Administrative Agent for
the purpose of monitoring and establishing security interest in favor of
Administrative Agent for the benefit of Lenders in the proceeds of Accounts.
SECTION 6. NEGATIVE COVENANTS
Each Credit Party covenants and agrees that, so long as any Loan Commitment
is in effect and until payment in full of all Obligations, such Credit Party
shall perform, and shall cause each of its Subsidiaries to perform, all
covenants in this Section 6.
6.1. Indebtedness. No Credit Party shall, nor shall it permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or
otherwise become or remain directly or indirectly liable with respect to any
Indebtedness, except:
(a) the Obligations;
(b) Indebtedness of any Guarantor Subsidiary to either Borrower or to any
other Guarantor Subsidiary, or of either Borrower to any Guarantor Subsidiary,
or of Holdings to either Borrower, or of either Borrower to Holdings; provided,
--------
(i) all such Indebtedness shall be evidenced by promissory notes and all such
notes shall be subject to First Priority Lien pursuant to the Pledge and
Security Agreement, (ii) all such Indebtedness owed by either Borrower to
Holdings or any of its Guarantor Subsidiaries shall be subordinated in right of
payment to the payment in full of the Obligations pursuant to the terms of the
applicable promissory notes, (iii) any payment by any such Guarantor Subsidiary
under any guaranty of the Obligations shall result in a pro tanto reduction of
the amount of any Indebtedness owed by such Guarantor Subsidiary to such
Borrower or to any of its Guarantor Subsidiaries for whose benefit such payment
is made, and (iv) any Indebtedness of Holdings to either Borrower shall only be
incurred in lieu of Restricted Junior Payments otherwise permitted to be made by
a Borrower to Holdings;
(c) Indebtedness incurred by Holdings, either Borrower or any of their
respective Subsidiaries arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guaranties or
letters of credit, surety bonds or performance bonds securing the performance of
either Borrower or any such Subsidiary pursuant to such agreements, in
connection with acquisitions or dispositions of any business, assets or any
Subsidiary of either Borrower or any of its Subsidiaries;
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<PAGE>
(d) Indebtedness which may be deemed to exist pursuant to any guaranties,
performance bonds, surety bonds, statutory, appeal or similar obligations
obtained in the ordinary course of business;
(e) Guaranties by Holdings of Indebtedness permitted to be incurred
hereunder by any of its Subsidiaries;
(f) Indebtedness in respect of netting services, overdraft protections and
otherwise in connection with deposit accounts;
(g) guaranties in the ordinary course of business of the obligations of
suppliers, customers, franchisees and licensees of either Borrower and its
Subsidiaries;
(h) Indebtedness under the Senior Notes and the other Related Agreements
and other Indebtedness outstanding on the Closing Date and described in Schedule
6.1;
(i) Indebtedness constituting the nonrecourse sales of lease receivables at
a discount where the purchaser has recourse only to the lease receivables;
(j) purchase money Indebtedness (including, without limitation,
Indebtedness incurred for the purchase of inventory pursuant to an inventory
flooring plan and Indebtedness incurred in connection with the installation and
the integration of inventory and equipment) (such Indebtedness meeting the
requirements of this Section 6.1(j) being referred to herein as "Purchase Money
Indebtedness") or Capital Leases the proceeds of which are used to acquire
equipment or other assets to be sold or leased to a Borrower's customers or
retained for the Borrower's own use, provided, any such Indebtedness (i) shall
be secured only by the assets acquired in connection with the incurrence of such
Purchase Money Indebtedness, and (ii) shall constitute not less than 80% nor
more than 100% (except, with respect to amounts in excess of 100%, Purchase
Money Indebtedness the proceeds of which are used in connection with the
installation or integration of equipment or equipment) of the aggregate
consideration paid with respect to such asset, including, without limitation,
leases of equipment or inventory that are the subject of ENS Service Agreements;
(k) Indebtedness incurred by Holdings; provided that the weighted average
life to maturity of such Indebtedness is no earlier than the Senior Notes and
the other terms and provisions of such Indebtedness (without consideration of
provisions for original issue discount or payment in kind interest) are no less
favorable (when taken as a whole) to any Credit Party or the Lenders than the
terms and provisions of the Senior Notes;
(l) Acquired Indebtedness;
(m) Indebtedness of any Credit Party to the extent it represents a
replacement, renewal, refinancing or extension of outstanding Indebtedness of
the Credit Party incurred or outstanding pursuant to clause (k) or (i); provided
that (i) the amount of such Indebtedness at the time of such replacement,
renewal, refinancing or extension is not increased, (ii) the weighted average
life to maturity of such Indebtedness is no earlier than the Indebtedness being
refinanced and (iii) the other terms and provisions of such replacement,
renewal, refinancing of extension are no less favorable
50
<PAGE>
(when taken as a whole) to any Credit Party or the Lenders than the terms and
provisions of the Indebtedness replaced, renewed, refinanced or extended; and
(n) other Indebtedness in an aggregate amount not to exceed at any time
$5,000,000.
6.2. Liens. No Credit Party shall, nor shall it permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or permit to
exist any Lien on or with respect to any property or asset of any kind
(including any document or instrument in respect of goods or accounts
receivable) of Holdings or any of its Subsidiaries, whether now owned or
hereafter acquired, or any income or profits therefrom, or file or permit the
filing of, or permit to remain in effect, any financing statement or other
similar notice of any Lien with respect to any such property, asset, income or
profits under the UCC of any State or under any similar recording or notice
statute, except:
(a) Liens in favor of Administrative Agent for the benefit of
Administrative Agent and/or Lenders granted pursuant to any Credit Document;
(b) Liens for taxes, assessments or governmental charges or claims the
payment of which is not, at the time, required thereby or that are being
contested in good faith by appropriate proceedings, so long as such reserves or
other appropriate provisions, if any, as shall be required in conformity with
GAAP shall have been made for such contested amounts;
(c) statutory Liens of landlords, banks (and rights of set-off), of
carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other
Liens imposed by law, in each case incurred in the ordinary course of business
(i) for amounts not yet overdue or (ii for amounts that are overdue and that (in
the case of any such amounts overdue for a period in excess of five days) are
being contested in good faith by appropriate proceedings, so long as such
reserves or other appropriate provisions, if any, as shall be required by GAAP
shall have been made for any such contested amounts;
(d) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security, or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, trade contracts,
performance and return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money), so long as no foreclosure,
sale or similar proceedings have been commenced with respect to any portion of
the Collateral on account thereof;
(e) easements, rights-of-way, restrictions, encroachments, and other minor
defects or irregularities in title, in each case which do not and will not
interfere in any material respect with the ordinary conduct of the business of
either Borrower or any of its Subsidiaries;
(f) any interest or title of a lessor or sublessor under any lease
permitted hereunder;
(g) Liens incurred in connection with the purchase or shipping of goods or
assets on the related assets and proceeds thereof in favor of the seller or
shipper of such goods or assets;
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(h) Liens arising from filing precautionary UCC financing statements
relating solely to operating leases entered into the ordinary course of
business;
(i) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the importation of
goods;
(j) any zoning or similar law or right reserved to or vested in any
governmental office or agency to control or regulate the use of any real
property;
(k) licenses of patents, trademarks and other intellectual property rights
granted by either Borrower or any of its Subsidiaries in the ordinary course of
business and not interfering in any respect with the ordinary conduct of the
business of either Borrower or such Subsidiary;
(l) judgment liens not constituting an Event of Default pursuant to Section
8.1(h);
(m) Liens securing Indebtedness permitted pursuant to Section 6.1(h);
provided, however, that any such Lien shall encumber only the lease receivable
and the equipment subject to the underlying lease;
(n) Liens securing Indebtedness permitted pursuant to 6.1(i) and permitted
refinancings thereof; provided, any such Lien shall encumber only the asset
acquired with the proceeds of such Indebtedness;
(o) Liens created pursuant to the Senior Note Indenture and in effect on
the Closing Date;
(p) Liens securing Indebtedness outstanding under the Related Agreements;
provided that such Liens shall only extend to assets described in and shall be
- --------
subject to the terms of, the Related Agreements as in effect on the Closing
Date; and
(q) Liens securing Acquired Indebtedness as described in the definition of
Acquired Indebtedness;
(r) Liens existing on the date hereof described on Schedule 6.2;
(s) Liens on any property or assets of a Subsidiary in favor of a Borrower
or any Subsidiary Guarantor; and
(t) other Liens securing Indebtedness (other than Indebtedness for borrowed
money) in an aggregate amount not to exceed $500,000 at any time outstanding.
6.3. Equitable Lien; No Further Negative Pledges. If any Credit Party or
any of its Subsidiaries shall create or assume any Lien upon any of its
properties or assets, whether now owned or hereafter acquired, other than
Permitted Liens, it shall make or cause to be made effective provision whereby
the Obligations will be secured by such Lien equally and ratably with any and
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<PAGE>
all other Indebtedness secured thereby as long as any such Indebtedness shall be
so secured; provided, notwithstanding the foregoing, this covenant shall not be
construed as a consent by Requisite Lenders to the creation or assumption of any
such Lien not otherwise permitted hereby. Except with respect to (a) specific
property encumbered to secure payment of particular Indebtedness or to be sold
pursuant to an executed agreement with respect to an Asset Sale, (b) any
prohibition applicable to a Subsidiary at the time that it becomes a Subsidiary
that is not created in contemplation hereof, (c) any prohibition contained in
the Senior Note Indenture or any agreement or indenture evidencing Indebtedness
described in Section 6.1(j), (d) any other prohibition existing on the date
hereof described in Schedule 6.3 and (e) any prohibition existing under any
agreement or indenture that refinances or replaces an agreement or indenture
permitted by clause (b), (c) or (d) above; provided that the terms and
conditions of such prohibitions are not materially less favorable to the Lenders
than those under or pursuant to the agreement or indenture being replaced or the
agreement or indenture evidencing the Indebtedness refinanced no Credit Party
nor any of its Subsidiaries shall enter into any agreement prohibiting the
creation or assumption of any Lien upon any of its properties or assets, whether
now owned or hereafter acquired.
6.4. Restricted Payments; Restrictions on Subsidiary Distributions. (a) No
Credit Party shall nor shall it permit any of its Subsidiaries to, directly or
indirectly, declare, order, pay, make or set apart any sum for any Restricted
Junior Payment except the following:
(i) Holdings may make required (but not optional) payments of
principal and interest in respect of, and required repurchases of, any
Senior Notes and other Indebtedness incurred by Holdings pursuant to
Section 6.1(j) in accordance with the terms of, and only to the extent
required by, and subject to the subordination provisions, if any, contained
in, the indenture or other agreement pursuant to which such Indebtedness
was issued;
(ii) so long as no Default or Event of Default shall have occurred
and be continuing or shall be caused thereby, Borrowers may make Restricted
Junior Payments to Holdings (1) in an aggregate amount not to exceed
$2,000,000 in any Fiscal Year, to the extent necessary to permit Holdings
to pay general administrative costs and expenses, (2) to the extent
necessary to permit Holdings to discharge the consolidated tax liabilities
of Holdings and its Subsidiaries, and (3) to the extent necessary to permit
Holdings to discharge the obligations under clause (i) above, in each case
so long as Holdings applies the amount of any such Restricted Junior
Payment for such purpose.
(b) Notwithstanding paragraph (a) above, the Holdings and Borrowers may
take the following actions so long as no Default or Event of Default shall have
occurred and be continuing and to the extent otherwise permitted under the term
of the Senior Notes Indenture:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such dividend would
have complied with the provisions of paragraph (a) above and such payment
will be deemed to have been paid on such date of declaration for purposes
of the calculation required by paragraph (a) above;
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(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of capital stock of Holdings, in exchange for, or out
of the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of capital stock of Holdings;
provided, however, that such capital stock of Holdings may not be
-------- -------
redeemable at the option of the holder or be required to be redeemed prior
to the Loan Maturity Date;
(iii) the payment of cash in lieu of fractional shares of common
stock pursuant to the terms of any options, warrants or other rights to
acquire shares of any class of stock of Holdings;
(iv) payments of amounts required for any repurchase, redemption or
other acquisition or retirement for value of any capital stock of Holdings
or any options or rights to acquire such capital stock of Holdings owned by
any director, officer or employee of Holdings 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 capital stock of Holdings or
options shall not exceed in the aggregate $500,000 in any calendar year;
(v) repurchases of capital stock of Holdings or solely in connection
with cashless exercises of options, warrants and other convertible
securities.
(c) Except as provided herein or in the Senior Notes Indenture, no Credit
Party shall, nor shall it permit any of its Subsidiaries to, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind on the ability of any Credit Party to (i) pay dividends
or make any other distributions on any of such Credit Party's capital stock (ii
repay or prepay any Indebtedness owed by any Credit Party, (ii make loans or
advances to any Credit Party, or (iv transfer any of its property or assets to
any Credit Party except for (A) encumbrances and restrictions with respect to
specific property to secure payment of particular Indebtedness or to be sold
pursuant to an executed agreement with respect to any Asset Sale, (B) any
prohibition applicable to a Subsidiary at the time that it becomes a Subsidiary
that is not created in contemplation hereof, (C) any prohibition contained in
the Senior Note Indenture or any agreement or indenture evidencing Indebtedness
described in Section 6.1(j), (D) any other prohibition existing on the date
hereof described in Schedule 6.4, (E) any prohibition existing under any
agreement or indenture that refinances or replaces an agreement or indenture
permitted by clause (B), (C) or (D) above, provided that the terms and
conditions of such prohibition are not materially less favorable to the Lenders
than those under or pursuant to the agreement or indenture being replaced or the
agreement or indenture evidencing the Indebtedness refinanced, and (F) customary
non-assignment provisions entered into in the ordinary course of business.
6.5. Investments. No Credit Party shall, nor shall it permit any of its
Subsidiaries to, directly or indirectly, make or own any Investment in any
Person, including any Joint Venture, except:
54
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(a) Cash Equivalents;
(b) Investments owned as of the Closing Date in any Subsidiary;
(c) Investments (i) in accounts receivable arising and trade credit
granted in the ordinary course of business and in any Securities received in
satisfaction or partial satisfaction thereof from financially troubled account
debtors and (ii) prepayments and other credits to suppliers made in the ordinary
course of business consistent with the past practices of Holdings and its
Subsidiaries;
(d) intercompany loans to the extent permitted under Section 6.1(b);
(e) Consolidated Capital Expenditures permitted by Section 6.6;
(f) loans to employees of Holdings and its Subsidiaries in an aggregate
principal amount not to exceed $1,000,000 in the aggregate;
(g) Investments made in connection with Permitted Acquisitions;
(h) Investments owned as of the Closing Date and described in
Schedule 6.5;
(i) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and other
similar deposits;
(j) loans or advances to actual or potential customers or suppliers of
Holdings or any of its Subsidiaries that are made in connection with the
purchase of goods and services from Holdings or any of its Subsidiaries in the
ordinary course of business and consistent with practices in the industry of
Holdings;
(k) obligations owed by third parties which were acquired in connection
with a sale of assets sold by Holdings or any of its Subsidiaries permitted by
Section 6.7; provided such obligations in the form of promissory notes or
--------
similar obligations shall not exceed 25% of the aggregate consideration received
by Holdings or any of its Subsidiaries in connection with any such sale of
assets;
(l) Investments received as part of the settlement of litigation or in
satisfaction of extensions of credit to any Person otherwise permitted under
this Agreement pursuant to the reorganization, bankruptcy or liquidation of such
Person or a good faith settlement of debts with such Person;
(m) any Investment not permitted by the foregoing clauses of this Section
6.5 by a Credit Party in a Person in which the Credit Parties own, or
immediately after giving effect to such Investment will own, more than 20% of
such Person's outstanding voting stock (but which Person is not, and will not
be, after giving effect to such investment, a Subsidiary) in an aggregate
principal amount at any one time not to exceed $3,000,000; and
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(n) other Investments in an aggregate amount not to exceed at any time
$250,000.
6.6. Financial Covenants.
(a) Minimum Quarterly Revenue. Holdings shall not permit gross revenues of
-------------------------
Holdings and its Subsidiaries determined for any Fiscal Quarter on a
consolidated basis in accordance with GAAP to be less than the correlative
amount indicated below for such Fiscal Quarter:
Fiscal Quarter Ending Minimum Gross Revenues
-----------------------------------------------
6/30/99 $33,000,000
-----------------------------------------------
9/30/99 $43,000,000
-----------------------------------------------
12/31/99 $57,000,000
-----------------------------------------------
3/31/00 $66,000,000
-----------------------------------------------
6/30/00 $75,000,000
-----------------------------------------------
9/30/00 $85,000,000
-----------------------------------------------
12/31/00 $99,000,000
-----------------------------------------------
(b) EBITDA.
-------
(i) As of the last day of each Fiscal Quarter listed below,
Holdings and its Subsidiaries shall not permit the ratio of (y)
Consolidated Adjusted EBITDA losses to (z) gross revenues determined on a
consolidated basis for Holdings and its Subsidiaries and in accordance with
GAAP for such Fiscal Quarter to exceed the correlative amount indicated:
Fiscal Quarter Ending EBITDA Losses/
Gross Revenue
---------------------------------------
6/30/99 41.0%
---------------------------------------
9/30/99 28.0%
---------------------------------------
12/31/99 18.0%
---------------------------------------
3/31/00 12.0%
---------------------------------------
6/30/00 7.5%
---------------------------------------
9/30/00 5.0%
---------------------------------------
(ii) As of the last day of the Fiscal Quarter listed below,
Holdings and its Subsidiaries shall not permit the ratio (y) Consolidated
Adjusted EBITDA to (z) gross revenues determined on a consolidated basis
and in accordance with GAAP for Holdings and its Subsidiaries for such
Fiscal Quarter to be less than the correlative amount indicated:
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---------------------------------------
Fiscal Quarter Ending EBITDA/
Gross Revenues
---------------------------------------
12/31/00 2.5%
---------------------------------------
(c) Senior Debt Ratio.
-----------------
(i) As of the last day of each Fiscal Quarter listed below,
Holdings and its Subsidiaries shall not permit the Senior Ratio A for
such Fiscal Quarter to be greater than the correlative amount
indicated:
--------------------------------
Fiscal Quarter Senior Debt/
Ending Capitalization
--------------------------------
6/30/99 15.0%
--------------------------------
9/30/99 20.0%
--------------------------------
12/31/99 22.5%
--------------------------------
3/31/00 25.0%
--------------------------------
6/30/00 27.0%
--------------------------------
9/30/00 28.5%
--------------------------------
12/31/00 30.0%
--------------------------------
(ii) As of the last day of the Fiscal Quarter listed below,
Holdings and its Subsidiaries shall not permit the Senior Ratio B for
such Fiscal Quarter to be greater than the correlative amount
indicated:
-------------------------------------
Fiscal Quarter Ending Senior
Debt/
EBITDA
-------------------------------------
3/31/01 5.0:1.0
-------------------------------------
6/30/01 4.0:1.0
-------------------------------------
9/30/01 4.0:1.0
-------------------------------------
12/31/01 3.0:1.0
-------------------------------------
3/31/02 3.0:1.0
-------------------------------------
(d) Maximum Consolidated Capital Expenditures. Holdings shall not,
-----------------------------------------
and shall not permit its Subsidiaries to, make or incur Consolidated Capital
Expenditures in any Fiscal Quarter in an aggregate amount for Holdings and its
Subsidiaries in excess of $2,000,000 during such Fiscal Quarter provided, such
amount for any Fiscal Quarter shall be increased by an amount equal to the
excess, if any, of such amount for the previous Fiscal Quarter (as adjusted in
accordance with this proviso) over the actual amount of Consolidated Capital
Expenditures for such previous Fiscal Quarter; provided further that, after
consummation of an IPO, Holding and its Subsidiaries may make additional
Consolidated Capital Expenditures not in excess of $15,000,000 in the aggregate.
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(e) Qualifying Receivables Ratio. Holdings shall not permit the
----------------------------
Qualifying Receivables Ratio to be less than 1.20:1.00 at any time.
6.7. Fundamental Changes; Disposition of Assets; Acquisitions. No Credit
Party shall, nor shall it permit, any of its Subsidiaries to, enter into any
transaction of merger or consolidation, or liquidate, wind-up or dissolve itself
(or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease
(as lessor or sublessor), transfer or otherwise dispose of, in one transaction
or a series of transactions, all or any part of its business, property or
assets, whether now owned or hereafter acquired, or acquire by purchase or
otherwise (other than purchases or other acquisitions of inventory, materials,
equipment and other property in the ordinary course of business) the business,
property or fixed assets of, or equity securities or other evidence of
beneficial ownership of, any Person or any division or line of business of any
Person, except:
(a) any Subsidiary of either Borrower may be merged with or into such
Borrower or any Guarantor Subsidiary, or be liquidated, wound up or dissolved,
or all or any part of its business, property or assets may be conveyed, sold,
leased, transferred or otherwise disposed of, in one transaction or a series of
transactions, to either Borrower or any Guarantor Subsidiary; provided, in the
case of such a merger, the applicable Borrower or such Guarantor Subsidiary
shall be the continuing or surviving Person;
(b) Investments made in accordance with Section 6.5.
(c) sales of assets which do not constitute Asset Sales;
(d) leases or subleases to other Persons of assets by either Borrower or
any of it Subsidiaries in the ordinary course of business;
(e) licenses to other Persons of Intellectual Property by either Borrower
or any of its Subsidiaries in the ordinary course of business;
(f) Asset Sales, the proceeds of which constitute less than $10,000,000
in the aggregate in any Fiscal Year; and
(g) Permitted Acquisitions.
6.8. Disposal of Subsidiary Interests. Except as required under the
Collateral Documents and except for any sale of 100% of the equity Securities of
any of its Subsidiaries in compliance with the provisions of Section 6.7, no
Credit Party shall or (a) directly or indirectly sell, assign, pledge or
otherwise encumber or dispose of any equity Securities of any of its
Subsidiaries, except to qualify directors if required by applicable law; or (b)
permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or
otherwise encumber or dispose of any equity Securities of any of its
Subsidiaries (including such Subsidiary), except to another Credit Party
(subject to the restrictions on such disposition otherwise imposed herein
under), or to qualify directors if required by applicable law.
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6.9. Transactions with Shareholders and Affiliates. No Credit Party shall,
nor shall it permit any of its Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any holder of 5%
or more of any class of equity Securities of Holdings or any of its Subsidiaries
or with any Affiliate of Holdings or of any such holder, on terms that are less
favorable to Holdings or that Subsidiary, as the case may be, than those that
might be obtained at the time from Persons who are not such a holder or
Affiliate; provided, the foregoing restriction shall not apply to (a) any
transaction between Holdings and any Guarantor Subsidiary or between any of the
Guarantors and any of the Borrowers; (b) reasonable and customary fees and
indemnifications paid to members of the Boards of Directors of Holdings and its
Subsidiaries; or (c) officer and other employee of Holdings and its Subsidiaries
compensation and other customary arrangements entered into in the ordinary
course of business (d) transactions pursuant to agreements and arrangements
existing on the date hereof described in Schedule 6.9, (e) Restricted Junior
Payments paid by a Borrower or Holdings pursuant to Section 6.4 and (f) loans or
advances to officers or employees of any Credit Party for moving, entertainment
and travel expenses, drawing accounts and similar expenditures made in the
ordinary course of business.
6.10. Conduct of Business. From and after the Closing Date, no Credit Party
shall, nor shall it permit any of its Subsidiaries to, engage in any business
other than (a) the businesses engaged in by such Credit Party on the Closing
Date and similar or related businesses and (b) such other lines of business as
may be consented to by Requisite Lenders. Holdings shall own and control,
directly or indirectly, 100% of the capital stock of each of its Subsidiaries.
6.11. Amendments or Waivers of Related Agreements. No Credit Party shall,
nor shall it permit any of its Subsidiaries to, amend or otherwise change the
terms of any Related Agreement, or make any payment not required to be made
under the terms of any Related Agreement, if the effect of such amendment or
payment results in, or could reasonably be expected to result in, a Material
Adverse Effect.
6.12. Fiscal Year. No Credit Party shall, nor shall it permit any of its
subsidiaries to change its Fiscal Year-end from December 31.
SECTION 7. GUARANTY
7.1. Guaranty of the Obligations. Subject to the provisions of Section
7.2, Guarantors jointly and severally hereby irrevocably and unconditionally
guaranty the due and punctual payment in full of all Obligations when the same
shall become due, whether at stated maturity, by required prepayment,
declaration, acceleration, demand or otherwise (including amounts that would
become due but for the operation of the automatic stay under Section 362(a) of
the Bankruptcy Code, 11 U.S.C. (S) 362(a)).
7.2. Contribution by Guarantors. Each Guarantor (other than Holdings)
desires to allocate among themselves (collectively, the "Contributing
Guarantors"), in a fair and equitable manner, their obligations arising under
this Guaranty. Accordingly, in the event any payment or distribution
59
<PAGE>
is made on any date by a Guarantor (other than Holdings) under this Guaranty (a
"Funding Guarantor") that exceeds its Fair Share as of such date, that Funding
Guarantor shall be entitled to a contribution from each of the other
Contributing Guarantors in the amount of such other Contributing Guarantor's
Fair Share Shortfall as of such date, with the result that all such
contributions will cause each Contributing Guarantor's Aggregate Payments to
equal its Fair Share as of such date. "Fair Share" means, with respect to a
Contributing Guarantor as of any date of determination, an amount equal to (a)
the ratio of (i) the Fair Share Contribution Amount with respect to such
Contributing Guarantor to (ii) the aggregate of the Fair Share Contribution
Amounts with respect to all Contributing Guarantors multiplied by (b) the
aggregate amount paid or distributed on or before such date by all Funding
Guarantors under this Guaranty in respect of the obligations guarantied. "Fair
Share Shortfall" means, with respect to a Contributing Guarantor as of any date
of determination, the excess, if any, of the Fair Share of such Contributing
Guarantor over the Aggregate Payments of such Contributing Guarantor. "Fair
Share Contribution Amount" means, with respect to a Contributing Guarantor as of
any date of determination, the maximum aggregate amount of the obligations of
such Contributing Guarantor under this Guaranty that would not render its
obligations hereunder or thereunder subject to avoidance as a fraudulent
transfer or conveyance under Section 548 of Title 11 of the United States Code
or any applicable provisions of comparable state law; provided, solely for
purposes of calculating the "Fair Share Contribution Amount" with respect to any
Contributing Guarantor for purposes of this Section 7.2, any assets or
liabilities of such Contributing Guarantor arising by virtue of any rights to
subrogation, reimbursement or indemnification or any rights to or obligations of
contribution hereunder shall not be considered as assets or liabilities of such
Contributing Guarantor. "Aggregate Payments" means, with respect to a
Contributing Guarantor as of any date of determination, an amount equal to (1)
the aggregate amount of all payments and distributions made on or before such
date by such Contributing Guarantor in respect of this Guaranty (including,
without limitation, in respect of this Section 7.2), minus (2) the aggregate
amount of all payments received on or before such date by such Contributing
Guarantor from the other Contributing Guarantors as contributions under this
Section 7.2. The amounts payable as contributions hereunder shall be determined
as of the date on which the related payment or distribution is made by the
applicable Funding Guarantor. The allocation among Contributing Guarantors of
their obligations as set forth in this Section 7.2 shall not be construed in any
way to limit the liability of any Contributing Guarantor hereunder. Each
Subsidiary Guarantor is a third party beneficiary to the contribution agreement
set forth in this Section 7.2.
7.3. Payment by Guarantors. Subject to Section 7.2, Guarantors hereby
jointly and severally agree, in furtherance of the foregoing and not in
limitation of any other right which any Beneficiary may have at law or in equity
against any Guarantor by virtue hereof, that upon the failure of either Borrower
to pay any of the Obligations when and as the same shall become due, whether at
stated maturity, by required prepayment, declaration, acceleration, demand or
otherwise (including amounts that would become due but for the operation of the
automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)
362(a)), Guarantors will upon demand pay, or cause to be paid, in cash, to
Administrative Agent for the ratable benefit of Beneficiaries, an amount equal
to the sum of the unpaid principal amount of all Obligations then due as
aforesaid, accrued and unpaid interest on such Obligations (including interest
which, but for the filing of a petition in bankruptcy with respect to either
Borrower, would have accrued on such Obligations, whether or not a claim is
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allowed against either Borrower for such interest in the related bankruptcy
proceeding) and all other Obligations then owed to Beneficiaries as aforesaid.
7.4. Liability of Guarantors Absolute. Each Guarantor agrees that its
obligations hereunder are irrevocable, absolute, independent and unconditional
and shall not be affected by any circumstance which constitutes a legal or
equitable discharge of a guarantor or surety other than payment in full of the
Obligations. In furtherance of the foregoing and without limiting the
generality thereof, each Guarantor agrees as follows:
(a) this Guaranty is a guaranty of payment when due and not of
collectibility;
(b) Administrative Agent may enforce this Guaranty upon the occurrence of
an Event of Default notwithstanding the existence of any dispute between either
Borrower and any Beneficiary with respect to the existence of such Event of
Default;
(c) the obligations of each Guarantor hereunder are independent of the
obligations of either Borrower and the obligations of any other guarantor
(including any other Guarantor) of the obligations of either Borrower, and a
separate action or actions may be brought and prosecuted against such Guarantor
whether or not any action is brought against either Borrower or any of such
other guarantors and whether or not either Borrower is joined in any such action
or actions;
(d) payment by any Guarantor of a portion, but not all, of the Obligations
shall in no way limit, affect, modify or abridge any Guarantor's liability for
any portion of the Obligations which has not been paid. Without limiting the
generality of the foregoing, if Administrative Agent is awarded a judgment in
any suit brought to enforce any Guarantor's covenant to pay a portion of the
Obligations, such judgment shall not be deemed to release such Guarantor from
its covenant to pay the portion of the Obligations that is not the subject of
such suit, and such judgment shall not, except to the extent satisfied by such
Guarantor, limit, affect, modify or abridge any other Guarantor's liability
hereunder in respect of the Obligations;
(e) any Beneficiary, upon such terms as it deems appropriate, without
notice or demand and without affecting the validity or enforceability hereof or
giving rise to any reduction, limitation, impairment, discharge or termination
of any Guarantor's liability hereunder, from time to time may (i) renew, extend,
accelerate, increase the rate of interest on, or otherwise change the time,
place, manner or terms of payment of the Obligations; (ii) settle, compromise,
release or discharge, or accept or refuse any offer of performance with respect
to, or substitutions for, the Obligations or any agreement relating thereto
and/or subordinate the payment of the same to the payment of any other
obligations; (iii) request and accept other guaranties of the Obligations and
take and hold security for the payment hereof or the Obligations; (iv) release,
surrender, exchange, substitute, compromise, settle, rescind, waive, alter,
subordinate or modify, with or without consideration, any security for payment
of the Obligations, any other guaranties of the Obligations, or any other
obligation of any Person (including any other Guarantor) with respect to the
Obligations; (v) enforce and apply any security now or hereafter held by or for
the benefit of such Beneficiary in respect hereof or the Obligations and direct
the order or manner of sale thereof, or exercise any other right or remedy that
such Beneficiary may have against any such security, in each case as such
Beneficiary in its
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discretion may determine consistent herewith or the applicable Hedge Agreement
and any applicable security agreement, including foreclosure on any such
security pursuant to one or more judicial or nonjudicial sales, whether or not
every aspect of any such sale is commercially reasonable, and even though such
action operates to impair or extinguish any right of reimbursement or
subrogation or other right or remedy of any Guarantor against either Borrower or
any security for the Obligations; and (vi) exercise any other rights available
to it under the Credit Documents or the Hedge Agreements; and
(f) this Guaranty and the obligations of Guarantors hereunder shall be
valid and enforceable and shall not be subject to any reduction, limitation,
impairment, discharge or termination for any reason (other than payment in full
of the Obligations), including the occurrence of any of the following, whether
or not any Guarantor shall have had notice or knowledge of any of them: (i) any
failure or omission to assert or enforce or agreement or election not to assert
or enforce, or the stay or enjoining, by order of court, by operation of law or
otherwise, of the exercise or enforcement of, any claim or demand or any right,
power or remedy (whether arising under the Credit Documents or the Hedge
Agreements, at law, in equity or otherwise) with respect to the Obligations or
any agreement relating thereto, or with respect to any other guaranty of or
security for the payment of the Obligations; (ii) any rescission, waiver,
amendment or modification of, or any consent to departure from, any of the terms
or provisions (including provisions relating to events of default) hereof, any
of the other Credit Documents, any of the Hedge Agreements or any agreement or
instrument executed pursuant thereto, or of any other guaranty or security for
the Obligations, in each case whether or not in accordance with the terms hereof
or such Credit Document, such Hedge Agreement or any agreement relating to such
other guaranty or security; (iii) the Obligations, or any agreement relating
thereto, at any time being found to be illegal, invalid or unenforceable in any
respect; (iv) the application of payments received from any source (other than
payments received pursuant to the other Credit Documents or any of the Hedge
Agreements or from the proceeds of any security for the Obligations, except to
the extent such security also serves as collateral for indebtedness other than
the Obligations) to the payment of indebtedness other than the Obligations, even
though any Beneficiary might have elected to apply such payment to any part or
all of the Obligations; (v) any Beneficiary's consent to the change,
reorganization or termination of the corporate structure or existence of either
Borrower or any of its Subsidiaries and to any corresponding restructuring of
the Obligations; (vi) any failure to perfect or continue perfection of a
security interest in any collateral which secures any of the Obligations; (vii)
any defenses, set-offs or counterclaims which either Borrower may allege or
assert against any Beneficiary in respect of the Obligations, including failure
of consideration, breach of warranty, payment, statute of frauds, statute of
limitations, accord and satisfaction and usury; and (viii) any other act or
thing or omission, or delay to do any other act or thing, which may or might in
any manner or to any extent vary the risk of any Guarantor as an obligor in
respect of the Obligations.
7.5. Waivers by Guarantors. Each Guarantor hereby waives, for the benefit
of Beneficiaries: (a) any right to require any Beneficiary, as a condition of
payment or performance by such Guarantor, to (i) proceed against either
Borrower, any other guarantor (including any other Guarantor) of the Obligations
or any other Person, (ii) proceed against or exhaust any security held from
either Borrower, any such other guarantor or any other Person, (iii) proceed
against or have resort to any balance of any deposit account or credit on the
books of any Beneficiary in favor of
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either Borrower or any other Person, or (1) pursue any other remedy in the power
of any Beneficiary whatsoever; (b) any defense arising by reason of the
incapacity, lack of authority or any disability or other defense of either
Borrower including any defense based on or arising out of the lack of validity
or the unenforceability of the Obligations or any agreement or instrument
relating thereto or by reason of the cessation of the liability of either
Borrower from any cause other than payment in full of the Obligations; (c) any
defense based upon any statute or rule of law which provides that the obligation
of a surety must be neither larger in amount nor in other respects more
burdensome than that of the principal; (d) any defense based upon any
Beneficiary's errors or omissions in the administration of the Obligations,
except behavior which amounts to bad faith; (e) (i) any principles or provisions
of law, statutory or otherwise, which are or might be in conflict with the terms
hereof and any legal or equitable discharge of such Guarantor's obligations
hereunder, (ii) the benefit of any statute of limitations affecting such
Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to
set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any
requirement that any Beneficiary protect, secure, perfect or insure any security
interest or lien or any property subject thereto; (f) notices, demands,
presentments, protests, notices of protest, notices of dishonor and notices of
any action or inaction, including acceptance hereof, notices of default
hereunder, the Hedge Agreements or any agreement or instrument related thereto,
notices of any renewal, extension or modification of the Obligations or any
agreement related thereto, notices of any extension of credit to either Borrower
and notices of any of the matters referred to in Section 7.4 and any right to
consent to any thereof; and (g) any defenses or benefits that may be derived
from or afforded by law which limit the liability of or exonerate guarantors or
sureties, or which may conflict with the terms hereof.
7.6. Guarantors' Rights of Subrogation, Contribution, Etc. Until the
Obligations shall have been indefeasibly paid in full and the Loan Commitments
shall have terminated, each Guarantor hereby waives any claim, right or remedy,
direct or indirect, that such Guarantor now has or may hereafter have against
either Borrower or any of its assets in connection with this Guaranty or the
performance by such Guarantor of its obligations hereunder, in each case whether
such claim, right or remedy arises in equity, under contract, by statute, under
common law or otherwise and including without limitation (a) any right of
subrogation, reimbursement or indemnification that such Guarantor now has or may
hereafter have against either Borrower with respect to its Obligations, (b) any
right to enforce, or to participate in, any claim, right or remedy that any
Beneficiary now has or may hereafter have against either Borrower, and (c) any
benefit of, and any right to participate in, any collateral or security now or
hereafter held by any Beneficiary. In addition, until the Obligations shall
have been indefeasibly paid in full and the Loan Commitments shall have
terminated, each Guarantor shall withhold exercise of any right of contribution
such Guarantor may have against any other guarantor (including any other
Guarantor) of the Obligations, including, without limitation, any such right of
contribution as contemplated by Section 7.2. Each Guarantor further agrees
that, to the extent the waiver or agreement to withhold the exercise of its
rights of subrogation, reimbursement, indemnification and contribution as set
forth herein is found by a court of competent jurisdiction to be void or
voidable for any reason, any rights of subrogation, reimbursement or
indemnification such Guarantor may have against either Borrower or against any
collateral or security, and any rights of contribution such Guarantor may have
against any such other guarantor, shall be junior and subordinate to any rights
any Beneficiary may have against either Borrower, to all right, title and
interest any Beneficiary may have in any such collateral or security,
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and to any right any Beneficiary may have against such other guarantor. If any
amount shall be paid to any Guarantor on account of any such subrogation,
reimbursement, indemnification or contribution rights at any time when all
Obligations shall not have been paid in full, such amount shall be held in trust
for thereby on behalf of Beneficiaries and shall forthwith be paid over thereto
for the benefit of Beneficiaries to be credited and applied against the
Obligations, whether matured or unmatured, in accordance with the terms hereof.
7.7. Subordination of Other Obligations. Any Indebtedness of either
Borrower or any Guarantor now or hereafter held by any Guarantor (the "Obligee
Guarantor") is hereby subordinated in right of payment to the Obligations, and
any such indebtedness collected or received by the Obligee Guarantor after an
Event of Default has occurred and is continuing shall be held in trust for
Administrative Agent on behalf of Beneficiaries and shall forthwith be paid over
to Administrative Agent for the benefit of Beneficiaries to be credited and
applied against the Obligations but without affecting, impairing or limiting in
any manner the liability of the Obligee Guarantor under any other provision
hereof.
7.8. Continuing Guaranty. This Guaranty is a continuing guaranty and shall
remain in effect until all of the Obligations shall have been paid in full and
the Loan Commitments shall have terminated. Each Guarantor hereby irrevocably
waives any right to revoke this Guaranty as to future transactions giving rise
to any Obligations.
7.9. Authority of Guarantors or either Borrower. It is not necessary for
any Beneficiary to inquire into the capacity or powers of any Guarantor or
either Borrower or the officers, directors or any agents acting or purporting to
act on behalf of any of them.
7.10. Financial Condition of either Borrower. Any Credit Extension may be
granted to either Borrower or continued from time to time, and any Hedge
Agreements may be entered into from time to time, in each case without notice to
or authorization from any Guarantor regardless of the financial or other
condition of either Borrower at the time of any such grant or continuation or at
the time such Hedge Agreement is entered into, as the case may be. No
Beneficiary shall have any obligation to disclose or discuss with any Guarantor
its assessment, or any Guarantor's assessment, of the financial condition of
either Borrower. Each Guarantor has adequate means to obtain information from
either Borrower on a continuing basis concerning the financial condition of
either Borrower and its ability to perform its obligations under the Credit
Documents and the Hedge Agreements, and each Guarantor assumes the
responsibility for being and keeping informed of the financial condition of
either Borrower and of all circumstances bearing upon the risk of nonpayment of
the Obligations. Each Guarantor hereby waives and relinquishes any duty on the
part of any Beneficiary to disclose any matter, fact or thing relating to the
business, operations or conditions of either Borrower now known or hereafter
known by any Beneficiary.
7.11. Bankruptcy, Etc. (a) The obligations of Guarantors hereunder shall
not be reduced, limited, impaired, discharged, deferred, suspended or terminated
by any proceeding, voluntary or involuntary, involving the bankruptcy,
insolvency, receivership, reorganization, liquidation or arrangement of either
Borrower or by any defense which either Borrower may have by reason of the
order, decree or decision of any court or administrative body resulting from any
such proceeding.
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(b) Each Guarantor acknowledges and agrees that any interest on any
portion of the Obligations which accrues after the commencement of any
proceeding referred to in clause (a) above (or, if interest on any portion of
the Obligations ceases to accrue by operation of law by reason of the
commencement of said proceeding, such interest as would have accrued on such
portion of the Obligations if said proceedings had not been commenced) shall be
included in the Obligations because it is the intention of Guarantors and
Beneficiaries that the Obligations which are guarantied by Guarantors pursuant
hereto should be determined without regard to any rule of law or order which may
relieve either Borrower of any portion of such Obligations. Guarantors will
permit any trustee in bankruptcy, receiver, debtor in possession, assignee for
the benefit of creditors or similar person to pay Administrative Agent, or allow
the claim of Administrative Agent in respect of, any such interest accruing
after the date on which such proceeding is commenced.
(c) In the event that all or any portion of the Obligations are paid by
either Borrower, the obligations of Guarantors hereunder shall continue and
remain in full force and effect or be reinstated, as the case may be, in the
event that all or any part of such payment(s) are rescinded or recovered
directly or indirectly from any Beneficiary as a preference, fraudulent transfer
or otherwise, and any such payments which are so rescinded or recovered shall
constitute Obligations for all purposes hereunder.
7.12. Notice of Events. As soon as any Guarantor obtains knowledge
thereof, such Guarantor shall give Administrative Agent written notice of any
condition or event which has resulted in (i) a material adverse change in the
financial condition of any Guarantor or either Borrower or (ii) a breach of or
noncompliance with any term, condition or covenant contained herein, any other
Credit Document, any Hedge Agreement or any other document delivered pursuant
hereto or thereto.
7.13. Discharge of Guaranty Upon Sale of Guarantor. If all of the equity
Securities of any Guarantor or any of its successors in interest hereunder shall
be sold or otherwise disposed of (including by merger or consolidation) in
accordance with the terms and conditions hereof, the Guaranty of such Guarantor
or such successor in interest, as the case may be, hereunder shall automatically
be discharged and released without any further action by any Beneficiary or any
other Person effective as of the time of such Asset Sale; provided, as a
condition precedent to such discharge and release, Administrative Agent shall
have received evidence satisfactory to it that arrangements satisfactory to it
have been made for compliance with Section 2.10.
SECTION 8. EVENTS OF DEFAULT
8.1. Events of Default. If any one or more of the following conditions or
events shall occur:
(a) failure by either Borrower to pay (i) when due any installment of
principal of any Loan when due, whether at stated maturity, by acceleration, by
notice of voluntary prepayment, by mandatory prepayment or otherwise (other than
an inadvertent failure outside of such Borrower's control that can be and is
fully remedied within twenty-four hours of the occurrence thereof); or (ii)
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any interest on any Loan or any fee or any other amount due hereunder within
five (5) days after the date due; or
(b) (i) failure of any Credit Party to pay when due any principal of or
interest on or any other amount payable in respect of one or more items of
Indebtedness (other than Indebtedness referred to in Section 8.1(a)) in an
individual principal amount of $1,000,000 or more or with an aggregate principal
amount of $2,000,000 or more, in each case beyond the end of any grace period
provided therefor; or (ii) breach or default by any Credit Party with respect to
any other material term of (1) one or more items of Indebtedness in the
individual or aggregate principal amounts referred to in clause (i) above or (2)
any loan agreement, mortgage, indenture or other agreement relating to such
item(s) of Indebtedness, if the effect of such breach or default is to cause, or
to permit the holder or holders of that Indebtedness (or a trustee on behalf of
such holder or holders) to cause, that Indebtedness to become or be declared due
and payable prior to its stated maturity or the stated maturity of any
underlying obligation, as the case may be.
(c) failure of any Credit Party to perform or comply with any term or
condition contained in Section 2.3, 5.2 (as to existence) or Section 6 hereof;
or
(d) any representation, warranty, certification made or deemed made by
any Credit Party in any Credit Document or in any statement or certificate at
any time given by Holdings or any of its Subsidiaries in writing pursuant hereto
or thereto or in connection herewith or therewith shall be false in any material
respect as the date made or deemed made; or
(e) any Credit Party shall default in the performance of or compliance
with any term contained herein or any of the other Credit Documents, other than
any such term referred to in any other Section of this Section 8.1, and such
default shall not have been remedied or waived within thirty (30) days after the
earlier of (i) an Authorized Officer of such Credit Party becoming aware of such
default or (ii) receipt by either Borrower of notice from Administrative Agent
or any Lender of such default; or
(f) (i) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of Holdings or any of its Subsidiaries (other an
Immaterial Subsidiary) an in an involuntary case under the Bankruptcy Code or
under any other applicable bankruptcy, insolvency or similar law now or
hereafter in effect, which decree or order is not stayed; or any other similar
relief shall be granted under any applicable federal or state law; or (ii) an
involuntary case shall be commenced against Holdings or any of its Subsidiaries
under the Bankruptcy Code or under any other applicable bankruptcy, insolvency
or similar law now or hereafter in effect; or a decree or order of a court
having jurisdiction in the premises for the appointment of a receiver,
liquidator, sequestrator, trustee, custodian or other officer having similar
powers over Holdings or any of its Subsidiaries (other an Immaterial
Subsidiary), or over all or a substantial part of its property, shall have been
entered; or there shall have occurred the involuntary appointment of an interim
receiver, trustee or other custodian of Holdings or any of its Subsidiaries for
all or a substantial part of its property; or a warrant of attachment, execution
or similar process shall have been issued against any substantial part of the
property of Holdings or any of its Subsidiaries (other an Immaterial
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Subsidiary), and any such event described in this clause (ii) shall continue for
sixty (60) days unless dismissed, bonded or discharged; or
(g) (i) Holdings or any of its Subsidiaries (other an Immaterial
Subsidiary) shall have an order for relief entered with respect to it or
commence a voluntary case under the Bankruptcy Code or under any other
applicable bankruptcy, insolvency or similar law now or hereafter in effect, or
shall consent to the entry of an order for relief in an involuntary case, or to
the conversion of an involuntary case to a voluntary case, under any such law,
or shall consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property; or
Holdings or any of its Subsidiaries (other an Immaterial Subsidiary) shall make
any assignment for the benefit of creditors; or (ii) Holdings or any of its
Subsidiaries (other an immaterial Subsidiary) shall be unable, or shall fail
generally, or shall admit in writing its inability, to pay its debts as such
debts become due; or the Board of Directors of Holdings or any of its
Subsidiaries (other an Immaterial Subsidiary) (or any committee thereof) shall
adopt any resolution or otherwise authorize any action to approve any of the
actions referred to herein or in Section 8.1(f); or
(h) any money judgment, writ or warrant of attachment or similar process
involving (i) in any individual case an amount in excess of $500,000 or (ii) in
the aggregate at any time an amount in excess of $1,000,000 (in either case not
adequately covered by insurance as to which a solvent and unaffiliated insurance
company has acknowledged coverage) shall be entered or filed against Holdings or
any of its Subsidiaries or any of their respective assets and shall remain
undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days
(or in any event later than five days prior to the date of any proposed sale
thereunder); or
(i) any order, judgment or decree shall be entered against any Credit
Party decreeing the dissolution or split up of Holdings or that Subsidiary
(other than an Immaterial Subsidiary) and such order shall remain undischarged
or unstayed for a period in excess of thirty (30) days; or
(j) there shall occur one or more ERISA Events with respect to Pension
Plans which individually or in the aggregate results in or might reasonably be
expected to result in liability of Holdings, any of its Subsidiaries or any of
their respective ERISA Affiliates in excess of $500,000 during the term hereof;
or there shall exist an amount of unfunded benefit liabilities (as defined in
Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension
Plans (excluding for purposes of such computation any Pension Plans with respect
to which assets exceed benefit liabilities), which exceeds $1,000,000; or
(k) a Change of Control shall occur; or
(l) at any time after the execution and delivery thereof, (i) the
Guaranty for any reason, other than the satisfaction in full of all Obligations,
shall cease to be in full force and effect (other than in accordance with its
terms) or shall be declared to be null and void or any Guarantor shall repudiate
its obligations thereunder, (ii) this Agreement or any Collateral Document
ceases to be in full force and effect (other than by reason of a release of
Collateral in accordance with the terms hereof or thereof or the satisfaction in
full of the Obligations in accordance with the terms hereof) or shall be
declared null and void, or Administrative Agent shall not have or shall cease to
have a
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valid and perfected Lien in any Collateral purported to be covered thereby, in
each case for any reason other than the failure of Administrative Agent or any
Lender to take any action within its control, or (iii) any Credit Party shall
contest the validity or enforceability of any Credit Document in writing or deny
in writing that it has any further liability, including with respect to future
advances by Lenders, under any Credit Document to which it is a party; or
(m) Holdings shall (i) engage in any business other than entering into and
performing its obligations under and in accordance with the Credit Documents and
Related Agreements to which it is a party and the incurrence of indebtedness
permitted to be incurred by Holdings hereunder or (ii) own any assets other than
(1) the capital stock of each Borrower and (2) Cash and Cash Equivalents in an
amount not in excess of that necessary for the payment of general operating
expenses of Holdings; provided that no circumstance or event that would
--------
otherwise give rise to an Event of Default under this subdivision (m) shall be
deemed to exist so long as a Borrower or Holdings shall have made arrangements,
reasonably satisfactory to Administrative Agent, to cash collateralize the
Obligations;
THEN, (A) upon the occurrence of any Event of Default described in Section
8.1(f) or 8.1(g), automatically, and (B) upon the occurrence of any other Event
of Default, at the request of (or with the consent of) Requisite Lenders, upon
notice to Holdings or either Borrower by Administrative Agent, the Loan
Commitments shall immediately terminate and the unpaid principal amount of and
accrued interest on the Loans and all other Obligations each of the following
shall immediately become due and payable, in each case without presentment,
demand, protest or other requirements of any kind, all of which are hereby
expressly waived by each Credit Party.
SECTION 9. ADMINISTRATIVE AGENTS
9.1. Appointment of Administrative Agent. GSCP is hereby appointed
Administrative Agent hereunder and under the other Credit Documents and each
Lender hereby authorizes Administrative Agent to act as its agent in accordance
with the terms hereof and the other Credit Documents. Administrative Agent
hereby agrees to act upon the express conditions contained herein and the other
Credit Documents, as applicable. The provisions of this Section 9 are solely
for the benefit of Administrative Agent and Lenders and no Credit Party shall
have any rights as a third party beneficiary of any of the provisions thereof.
In performing its functions and duties hereunder, Administrative Agent shall act
solely as an agent of Lenders and does not assume and shall not be deemed to
have assumed any obligation towards or relationship of agency or trust with or
for Holdings or any of its Subsidiaries. Administrative Agent, without consent
of or notice to any party hereto, may assign any and all of its rights or
obligations hereunder to any of its Affiliates. As of the Closing Date, all the
respective obligations of GSCP, in its capacity as Lead Arranger, shall
terminate.
9.2. Powers and Duties. Each Lender irrevocably authorizes Administrative
Agent to take such action on such Lender's behalf and to exercise such powers,
rights and remedies hereunder and under the other Credit Documents as are
specifically delegated or granted to Administrative Agent by the terms hereof
and thereof, together with such powers, rights and remedies as are reasonably
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incidental thereto. Administrative Agent shall have only those duties and
responsibilities that are expressly specified herein and the other Credit
Documents. Administrative Agent may exercise such powers, rights and remedies
and perform such duties by or through its agents or employees. Administrative
Agent shall not have, by reason hereof or any of the other Credit Documents, a
fiduciary relationship in respect of any Lender; and nothing herein or any of
the other Credit Documents, expressed or implied, is intended to or shall be so
construed as to impose upon Administrative Agent any obligations in respect
hereof or any of the other Credit Documents except as expressly set forth herein
or therein.
9.3. General Immunity. (a) The Administrative Agent shall not be
responsible to any Lender for the execution, effectiveness, genuineness,
validity, enforceability, collectibility or sufficiency hereof or any other
Credit Document or for any representations, warranties, recitals or statements
made herein or therein or made in any written or oral statements or in any
financial or other statements, instruments, reports or certificates or any other
documents furnished or made by Administrative Agent to Lenders or by or on
behalf of either Borrower to Administrative Agent or any Lender in connection
with the Credit Documents and the transactions contemplated thereby or for the
financial condition or business affairs of any Credit Party or any other Person
liable for the payment of any Obligations, nor shall Administrative Agent be
required to ascertain or inquire as to the performance or observance of any of
the terms, conditions, provisions, covenants or agreements contained in any of
the Credit Documents or as to the use of the proceeds of the Loans or as to the
existence or possible existence of any Event of Default or Default. Anything
contained herein to the contrary notwithstanding, Administrative Agent shall not
have any liability arising from confirmations of the amount of outstanding
Loans.
(b) Neither Administrative Agent nor any of its officers, partners,
directors, employees or agents shall be liable to Lenders for any action taken
or omitted by Administrative Agent under or in connection with any of the Credit
Documents except to the extent caused by Administrative Agent's gross negligence
or willful misconduct. Administrative Agent shall be entitled to refrain from
any act or the taking of any action (including the failure to take an action) in
connection herewith or any of the other Credit Documents or from the exercise of
any power, discretion or authority vested in it hereunder or thereunder unless
and until Administrative Agent shall have received instructions in respect
thereof from Requisite Lenders (or such other Lenders as may be required to give
such instructions under Section 10.5) and, upon receipt of such instructions
from Requisite Lenders (or such other Lenders, as the case may be),
Administrative Agent shall be entitled to act or (where so instructed) refrain
from acting, or to exercise such power, discretion or authority, in accordance
with such instructions. Without prejudice to the generality of the foregoing,
(i) Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any communication, instrument or document believed by
it to be genuine and correct and to have been signed or sent by the proper
person or persons, and shall be entitled to rely and shall be protected in
relying on opinions and judgments of attorneys (who may be attorneys for
Holdings and its Subsidiaries), accountants, experts and other professional
advisors selected by it; and (ii) no Lender shall have any right of action
whatsoever against Administrative Agent as a result of Administrative Agent
acting or (where so instructed) refraining from acting hereunder or any of the
other Credit Documents in accordance with the instructions of Requisite Lenders
(or such other Lenders as may be required to give such instructions under
Section 10.5).
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9.4. Administrative Agent Entitled to Act as Lender. The agency hereby
created shall in no way impair or affect any of the rights and powers of, or
impose any duties or obligations upon, Administrative Agent in its individual
capacity as a Lender hereunder. With respect to its participation in the Loans,
Administrative Agent shall have the same rights and powers hereunder as any
other Lender and may exercise the same as though it were not performing the
duties and functions delegated to it hereunder, and the term "Lender" shall,
unless the context clearly otherwise indicates, include Administrative Agent in
its individual capacity. Administrative Agent and its Affiliates may accept
deposits from, lend money to and generally engage in any kind of banking, trust,
financial advisory or other business with Holdings or any of its Affiliates as
if it were not performing the duties specified herein, and may accept fees and
other consideration from either Borrower for services in connection herewith and
otherwise without having to account for the same to Lenders.
9.5. Lenders' Representations and Warranties. Each Lender represents and
warrants that it has made its own independent investigation of the financial
condition and affairs of Holdings and its Subsidiaries in connection with Credit
Extensions hereunder and that it has made and shall continue to make its own
appraisal of the creditworthiness of Holdings and its Subsidiaries.
Administrative Agent shall not have any duty or responsibility, either initially
or on a continuing basis, to make any such investigation or any such appraisal
on behalf of Lenders or to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter, and Administrative Agent
shall not have any responsibility with respect to the accuracy of or the
completeness of any information provided to Lenders.
9.6. Right to Indemnity. Each Lender, in proportion to its Pro Rata Share,
severally agrees to indemnify Administrative Agent, to the extent that
Administrative Agent shall not have been reimbursed by either Borrower, for and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses (including counsel fees and
disbursements) or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against Administrative Agent in exercising
its powers, rights and remedies or performing its duties hereunder or under the
other Credit Documents or otherwise in its capacity as Administrative Agent in
any way relating to or arising out hereof or the other Credit Documents;
provided, no Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from Administrative Agent's gross negligence
or willful misconduct. If any indemnity furnished to Administrative Agent for
any purpose shall, in the opinion of Administrative Agent, be insufficient or
become impaired, Administrative Agent may call for additional indemnity and
cease, or not commence, to do the acts indemnified against until such additional
indemnity is furnished; provided, in no event shall this sentence require any
Lender to indemnify Administrative Agent against any liability, obligation,
loss, damage, penalty, action, judgment, suit, cost, expense or disbursement in
excess of such Lender's Pro Rata Share thereof; and provided further, this
sentence shall not be deemed to require any Lender to indemnify Administrative
Agent against any liability, obligation, loss, damage, penalty, action,
judgment, suit, cost, expense or disbursement described in the proviso in the
immediately preceding sentence.
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9.7. Successor Administrative Agent. Administrative Agent may resign at
any time by giving thirty (30) days' prior written notice thereof to Lenders and
each Borrower, and Administrative Agent may be removed at any time with or
without cause by an instrument or concurrent instruments in writing delivered to
each Borrower and Administrative Agent and signed by Requisite Lenders. Upon
any such notice of resignation or any such removal, Requisite Lenders shall have
the right, upon five Business Days' notice to each Borrower, to appoint a
successor Administrative Agent. Alternatively, if Administrative Agent sells,
assigns or transfers all or any part of its Loans pursuant to Section 10.6
hereof, Administrative Agent may appoint the subsequent holder, assignee or
transferee of such loans as Administrative Agent. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent, that successor Administrative Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring or
removed Administrative Agent and the retiring or removed Administrative Agent
shall be discharged from its duties and obligations hereunder. After any
retiring or removed Administrative Agent's resignation or removal hereunder as
Administrative Agent, the provisions of this Section 9 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent hereunder.
9.8. Collateral Documents and Guaranties. (a) Each Lender hereby further
authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to
be the agent for and representative of Lenders with respect to the Guaranty, the
Collateral and the Collateral Document. Subject to Section 10.5, without further
written consent or authorization from Lenders, Administrative Agent may execute
any documents or instruments necessary to (i) release any Lien encumbering any
item of Collateral that is the subject of a sale or other disposition of assets
permitted hereby or to which Requisite Lenders (or such other Lenders as may be
required to give such consent under Section 10.5) have otherwise consented or
(ii) release any Guarantor from the Guaranty pursuant to Section 7.13 or with
respect to which Requisite Lenders (or such other Lenders as may be required to
give such consent under Section 10.5) have otherwise consented.
(b) Anything contained in any of the Credit Documents to the contrary
notwithstanding, each Borrower, Administrative Agent and each Lender hereby
agree that (i) no Lender shall have any right individually to realize upon any
of the Collateral or to enforce the Guaranty, it being understood and agreed
that all powers, rights and remedies hereunder may be exercised solely by
Administrative Agent for the benefit of Lenders in accordance with the terms
hereof, and (ii) in the event of a foreclosure by Administrative Agent on any of
the Collateral pursuant to a public or private sale, Administrative Agent or any
Lender may be the purchaser of any or all of such Collateral at any such sale
and Administrative Agent, as agent for and representative of Lenders (but not
any Lender or Lenders in its or their respective individual capacities unless
Requisite Lenders shall otherwise agree in writing) shall be entitled, for the
purpose of bidding and making settlement or payment of the purchase price for
all or any portion of the Collateral sold at any such public sale, to use and
apply any of the Obligations as a credit on account of the purchase price for
any collateral payable by Administrative Agent at such sale.
(c) It is the purpose hereof and the other Credit Documents that there
shall be no violation of any law of any jurisdiction denying or restricting the
right of banking corporations or associations to transact business as agent or
trustee in such jurisdiction. It is recognized that in case
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of litigation hereunder or any of the other Credit Documents, and in particular
in case of the enforcement of any of the Credit Documents, or in case
Administrative Agent deems that by reason of any present or future law of any
jurisdiction it may not exercise any of the rights, powers or remedies granted
herein or in any of the other Credit Documents or take any other action which
may be desirable or necessary in connection therewith, it may be necessary that
Administrative Agent appoint an additional individual or institution as a
separate trustee, co-trustee, collateral agent or collateral co-agent (a
"Supplemental Collateral Agent"). In the event that Administrative Agent
appoints a Supplemental Collateral Agent with respect to any Collateral, (i)
each and every right, power, privilege or duty expressed or intended hereby or
any of the other Credit Documents to be exercised by or vested in or conveyed to
Administrative Agent with respect to such Collateral shall be exercisable by and
vest in such Supplemental Collateral Agent to the extent, and only to the
extent, necessary to enable such Supplemental Collateral Agent to exercise such
rights, powers and privileges with respect to such Collateral and to perform
such duties with respect to such Collateral, and every covenant and obligation
contained in the Credit Documents and necessary to the exercise or performance
thereof by such Supplemental Collateral Agent shall run to and be enforceable by
either agent or such Supplemental Collateral Agent, and (ii) the provisions of
this Section 9 and of Sections 10.2 and 10.3 that refer to Administrative Agent
shall inure to the benefit of such Supplemental Collateral Agent and all
references therein to Administrative Agent shall be deemed to be references to
Administrative Agent and/or such Supplemental Collateral Agent, as the context
may require. Should any instrument in writing from either Borrower or any other
Credit Party be required by any Supplemental Collateral Agent so appointed by
Administrative Agent for more fully and certainly vesting in and confirming to
him or it such rights, powers, privileges and duties, each Borrower shall, or
shall cause such Credit Party to, execute, acknowledge and deliver any and all
such instruments promptly upon request by Administrative Agent. In case any
Supplemental Collateral Agent, or a successor thereto, shall die, become
incapable of acting, resign or be removed, all the rights, powers, privileges
and duties of such Supplemental Collateral Agent, to the extent permitted by
law, shall vest in and be exercised by Administrative Agent until the
appointment of a new Supplemental Collateral Agent.
SECTION 10. MISCELLANEOUS
10.1. Notices. Unless otherwise specifically provided herein, any notice or
other communication herein required or permitted to be given to a Credit Party
or Administrative Agent shall be sent to such Person's address as set forth on
Appendix B or in the other relevant Credit Document, and in the case of any
Lender, the address as indicated on Schedule B or otherwise indicated to
Administrative Agent in writing. Each notice hereunder shall be in writing and
may be personally served, telexed or sent by telefacsimile or United States mail
or courier service and shall be deemed to have been given when delivered in
person or by courier service and signed for against receipt thereof, upon
receipt of telefacsimile or telex, or three Business Days after depositing it in
the United States mail, certified or registered with postage prepaid and
properly addressed.
10.2. Expenses. Whether or not the transactions contemplated hereby shall
be consummated, Borrowers agree to pay (subject to any separate agreement in
writing entered into by Borrower, Holdings, and GSCP prior for the Closing Date)
promptly (a) all the actual and reasonable
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costs and expenses of preparation of the Credit Documents and any consents,
amendments, waivers or other modifications thereto; (b) all the costs of
furnishing all opinions by counsel for Borrowers and the other Credit Parties
(including any opinions requested by Lenders as to any legal matters arising
hereunder) and of Borrowers' and each other Credit Party's performance of and
compliance with all agreements and conditions on its part to be performed or
complied with hereunder and the other Credit Documents including with respect to
confirming compliance with environmental, insurance and solvency requirements;
(c) the reasonable fees, expenses and disbursements of counsel to Administrative
Agent (in each case including without duplication allocated costs of internal
counsel) in connection with the negotiation, preparation, execution and
administration of the Credit Documents and any consents, amendments, waivers or
other modifications thereto and any other documents or matters requested by
either Borrower; (d) all the actual costs and reasonable expenses of creating
and perfecting Liens in favor of Administrative Agent on behalf of Lenders
pursuant hereto, including filing and recording fees, expenses and taxes, stamp
or documentary taxes, search fees, and reasonable fees, expenses and
disbursements of counsel to Administrative Agent and of counsel providing any
opinions that Administrative Agent or Requisite Lenders may request in respect
of the Collateral or the Liens created pursuant the Collateral Documents; (e)
all the actual costs and reasonable fees, expenses and disbursements of any
auditors, accountants, consultants or appraisers and for any audit or report
provided for hereunder with respect to Accounts or Inventory; (f) all the actual
costs and reasonable expenses (including the reasonable fees, expenses and
disbursements of any appraisers, consultants, advisors and agents employed or
retained by Administrative Agent and its counsel) in connection with the custody
or preservation of any of the Collateral; and (g) after the occurrence or an
Event of Default, all costs and expenses, including reasonable attorneys' fees
(including allocated costs of internal counsel) and costs of settlement,
incurred by any Agent and Lenders in enforcing any Obligations of or in
collecting any payments due from any Credit Party hereunder or under the other
Credit Documents by reason of such Event of Default (including in connection
with the sale of, collection from, or other realization upon any of the
Collateral or the enforcement of the Guaranty) or in connection with any
refinancing or restructuring of the credit arrangements provided hereunder in
the nature of a "work-out" or pursuant to any insolvency or bankruptcy
proceedings.
10.3. Indemnity. In addition to the payment of expenses pursuant to
Section 10.2, whether or not the transactions contemplated hereby shall be
consummated, each Credit Party agrees to defend (subject to Indemnitees'
selection of counsel), indemnify, pay and hold harmless, Administrative Agent
and Lender and the officers, partners, directors, trustees, employees, agents
and Affiliates of each Agent and each Lender (each, an "Indemnitee"), from and
against any and all Indemnified Liabilities; provided, no Credit Party shall
have any obligation to any Indemnitee hereunder with respect to any Indemnified
Liabilities to the extent such Indemnified Liabilities arise from the gross
negligence or willful misconduct of that Indemnitee as determined by a final
non-appealable judgment of a court of competent jurisdiction. To the extent that
the undertakings to defend, indemnify, pay and hold harmless set forth in this
Section 10.3 may be unenforceable in whole or in part because they violate any
law or public policy, the applicable Credit Party shall contribute the maximum
portion that it is permitted to pay and satisfy under applicable law to the
payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees
or any of them.
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10.4. Set-Off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default each Lender is hereby authorized by each
Credit Party at any time or from time to time subject to the consent of
Administrative Agent (such consent not to be unreasonably withheld or delayed),
without notice to any Credit Party or to any other Person (other than
Administrative Agent), any such notice being hereby expressly waived, to set off
and to appropriate and to apply any and all deposits (general or special,
including Indebtedness evidenced by certificates of deposit, whether matured or
unmatured, but not including trust accounts) and any other Indebtedness at any
time held or owing by such Lender to or for the credit or the account of any
Credit Party against and on account of the obligations and liabilities of any
Credit Party to such Lender hereunder and the other Credit Documents, including
all claims of any nature or description arising out of or connected herewith or
any other Credit Document, irrespective of whether or not (a) such Lender shall
have made any demand hereunder or (b) the principal of or the interest on the
Loans or any other amounts due hereunder shall have become due and payable
pursuant to Section 2 and although said obligations and liabilities, or any of
them, may be contingent or unmatured. Each Credit Party hereby further grants to
Administrative Agent and each Lender a security interest in all Deposit Accounts
maintained with Administrative Agent or such Lender as security for the
Obligations.
10.5. Amendments and Waivers. (a) Subject to Section 10.5(b) and 10.5(c),
no amendment, modification, termination or waiver of any provision of the Credit
Documents, or consent to any departure by any Credit Party therefrom, shall in
any event be effective without the written concurrence of the Requisite Lenders.
(b) Without the written consent of each Lender that would be affected
thereby, no amendment, modification, termination, or consent shall be effective
if the effect thereof would:
(i) extend the scheduled final maturity of any Loan or Note;
(ii) waive, reduce or postpone any scheduled principal repayment
(but not prepayment);
(iii) reduce the rate of interest on any Loan (other than any waiver
of any increase in the interest rate applicable to any Loan pursuant to
Section 2.6) or any fee payable hereunder;
(iv) extend the time for payment of any such interest or fees;
(v) reduce the principal amount of any Loan;
(vi) amend, modify, terminate or waive any provision of this
Section 10.5(b);
(vii) amend the definition of "Requisite Lenders" or "Pro Rata
Share" provided, with the consent of Requisite Lenders, additional
extensions of credit pursuant hereto may be included in the determination
of "Requisite Lenders" and "Pro Rata Share" on
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substantially the same basis as the Loan Commitments and the Loans are
included on the Closing Date;
(viii) release or otherwise subordinate all or substantially all of
the Collateral or all or substantially all of the Guarantors from the
Guaranty except as expressly provided in the Credit Documents; or
(ix) consent to the assignment or transfer by any Credit Party of
any of its rights and obligations under any Credit Document (except
pursuant to transactions permitted under Section 6.7(a)).
(c) No amendment, modification, termination or waiver of any provision of
the Credit Documents, or consent to any departure by any Credit Party therefrom,
shall:
(i) increase any Loan Commitment of any Lender over the amount thereof
then in effect without the consent of such Lender; provided, no amendment,
modification or waiver of any condition precedent, covenant, Default or
Event of Default shall constitute an increase in any Loan Commitment of any
Lender; or
(ii) amend, modify, terminate or waive any provision of Section 9 as
the same applies to any Agent, or any other provision hereof as the same
applies to the rights or obligations of any Agent, in each case without the
consent of such Agent.
(d) Administrative Agent may, but shall have no obligation to, with the
concurrence of any Lender, execute amendments, modifications, waivers or
consents on behalf of such Lender. Any waiver or consent shall be effective
only in the specific instance and for the specific purpose for which it was
given. No notice to or demand on any Credit Party in any case shall entitle any
Credit Party to any other or further notice or demand in similar or other
circumstances. Any amendment, modification, termination, waiver or consent
effected in accordance with this Section 10.5 shall be binding upon each Lender
at the time outstanding, each future Lender and, if signed by a Credit Party, on
such Credit Party.
(e) Notwithstanding the foregoing provisions of this Section 10.5, the
parties hereto agree that, in the event the Borrowers incur Purchase Money
Indebtedness under a flooring agreement facility from Deutsche Financial
Services Corporation ("Deutsche") under terms substantially similar to those
previously described to the Administrative Agent, Administrative Agent shall
enter into such amendments to the Pledge and Security Agreement and related UCC
financing statements as may be in form and substance reasonably acceptable to
Administrative Agent for the purpose of (y) granting to Deutsche a first
priority Lien on the inventory included in the Collateral of the Credit Parties
and providing for a second priority Lien on such inventory in favor of the
Administrative Agent for the benefit of the Lenders and (z) granting to Deutsche
a second priority security interest in the Accounts of the Credit Parties to
secure up to $5,000,000 of Indebtedness owed by the Borrowers to Deutsche (which
in any event shall not provide for rights of a second priority lien holder with
respect to the Collateral other than to receive proceeds therefrom after payment
in full of the obligations secured by the first priority liens).
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10.6. Successors and Assigns; Participations. (a) This Agreement shall be
binding upon the parties hereto and their respective successors and assigns and
shall inure to the benefit of the parties hereto and the successors and assigns
of Lenders. Except pursuant to transaction permitted by Section 6.7(a), no
Credit Party's rights or obligations hereunder nor any interest therein may be
assigned or delegated by any Credit Party without the prior written consent of
all Lenders.
(b) Borrowers, Administrative Agent and Lenders shall deem and treat the
Persons listed as Lenders in the Register as the holders and owners of the
corresponding Loan Commitments and Loans listed therein for all purposes hereof,
and no assignment or transfer of any such Loan Commitment or Loan shall be
effective unless and until an Assignment Agreement effecting the assignment or
transfer thereof shall have been delivered to Administrative Agent and recorded
in the Register. Prior to such recordation, all amounts owed with respect to
the applicable Loan Commitment or Loan shall be owed to the Lender listed in the
Register as the owner thereof, and any request, authority or consent of any
Person who, at the time of making such request or giving such authority or
consent, is listed in the Register as a Lender shall be conclusive and binding
on any subsequent holder, assignee or transferee of the corresponding Loan
Commitments or Loans.
(c) Each Lender shall have the right at any time to sell, assign or
transfer any Loan Commitment, any Loan or any other Obligation:
(i) to any Person meeting the criteria of clause (i) of the definition
of the term of "Eligible Assignee" upon the giving of notice to Holdings
and Administrative Agent; and
(ii) to any Person meeting the criteria of clause (ii) of the
definition of the term of "Eligible Assignee" upon the consent of each of
Holdings and Administrative Agent (neither of which shall be unreasonably
withheld or delayed or shall be required at any time an Event of Default
shall have occurred and then be continuing); provided, each such assignment
pursuant to this Section 10.6(c)(ii) shall be in an aggregate amount of not
less than $2,000,000 (or such lesser amount as may be agreed to by Holdings
and Administrative Agent or as shall constitute the aggregate amount of the
Loan Commitments, Loans and other Obligations of the assigning Lender).
(d) The assigning Lender and the assignee thereof shall execute and
deliver to Administrative Agent an Assignment Agreement, together with (i) a
processing and recordation fee of $500 in the case of assignments pursuant to
Section 10.6(c)(i), and $1,500 in the case of all other assignments, and (ii)
such forms, certificates or other evidence, if any, with respect to United
States federal income tax withholding matters as the assignee under such
Assignment Agreement may be required to deliver to Administrative Agent pursuant
to Section 2.20(c).
(e) Upon its receipt of a duly executed and completed Assignment
Agreement, together with the processing and recordation fee referred to in
Section 10.6(d) (and any forms, certificates or other evidence required by this
Agreement in connection therewith), Administrative Agent shall record the
information contained in such Assignment Agreement in the Register, shall give
prompt notice thereof to Holdings, Borrowers and shall maintain a copy of such
Assignment Agreement.
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(f) Each Lender, upon execution and delivery hereof or upon executing and
delivering an Assignment Agreement, as the case may be, represents and warrants
as of the Closing Date or as of the applicable Effective Date (as defined in the
applicable Assignment Agreement) that (i) it is an Eligible Assignee; (ii) it
has experience and expertise in the making of or investing in commitments or
loans such as the Loan Commitments or Loans, as the case may be; and (iii) it
will make or invest in, as the case may be, its Loan Commitments or Loans for
its own account in the ordinary course of its business and without a view to
distribution of such Loan Commitments or Loans within the meaning of the
Securities Act or the Exchange Act or other federal securities laws (it being
understood that, subject to the provisions of this Section 10.6, the disposition
of such Loan Commitments Loans or any interests therein shall at all times
remain within its exclusive control).
(g) Subject to the terms and conditions of this Section 10.6, as of the
"Effective Date" specified in such Assignment Agreement: (i) the assignee
thereunder shall have the rights and obligations of a "Lender" hereunder to the
extent such rights and obligations hereunder have been assigned to it pursuant
to such Assignment Agreement and shall thereafter be a party hereto and a
"Lender" for all purposes hereof; (ii) the assigning Lender thereunder shall, to
the extent that rights and obligations hereunder have been assigned thereby
pursuant to such Assignment Agreement, relinquish its rights (other than any
rights which survive the termination hereof under Section 10.8) and be released
from its obligations hereunder (and, in the case of an Assignment Agreement
covering all or the remaining portion of an assigning Lender's rights and
obligations hereunder, such Lender shall cease to be a party hereto); (iii) the
Loan Commitments shall be modified to reflect the Loan Commitment of such
assignee and any remaining Loan Commitment of such assigning Lender, if any; and
(iv) if any such assignment occurs after the issuance of any Note hereunder, the
assigning Lender shall, upon the effectiveness of such assignment or as promptly
thereafter as practicable, surrender its applicable Notes to Administrative
Agent for cancellation, and thereupon the applicable Borrower shall issue and
deliver new Notes, if so requested by the assignee and/or assigning Lender, to
such assignee and/or to such assigning Lender, with appropriate insertions, to
reflect the new Loan Commitments and/or outstanding Loans of the assignee and/or
the assigning Lender.
(h) Each Lender shall have the right at any time to sell one or more
participations to any Person in all or any part of its Loan Commitments, Loans
or in any other Obligation. The holder of any such participation, other than an
Affiliate of the Lender granting such participation, shall not be entitled to
require such Lender to take or omit to take any action hereunder except with
respect to any amendment modification or waiver described in Section 10.5(b) or
10.5(c) to the extent directly effect the Loan or Loan Commitment relating to
the participation. All amounts payable by any Credit Party hereunder, including
amounts payable to such Lender pursuant to Section 2.14 or 2.15, shall be
determined as if such Lender had not sold such participation. Each Credit Party
and each Lender hereby acknowledge and agree that, solely for purposes of
Sections 2.12 and 10.4, (1) any participation will give rise to a direct
obligation of each Credit Party to the participant and (2) the participant shall
be considered to be a "Lender".
(i) In addition to any other assignment permitted pursuant to this Section
10.6, (i) any Lender may assign and pledge all or any portion of its Loans, the
other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank
as collateral security pursuant to Regulation A of the Board of Governors of the
Federal Reserve System and any operating circular issued by such
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Federal Reserve Bank, and (ii) with the consent of Holdings and Administrative
Agent any Lender which is an investment fund may pledge all or any portion of
its Notes or Loans to its trustee in support of its obligations to such trustee;
provided, no Lender, as between Borrowers and such Lender, shall be relieved of
any of its obligations hereunder as a result of any such assignment and pledge,
and provided further, in no event shall the applicable Federal Reserve Bank or
trustee be considered to be a "Lender" or be entitled to require the assigning
Lender to take or omit to take any action hereunder.
10.7. Independence of Covenants. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or would otherwise be within the limitations of, another covenant shall not
avoid the occurrence of a Default or an Event of Default if such action is taken
or condition exists.
10.8. Survival of Representations, Warranties and Agreements. All
representations, warranties and agreements made herein shall survive the
execution and delivery hereof and the making of any Credit Extension.
Notwithstanding anything herein or implied by law to the contrary, the
agreements of each Credit Party set forth in Sections 2.14, 2.15, 10.2, 10.3 and
10.4 and the agreements of Lenders set forth in Sections 2.12 and 9.6 shall
survive the payment of the Loans.
10.9. No Waiver; Remedies Cumulative. No failure or delay on the part of
Administrative Agent or any Lender in the exercise of any power, right or
privilege hereunder or under any other Credit Document shall impair such power,
right or privilege or be construed to be a waiver of any default or acquiescence
therein, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other power,
right or privilege. The rights, powers and remedies given to each Agent and
each Lender hereby are cumulative and shall be in addition to and independent of
all rights, powers and remedies existing by virtue of any statute or rule of law
or in any of the other Credit Documents, any of the Hedge Agreements. Any
forbearance or failure to exercise, and any delay in exercising, any right,
power or remedy hereunder shall not impair any such right, power or remedy or be
construed to be a waiver thereof, nor shall it preclude the further exercise of
any such right, power or remedy.
10.10. Marshalling; Payments Set Aide. Neither Administrative Agent nor any
Lender shall be under any obligation to marshal any assets in favor of any
Credit Party or any other Person or against or in payment of any or all of the
Obligations. To the extent that any Credit Party makes a payment or payments to
Administrative Agent or Lenders (or to Administrative Agent for the benefit of
Lenders), or Administrative Agent or Lenders enforce any security interests or
exercise their rights of setoff, and such payment or payments or the proceeds of
such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, any
other state or federal law, common law or any equitable cause, then, to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied, and all Liens, rights and remedies therefor or related thereto,
shall be revived and continued in full force and effect as if such payment or
payments had not been made or such enforcement or setoff had not occurred.
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10.11. Severability. In case any provision in or obligation hereunder or
any Note shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
10.12. Obligations Several; Independent Nature of Lenders' Rights. The
obligations of Lenders hereunder are several and no Lender shall be responsible
for the obligations or Loan Commitments of any other Lender hereunder. Nothing
contained herein or in any other Credit Document, and no action taken by Lenders
pursuant hereto or thereto, shall be deemed to constitute Lenders as a
partnership, an association, a joint venture or any other kind of entity. The
amounts payable at any time hereunder to each Lender shall be a separate and
independent debt, and each Lender shall be entitled to protect and enforce its
rights arising out hereof and it shall not be necessary for any other Lender to
be joined as an additional party in any proceeding for such purpose.
10.13. Headings. Section headings herein are included herein for
convenience of reference only and shall not constitute a part hereof for any
other purpose or be given any substantive effect.
10.14. APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF
THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES THEREOF.
10.15. CONSENT TO JURISDICTION. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST
ANY CREDIT PARTY ARISING OUT OF OR RELATING HERETO OR ANY OTHER CREDIT DOCUMENT,
OR ANY OF THE OBLIGATIONS, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING
AND DELIVERING THIS AGREEMENT, EACH CREDIT PARTY, FOR ITSELF AND IN CONNECTION
WITH ITS PROPERTIES, IRREVOCABLY (A) ACCEPTS GENERALLY AND UNCONDITIONALLY THE
NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (B) WAIVES ANY DEFENSE OF
FORUM NON CONVENIENS; (C) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH
PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO THE APPLICABLE CREDIT PARTY AT ITS ADDRESS PROVIDED IN
ACCORDANCE WITH SECTION 10.1; (D) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (C)
ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE CREDIT
PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; AND (E) AGREES SUCH LENDERS
RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
BRING PROCEEDINGS AGAINST ANY CREDIT PARTY IN THE COURTS OF ANY OTHER
JURISDICTION.
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10.16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY AGREES TO
WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT HEREOF OR ANY OF THE OTHER CREDIT DOCUMENTS OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR
THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS
WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE
FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH
WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH
PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING
(OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION
10.16 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY
TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO OR
ANY OF THE OTHER CREDIT DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE LOANS MADE HEREUNDER. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
10.17. Confidentiality. Each Lender shall hold all non-public information
obtained pursuant to the requirements hereof which has been identified as
confidential by Holdings or Borrowers in accordance with such Lender's customary
procedures for handling confidential information of this nature and in
accordance with prudent lending or investing practices, it being understood and
agreed by Holdings and Borrowers that in any event a Lender may make disclosures
to Affiliates of such Lender or disclosures reasonably required by any bona fide
or potential assignee, transferee or participant in connection with the
contemplated assignment, transfer or participation by such Lender of any Loans
or any participations `therein or by any direct or indirect contractual
counterparties (or the professional advisors thereto) in swap agreements
(provided, such swap counterparties and advisors are advised of and agree to be
bound by the provisions of this Section 10.17) or disclosures required or
requested by any governmental agency or representative thereof or by the
National Association of Insurance Commissioners or pursuant to legal process;
provided, unless specifically prohibited by applicable law or court order, each
Lender shall notify Holdings and Borrowers of any request by any governmental
agency or representative thereof (other than any such request in connection with
any examination of the financial condition of such Lender by such governmental
agency) for disclosure of any such non-public information prior to disclosure
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of such information; and provided further, in no event shall any Lender be
obligated or required to return any materials furnished by Holdings or any of
its Subsidiaries.
10.18. Usury Savings Clause. Notwithstanding any other provision herein,
the aggregate interest rate charged with respect to any of the Obligations,
including all charges or fees in connection therewith deemed in the nature of
interest under applicable law shall not exceed the Highest Lawful Rate. If the
rate of interest (determined without regard to the preceding sentence) under
this Agreement at any time exceeds the Highest Lawful Rate, the outstanding
amount of the Loans made hereunder shall bear interest at the Highest Lawful
Rate until the total amount of interest due hereunder equals the amount of
interest which would have been due hereunder if the stated rates of interest set
forth in this Agreement had at all times been in effect. In addition, if when
the Loans made hereunder are repaid in full the total interest due hereunder
(taking into account the increase provided for above) is less than the total
amount of interest which would have been due hereunder if the stated rates of
interest set forth in this Agreement had at all times been in effect, then to
the extent permitted by law, Borrowers shall pay to Administrative Agent an
amount equal to the difference between the amount of interest paid and the
amount of interest which would have been paid if the Highest Lawful Rate had at
all times been in effect. Notwithstanding the foregoing, it is the intention of
Lenders and Borrowers to conform strictly to any applicable usury laws.
Accordingly, if any Lender contracts for, charges, or receives any consideration
which constitutes interest in excess of the Highest Lawful Rate, then any such
excess shall be cancelled automatically and, if previously paid, shall at such
Lender's option be applied to the outstanding amount of the Loans made hereunder
or be refunded to Borrowers.
10.19. Counterparts; Effectiveness. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto and receipt by
Borrowers and Administrative Agent of written or telephonic notification of such
execution and authorization of delivery thereof.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first written above.
CONVERGENT COMMUNICATIONS, INC.
By: /s/ JOHN R. EVANS
-----------------------------------
Name: John R. Evans
Title: CEO
CONVERGENT COMMUNICATIONS
SYSTEMS, INC.
By: /s/ JOHN R. EVANS
-----------------------------------
Name: John R. Evans
Title: CEO
CONVERGENT CAPITAL CORPORATION
By: /s/ JOHN R. EVANS
-----------------------------------
Name: John R. Evans
Title: CEO
S-1
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GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Administrative Agent and a Lender
By: /s/ Richard Katz
--------------------------------
Authorized Signatory
S-2
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EXHIBIT 10.32
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT, dated as of June 3, 1999 (this
"Agreement"), among EACH OF THE UNDERSIGNED, whether as an original signatory
hereto or as an Additional Grantor (as herein defined) (each, a "Grantor"), and
Goldman Sachs Credit Partners, L.P., as agent (in such capacity, "Secured
Party") for Lenders and Lender Counterparties (as each such term is defined in
the Credit Agreement referred to below and, collectively with Lenders and
Secured Party, the "Secured Parties").
RECITALS:
WHEREAS, each Grantor is a party to the Credit and Guaranty Agreement of
even date herewith (as it may be from time to time amended, supplemented or
otherwise modified, the "Credit Agreement") among Grantors, Lenders, and
Goldman Sachs Credit Partners L.P., as Administrative Agent; and
WHEREAS, in consideration of the extensions of credit and other accommoda
tions of Lenders as set forth in the Credit Agreement, each Grantor has agreed,
subject to the terms and conditions hereof, and of each other Credit Document,
to secure such Grantor's Obligations under the Credit Documents as set forth
herein; and
WHEREAS, capitalized terms used herein (including the recitals hereto) not
otherwise defined herein shall have the meanings ascribed thereto in the Credit
Agreement.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, each Grantor and Secured Party agree
as follows:
SECTION 1. GRANT OF SECURITY
Each Grantor hereby grants to Secured Party for its benefit and the ratable
benefit of the other Secured Parties a security interest in all of Grantor's
right, title and interest in and to the following, in each case whether now or
hereafter existing or in which Grantor now has or hereafter acquires an interest
and wherever the same may be located (collectively, the "Collateral"):
a. all "Investment Property", which term means:
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(i) all right, title and interest of such Grantor, whether now owned
or hereafter acquired, in all shares of capital stock owned by such
Grantor, including without limitation, all shares of capital stock
described on Schedule 1(a), and the certificates representing such shares
and any interest of such Grantor in the entries on the books of any
financial intermediary pertaining to such shares, and all dividends, cash,
warrants, rights, instruments and other property or proceeds from time to
time received, receivable or otherwise distrib uted in respect of or in
exchange for any or all of such shares (all of the foregoing being referred
to herein collectively as the "Pledged Stock"); provided, only the
outstanding capital stock of a controlled foreign corporation possessing up
to but not exceeding 65% of the voting power of all classes of capital
stock of such controlled foreign corporation entitled to vote shall be
deemed to be pledged hereunder;
(ii) all right, title and interest of such Grantor, whether now owned
or hereafter acquired, of all Indebtedness owed to such Grantor, including,
without limitation, all Indebtedness described on Schedule 1(a), issued by
the obligors named therein, the instruments evidencing such Indebtedness,
and all interest, cash, instruments and other property or proceeds from
time to time received, receivable or otherwise distributed in respect of or
in exchange for any or all of such Indebtedness (all of the foregoing being
referred to herein collectively as the "Pledged Debt");
(iii) all of such Grantor's right, title and interest as a limited
and/or general partner in all partnerships, including, without limitation,
the partnerships described on Schedule 1(a) (the "Partnerships"), whether
now owned or hereafter acquired, including, without limitation, all of such
Grantor's right, title and interest in, to and under the partnership
agreements described on Schedule 1(a) (as such agreements have heretofore
been and may hereafter be amended, restated, supplemented or otherwise
modified from time to time, collectively, the "Partnership Agreements") to
which it is a party (including, if such Grantor is a general partner of any
Partnership, the right to vote with respect to and to manage and administer
the business of such Partnership) together with all other rights,
interests, claims and other property of such Grantor in any manner arising
out of or relating to its limited and/or general partnership interest in
the Partnerships, whatever their respective kind or character, whether they
are tangible or intangible property, and wheresoever they may exist or be
located, and further including, without limitation, all of the rights of
such Grantor as a limited and/or general partner: to receive money due
and to become due (including without limitation dividends, distributions,
interest, income from partnership properties and operations, proceeds of
sale of partnership assets and
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returns of capital) under or pursuant to the Partnership Agreements, to
receive payments upon termination of the Partnership Agreements, and to
receive any other payments or distributions, whether cash or noncash, in
respect of such Grantor's limited and/or general partnership interest
evidenced by the Partner ship Agreements; in and with respect to claims and
causes of action rising out of or relating to the Partnerships; and to have
the access to the Partnerships' books and records and to other information
concerning or affecting the Partnerships; and any "certificate of
interest" or "certificates of interest" (or other certificates or
instruments however designated or titled) issued by the Partnerships and
evidencing such Grantor's interest as a limited and/or general partner in
the Partnerships (collectively, the "Certificates" and any interest of
such Grantor in the entries on the books of any financial intermediary
pertaining to such Grantor's interest as a limited and/or general partner
in the Partnership (all of the foregoing being referred to herein
collectively as the "Partnership Interests");
(iv) all of such Grantor's right, title and interest as a member of
all limited liability companies (the "LLCs"), including, without
limitation, all of such Grantor's right, title and interest in, to and
under the limited liability company interests set forth on Schedule 1(a),
whether now owned or hereafter acquired, including, without limitation, all
of such Grantor's right, title and interest in, to and under the operating
agreements with respect to any such LLC (as such agreements have heretofore
been and may hereafter be amended, restated, supplemented or otherwise
modified from time to time, collectively, each, an "LLC Agreement") to
which it is a party, regardless of whether such right, title and interest
arises under such LLC Agreement, including all rights of such Grantor to
receive distributions of any kind, in cash or otherwise, due or to become
due under or pursuant to each such LLC Agreement or otherwise in respect of
such Person, all rights of such Grantor to receive proceeds of any
insurance, indemnity, warranty or guaranty with respect to each such
Person, all claims of such Grantor for damages arising out of, or for the
breach of, or for a default under, each such LLC Agreement, any
certificated or uncertificated security evidencing any of the foregoing
issued by such Person to such Grantor and to the extent not included in
the foregoing, all proceeds of any and all of the foregoing (all of the
foregoing being referred to herein collectively as the "LLC Interests";
the Pledged Stock, the Pledged Debt, the Partnership Interests and the LLC
Interests being herein collectively referred to as the "Pledged
Securities";
(v) all additional shares of, limited and/or general partnership
interests in and limited liability company interests in, and all securities
convertible into and warrants, options and other rights to purchase or
otherwise
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acquire, stock of any issuer of the Pledged Stock, limited and/or general
partnership interests in the Partnerships, and limited liability company
interests in the LLCs, from time to time acquired by such Grantor in any
manner (which shares or interests shall be deemed to be part of the Pledged
Securities), the certificates or other instruments representing such
additional shares or interests, securities, warrants, options or other
rights and any interest of such Grantor in the entries on the books of any
financial intermediary pertaining to such additional shares or interests,
and all additional indebtedness from time to time owed to such Grantor by
any obligor on the Pledged Debt and the instruments evidencing such
indebtedness, and all interest, cash, instruments and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such indebtedness; (all of the
foregoing being referred to herein collectively as the "Additional Pledged
Securities"), and all dividends, distributions, cash, warrants, rights,
instruments, payments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in exchange
for any or all of such Additional Securities; and
(vi) all shares of, limited and/or general partnership interests in,
and limited liability company interests in, and all securities convertible
into and warrants, options and other rights to purchase or otherwise
acquire, stock of, limited and/or general partnership interests in, or
limited liability company interests in any Person that, after the date of
this Agreement, becomes, as a result of any occurrence, a direct Subsidiary
of such Grantor (which shares or interests shall be deemed to be part of
the Pledged Securities), the certificates or other instruments representing
such shares, interests, securities, warrants, options or other rights and
any interest of such Grantor in the entries on the books of any financial
intermediary pertaining to such shares or interests and all dividends,
distributions, cash, warrants, rights, instruments and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such shares, interests,
securities, warrants, options or other rights, and all Indebtedness from
time to time owed to such Grantor by any Person that, after the date of
this Agreement, becomes, as a result of any occurrence, a Subsidiary of
such Grantor, and the instruments evidencing such Indebtedness, and all
interest, cash, instruments and other property or proceeds from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such Indebtedness;
(b) all interest, cash, instruments, securities and other property from
time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the foregoing;
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(c) all "Intellectual Property", which term means:
(i) all trademarks, service marks, designs, logos, indicia,
tradenames, corporate names, company names, business names, fictitious
business names, trade styles and/or other source and/or business
identifiers and applications pertaining thereto, owned or used by such
Grantor in its business, or hereafter adopted and used, including, without
limitation, the Trademarks specifically identified in Schedule 1(c) (all of
the foregoing being referred to herein collectively as the "Trademarks"),
all registrations that have been or may hereaf ter be issued or applied for
thereon in the United States and any state thereof and in certain foreign
countries, including, without limitation, the registrations specifically
identified in Schedule 1(c) (all of the foregoing being referred to herein
collectively as the "Trademark Registrations"), all common law and other
rights (but in no event any of the obligations) in and to the Trademarks in
the United States and any state thereof and in certain foreign countries
(all of the foregoing being referred to herein collectively as the
"Trademark Rights"), and all goodwill of such Grantor's business
symbolized by the Trademarks and associated therewith (all of the foregoing
being referred to herein collectively as the "Associated Goodwill");
(ii) all patents and patent applications and rights and interests in
patents and patent applications under any domestic law that are presently,
or in the future may be, owned by such Grantor and all patents and patent
applications and rights and interests in patents and patent applications
under any domestic law that are presently, or in the future may be, held or
used by such Grantor in whole or in part, including, without limitation,
the patents and patent applica tions listed in Schedule 1(c), all rights
(but not obligations corresponding thereto), including, without limitation,
the right (but not the obligation, and exercisable only upon the occurrence
and continuation of an Event of Default) to sue for past, present and
future infringements in the name of such Grantor or in the name of Secured
Party or Secured Parties, and all re-issues, divisions, continuations,
renewals, extensions and continuations-in-part thereof (all of the
foregoing being collectively referred to as the "Patents"); it being
understood that the rights and interest included herein hereby shall
include, without limitation, all rights and interests pursuant to licensing
or other contracts in favor of such Grantor pertaining to patent
applications and patents presently or in the future owned or used by third
parties but, in the case of third parties which are not Affiliates of
Grantor, only to the extent permitted by such licensing or other contracts
and, if not so permitted, only with the consent of such third parties; and
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(iii) various published and unpublished works of authorship
including, without limitation, computer programs, computer data bases,
other computer software, including without limitation, object code and
source code, mask works, semiconductor chips, masks, cell libraries,
layouts, trade secrets, trade secret rights, trade dress rights, ideas,
drawings, designs, schematics, algorithms, writings, techniques, processes
and formulas, including, without limitation, the works listed on Schedule
1(c) (all of the foregoing being referred to herein collectively as the
"Copyrights"), all copyright registrations issued to such Grantor and
applications for copyright registration that have been or may hereafter be
issued or applied for thereon in the United States and any state thereof
and in certain foreign countries, including, without limitation, the
registrations listed on Schedule 1(c) (all of the foregoing being referred
to herein collectively as the "Copyright Registrations"), all common law
and other rights in and to the Copyrights in the United States and any
state thereof and in certain foreign countries including all copyright
licenses (but with respect to such copyright licenses, only to the extent
permitted by such licensing arrangements) (all of the foregoing being
referred to herein collectively as the "Copyright Rights"), including,
without limitation, each of the Copyrights, rights, titles and interests in
and to the Copyrights and works protectable by copyright, which are
presently, or in the future may be, owned, created (as a work for hire for
the benefit of such Grantor), authored (as a work for hire for the benefit
of such Grantor), acquired or used (whether pursuant to a license or
otherwise but only to the extent permitted by agreements governing such
license or other use) by such Grantor, in whole or in part, and all
Copyright Rights with respect thereto and all Copyright Registrations
therefor, heretofore or hereafter granted or applied for, and all renewals
and extensions thereof, throughout the world, including all proceeds
thereof (such as, by way of example and not by limitation, license
royalties and proceeds of infringement suits), the right (but not the
obligation) to renew and extend such Copyrights, Registrations and
Copyright Rights and to register works protectable by copyright and the
right (but not the obligation and exercisable only upon the occurrence and
continuation of an Event of Default) to sue or bring opposition or
cancellation proceedings in the name of such Grantor or in the name of
Secured Party or Secured Parties for past, present and future infringements
of the Copyrights and Copyright Rights;
(d) all of such Grantor's right, title and interest in, to and under any
inventory in all of its forms, including, but not limited to, all goods held by
such Grantor for sale or lease or to be furnished under contracts of service or
so leased or furnished, all raw materials, work in process, finished goods, and
materials used or consumed in the manufacture, packing, shipping, advertising,
selling, leasing, furnishing or production of such inventory or otherwise used
or consumed in such Grantor's business, all goods
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in which such Grantor has an interest in mass or a joint or other interest or
right of any kind, all goods which are returned to or repossessed by such
Grantor, and all accessions thereto and products thereof (all of the foregoing
being referred to herein collectively as the "Inventory"), and all negotiable
and non-negotiable documents of title, including, without limitation, warehouse
receipts, dock receipts and bills of lading issued by any Person covering any
Inventory; provided that Inventory shall not include any property or rights
included in Excluded Collateral (as defined below);
(e) all of such Grantor's right, title and interest in, to and under any
accounts, contract rights, chattel paper, documents, instruments, general
intangibles and other rights and obligations of any kind (all of the foregoing
being referred to herein collectively as the "Accounts") and all of such
Grantor's rights in, to and under all security agreements, leases and other
contracts securing or otherwise relating to any Accounts (all of the foregoing
being referred to herein collectively as the "Related Contracts"); provided
that, Accounts and Related Contracts shall not include any property or rights
included in Excluded Collateral (as defined below);
(f) all of such Grantor's right, title and interest in, to and under all
agreements and contracts to which such Grantor is a party as of the date hereof,
including, without limitation, each Material Contract, or to which such Grantor
becomes a party after the date hereof, as each such agreement may be amended,
supplemented or otherwise modified from time to time (all of the foregoing being
referred to herein collectively as the "Assigned Agreements"), including all
rights of such Grantor to receive moneys due or to become due under or pursuant
to the Assigned Agreements, all rights of such Grantor to receive proceeds of
any insurance, indemnity, warranty or guaranty with respect to the Assigned
Agreements, all claims of such Grantor for damages arising out of any breach of
or default under the Assigned Agreements, and all rights of such Grantor to
terminate, amend, supplement, modify or exercise rights or options under the
Assigned Agreements, to perform thereunder and to compel performance and
otherwise exercise all remedies thereunder; provided that Assigned Agreements
shall not include any property or rights included in Excluded Collateral (as
defined below);
(g) to the extent not otherwise included in any other paragraph of this
Section 1, all other general intangibles, including tax refunds, rights to
payment or performance, choses in action and judgments taken on any rights or
claims included in the Collateral;
(h) all books, records, ledger cards, files, correspondence, computer
programs, tapes, disks and related data processing software that at any time
evidence or
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contain information relating to any of the Collateral or are otherwise necessary
or helpful in the collection thereof or realization thereupon; and
(i) to the extent not covered by Sections 1(a) through 1(k), all other
personal property of such Grantor (other than Excluded Collateral, equipment and
fixtures), all proceeds, products, rents and profits of or from any and all of
the foregoing Collateral and, to the extent not otherwise included, all payments
under insurance (whether or not Secured Party is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral. For purposes of this
Agreement, the term "proceeds" includes whatever is receivable or received when
Collateral or proceeds are sold, exchanged, collected or otherwise disposed of,
whether such disposition is voluntary or involuntary.
Excluded Collateral is defined to include (i) any of such Grantor's rights
or interests in any license, contract or agreement to which such Grantor is a
party or any of its rights or interests thereunder to the extent, but only to
the extent, that such a grant would, under the terms of such license, contract
or agreement or otherwise, result in a breach of the terms of, or constitute a
default under any license, contract or agreement to which such Grantor is a
party (other than to the extent that any such term would be rendered ineffective
pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant
jurisdiction or any other applicable law (including the Bankruptcy Code) or
principles of equity); provided, immediately upon the ineffectiveness, lapse or
termination of any such provision, the Collateral shall include, and such
Grantor shall be deemed to have granted a security interest in, all such rights
and interests as if such provision had never been in effect (ii) any Inventory
held for lease or made available for use by customers or clients of a Grantor
under a lease, service contract or similar arrangement and (iii) Inventory
subject to a Lien or security interest securing Purchase Money Indebtedness and
Accounts and Related Contracts relating to such Inventory.
SECTION 2. SECURITY FOR OBLIGATIONS; GRANTORS REMAIN LIABLE
This Agreement secures, and the Collateral is collateral security for,
the prompt payment or performance in full when due, whether at stated maturity,
by required prepayment, declaration, acceleration, demand or otherwise
(including the payment of amounts that would become due but for the operation of
the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C.
(S)362(a)), of all Obligations with respect to each Grantor (the "Secured
Obligations"). Anything contained herein to the contrary notwithstanding, (a)
each Grantor shall remain liable under any Partnership Agreement, LLC Agreement
or any other contracts and agreements included in the Collateral, to the extent
set forth therein, to perform all of its duties and obligations
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thereunder to the same extent as if this Agreement had not been executed; (b)
the exercise by Secured Party of any of its rights hereunder shall not release
any Grantor from any of its duties or obligations under the contracts and
agreements included in the Collateral; and (c) Secured Party shall not have any
obligation or liability under any Partnership Agreement, LLC Agreement or any
other contracts and agreements included in the Collateral by reason of this
Agreement, nor shall Secured Party be obligated to perform any of the
obligations or duties of any Grantor thereunder or to take any action to collect
or enforce any claim for payment assigned hereunder. Notwithstanding any of the
foregoing, this Agreement shall not in any way be deemed to obligate Secured
Party, any Lender or any purchaser at a foreclosure sale under this Agreement to
assume any of any Grantor's obligations, duties, expenses or liabilities under
any LLC Agreement or Partnership Agreement (including any Grantor's obligations
as a general partner for the debts and obligations of a Partnership) and to
manage the business and affairs of any Partnership or any of such Grantor's
obligations for the debts and obligations of an LLC, or under any and all other
agreements now existing or hereafter drafted or executed (collectively, the
"Grantor Obligations") unless Secured Party, any Lender or any such purchaser
otherwise expressly agrees in writing to assume any or all of said Grantor
Obligations. In the event of foreclosure by Secured Party, each Grantor shall
remain bound and obligated to perform its Grantor Obligations arising during or
otherwise related to its ownership of the Collateral, and neither Secured Party
nor any Lender shall be deemed to have assumed any of such Grantor Obligations
except as provided in the preceding sentence. Without limiting the generality of
the foregoing, neither the grant of the security interest in the Collateral in
favor of Secured Party as provided herein nor the exercise by Secured Party of
any of its rights hereunder nor any action by the Secured party in connection
with a foreclosure on the Collateral shall be deemed to constitute Secured Party
or any Lender a partner of any Partnership or a member of any LLC; provided, in
the event Secured Party or any purchaser of Collateral at a foreclosure sale
elects to become a substituted general partner of any Partnership or manager of
any LLC in place of any Grantor, Secured Party or such purchaser, as the case
may, shall adopt in writing the applicable Partnership Agreement or LLC
Agreement, as the case may be, and agree to be bound by the terms and provisions
thereof.
SECTION 3. REPRESENTATIONS AND WARRANTIES
3.1. Generally. Each Grantor represents and warrants that each of the
representations and warranties set forth in Section 4.10 of the Credit Agreement
is true and correct with respect to each item of Collateral applicable thereto
owned by such Grantor as if fully set forth herein.
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3.2. Investment Property. In addition to any other representation made
thereby in any other Credit Document, each Grantor represents and warrants that
all of the Pledged Stock has been duly authorized and validly issued and are
fully paid and non-assessable; the Pledged Securities constitute all of the
issued and outstanding equity Securities of each issuer thereof that are owned
by such Grantor, and there are no outstanding warrants, options or other rights
to purchase, or other agreements outstanding with respect to, or property that
is now or hereafter convertible into, or that requires the issuance or sale of,
any of the Pledged Securities; all of the Pledged Debt constitutes all of the
issued and outstanding inter company Indebtedness evidenced by a promissory note
of the respective issuers thereof owing to such Grantor; the security interest
of Secured Party hereunder has been registered on the books and records of any
issuer of "uncertificated securities" (as such term is defined in the UCC)
included in the Collateral; and with respect to any Investment Property, no
consent of any Person, including any other limited or general partner of the
Partnerships, any other member of any LLC, or any creditor of any Grantor, and
no authorization, approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required for either the grant
by any Grantor of the security interests granted hereby, the execution,
delivery or performance of this Agreement by any Grantor, or the perfection of
or the exercise by Secured Party of its rights and remedies hereunder (except as
may have been taken by or at the direction of any Grantor and except for filings
and notices that may be required under federal and state securities laws in
connection with the exercise by Secured Party of its rights and remedies
hereunder).
3.3. Intellectual Property Collateral. In addition to any other
representation made thereby in any other Credit Document, each Grantor
represents and warrants that a true and complete list of all Trademark
Registrations and Trademark applications owned, held (whether pursuant to a
license or otherwise) or used by such Grantor, in whole or in part, as of the
date of this Agreement is set forth in Schedule 1(c); a true and complete list
of all Patents owned, held (whether pursuant to a license or otherwise) or used
by such Grantor, in whole or in part, as of the date of this Agreement is set
forth in Schedule 1(c); a true and complete list of all Copyright Registrations
and applica tions for Copyright Registrations held (whether pursuant to a
license or otherwise) or used by such Grantor, in whole or in part, as of the
date of this Agreement is set forth in Schedule 1(c); except as set forth on
Schedule 3.1, Grantor is not aware of any pending or threatened claim by any
third party that any of the Intellectual Property owned, held or used by such
Grantor is invalid or unenforceable; and no effective security interest or
other Lien covering all or any part of the Intellectual Property Collateral is
on file in the United States Patent and Trademark Office or the United States
Copyright Office.
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3.4. Location of Inventory. In addition to the representations and
warranties made thereby in any other Credit Document, each Grantor represents
and warrants that all of the Inventory included in the Collateral (other than
Inventory located in any state the aggregate value of which does not exceed
$100,000 in such state) is, as of the date hereof, located in the jurisdictions
specified in Schedule 3.4.
3.5. Office Locations; Other Names. In addition to the representations
and warranties made thereby in any other Credit Document, each Grantor
represents and warrants that as of the date hereof the chief place of business,
the chief executive office and the office where such Grantor keeps its records
regarding the Accounts and all originals of all chattel paper that evidence
Accounts is, and has been for the four month period preceding the date hereof,
located at the places indicated on Schedule 3.5, and no Grantor has in the past
twelve months, and does not now do, business under any other name (including any
trade-name or fictitious business name) except for those names set forth on
Schedule 3.5.
SECTION 4. FURTHER ASSURANCES; ADDITIONAL GRANTORS
4.1. Generally. Each Grantor agrees that from time to time, at the
expense of Grantor, each Grantor will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that Secured Party may reasonably request, in order to perfect and
protect any security interest granted or purported to be granted hereby or to
enable Secured Party to exercise and enforce its rights and remedies hereunder
with respect to any Collateral. Without limiting the generality of the
foregoing, each Grantor will execute and file such financing or continuation
statements, or amendments thereto, and such other instruments or notices, as may
be necessary, or as Secured Party may reasonably request, in order to perfect
and preserve the security interests granted or purported to be granted hereby;
at any reasonable time, upon request by Secured Party, exhibit the Collateral to
and allow inspection of the Collateral by Secured Party, or persons designated
by Secured Party; and at Secured Party's request, appear in and defend any
action or proceeding that may affect Grantor's title to or Secured Party's
security interest in all or any part of the Collateral. Each Grantor hereby
authorizes Secured Party to file one or more financing or continuation
statements, and amendments thereto, relative to all or any part of the
Collateral without the signature of Grantor. Each Grantor agrees that a carbon,
photographic or other reproduction of this Agreement or of a financing statement
signed by Grantor shall be sufficient as a financing statement and may be filed
as a financing statement in any and all jurisdictions. Each Grantor will
furnish to Secured Party from time to time statements and schedules further
identifying and describing the Collateral
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and such other reports in connection with the Collateral as Secured Party may
reasonably request, all in reasonable detail.
4.2. Investment Property. (a) Each Grantor agrees that it will, upon
obtaining any additional shares of stock or other securities required to be
pledged hereunder, promptly (and in any event within five Business Days) deliver
to Secured Party a Pledge Supplement, duly executed by Grantor, in substantially
the form of Exhibit A (a "Pledge Supplement"), in respect of the additional
Pledged Shares to be pledged pursuant to this Agreement. Each Grantor hereby
authorizes Secured Party to attach each Pledge Supplement to this Agreement and
agrees that all Pledged Shares of Grantor listed on any Pledge Supplement shall
for all purposes hereunder be considered Collateral of Grantor; provided, the
failure of any Grantor to execute a Pledge Supplement with respect to any
additional Pledged Shares pledged pursuant to this Agreement shall not impair
the security interest of Secured Party therein or otherwise adversely affect the
rights and remedies of Secured Party hereunder with respect thereto.
(b) Upon request Secured Party, each Grantor shall cause each Person which
is an issuer of an uncertificated security included in the Collateral to execute
and deliver all instruments and documents, and take all further action Secured
Party may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted in such uncertificated securities,
to establish "control" (as such term is defined in the UCC) by Secured Party
over such Collateral or to enable Secured Party to exercise and enforce its
rights and remedies hereunder with respect to such Collateral, including, and as
applicable, register the security interest granted hereby upon the books of
such Person in accordance with Article 8 of the UCC, and deliver to Secured
Party an Acknowledgment of Pledge, duly executed by such the issuer of the
applicable uncertificated security, in substantially the form of Exhibit B (an
"Acknowledgment of Pledge").
4.3. Intellectual Property Collateral. If any Grantor shall hereafter
obtain rights to any new Intellectual Property Collateral or become entitled to
the benefit of any patent application or patent or any reissue, division,
continuation, renewal, extension or continuation-in-part of any Patent or any
improvement of any Patent; or any Copyright Registration, application for
Registration or renewals or extension of any Copyright, then in any such case,
the provisions of this Agreement shall automatically apply thereto. Each
Grantor shall promptly notify Secured Party in writing of any of the foregoing
rights acquired by Grantor after the date hereof that are registered (or subject
to an application for registration) in the name of Grantor and of any Trademark
Registrations issued or applications for Trademark Registration or applications
for Patents made, and any Copyright Registrations issued or applications for
Copyright Registration made, in any such case, after the date hereof. Promptly
after the filing of
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an application for any Trademark Registration; Patent; and Copyright
Registration, each Grantor shall execute and deliver to Secured Party and record
in all places where this Agreement is recorded a Pledge Supplement, pursuant to
which Grantor shall grant to Secured Party a security interest to the extent of
its interest in such Intellectual Property Collateral; provided, if, in the
reasonable judgment of Grantor, after due inquiry, granting such interest would
result in the grant of a Trademark Registration or Copyright Registration in the
name of Secured Party, in which event Grantor shall give written notice to
Secured Party as soon as reasonably practicable and the filing shall instead be
undertaken as soon as practicable but in no case later than immediately
following the grant of the applicable Trademark Registration or Copyright
Registration, as the case may be. In addition to the foregoing, each Grantor
hereby authorizes Secured Party to modify this Agreement without obtaining
Grantor's approval of or signature to such modification by amending Schedule
1(c), as applicable, to include reference to any right, title or interest in any
existing Intellectual Property Collateral or any Intellectual Property
Collateral acquired or developed by Grantor after the execution hereof or to
delete any reference to any right, title or interest in any Intellectual
Property Collateral in which Grantor no longer has or claims any right, title or
interest.
4.4. Accounts. Each Grantor shall, at the reasonable request of Secured
Party, mark conspicuously each item of chattel paper included in the Accounts,
with a legend, in form and substance reasonably satisfactory to Secured Party,
indicating that such Collateral is subject to the security interest granted
hereby, and at the reasonable request of Secured Party, deliver and pledge to
Secured Party hereunder all promissory notes and other instruments (excluding
checks) and all original counterparts of chattel paper constituting Collateral,
duly endorsed and accompanied by duly executed instruments of transfer or
assignment, all in form and substance reasonably satisfactory to Secured Party.
4.5. Additional Grantors. From time to time subsequent to the date
hereof, additional Persons may become parties hereto as additional Grantors
(each, an "Additional Grantor"), by executing a Pledge Supplement. Upon
delivery of any such Counterpart Agreement to Secured Party, notice of which is
hereby waived by Grantors, each Additional Grantor shall be a Grantor and shall
be as fully a party hereto as if Additional Grantor were an original signatory
hereto. Each Grantor expressly agrees that its obligations arising hereunder
shall not be affected or diminished by the addition or release of any other
Grantor hereunder, nor by any election of Administrative Agent not to cause any
Subsidiary of Company to become an Additional Grantor hereunder. This Agreement
shall be fully effective as to any Grantor that is or becomes a party hereto
regardless of whether any other Person becomes or fails to become or ceases to
be a Grantor hereunder.
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SECTION 5. COVENANTS OF GRANTORS
5.1. Generally. Each Grantor shall except for the security interest
created by this Agreement, not create or suffer to exist any Lien upon or with
respect to any of the Collateral, except Permitted Liens; not use or permit any
Collateral to be used unlawfully or in violation of any provision of this
Agreement or any applicable statute, regulation or ordinance or any policy of
insurance covering the Collateral; notify Secured Party of any change in
Grantor's name, identity or corporate structure within 15 days of such change;
diligently keep reasonable records respecting the Intellectual Property
Collateral and at all times keep at least one complete set of its records
concerning such Collateral at its chief executive office or principal place of
business; if Secured Party gives value to enable Grantor to acquire rights in or
the use of any Collateral, use such value for such purposes; pay promptly when
due all property and other taxes, assessments and governmental charges or levies
imposed upon, and all claims (including claims for labor, materials and
supplies) against, the Collateral, except to the extent the validity thereof is
being contested in good faith; provided, Grantor shall in any event pay such
taxes, assessments, charges, levies or claims not later than five days prior to
the date of any proposed sale under any judgement, writ or warrant of attachment
entered or filed against Grantor or any of the Collateral as a result of the
failure to make such payment; and upon any Authorized Officer of such Grantor
obtaining knowledge thereof, promptly notify Secured Party in writing of any
event that may materially and adversely affect the value of the Collateral or
any portion thereof, the ability of Grantor or Secured Party to dispose of the
Collateral or any portion thereof, or the rights and remedies of Secured Party
in relation thereto, including, without limitation, the levy of any legal
process against the Collateral or any portion thereof. No Grantor shall sell,
transfer or assign (by operation of law or otherwise) any Collateral except
Asset Sales permitted by the Credit Agreement, sales or other dispositions of
assets that do not constitute Asset Sales, leases or subleases to other Persons
of assets in the ordinary course of business and licenses to other Persons of
Intellectual Property Collateral in the ordinary course of business (a
"Permitted Sale"). So long as no Event of Default shall have occurred and is
then continuing or would occur after giving effect to a Permitted Sale
constituting an Asset Sale, and to the extent required under the Credit
Agreement the Net Asset Sale Proceeds with respect to such Permitted Sale are
delivered to Secured Party contemporaneously with such Permitted Sale, the Lien
hereof encumbering the Collateral that is the subject of such Permitted Sale
shall be released. Secured Party shall execute each and every appropriate
filing statement and/or recording document reasonably requested by any Grantor
is connection with the foregoing. Any reasonable expense or cost incurred by
Secured Party in connection with any such release shall be for the account of
the applicable Grantor.
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5.2. Investment Property.
(a) Delivery. (i) All certificates or instruments representing or
evidencing the Investment Property shall be delivered to and held by or on
behalf of Secured Party pursuant hereto and shall be in suitable form for
transfer by delivery or, as applicable, shall be accompanied by Grantor's
endorsement, where necessary, or duly executed instruments of transfer or
assignment in blank, all in form and substance satisfactory to Secured Party.
Upon the occurrence and during the continuation of an Event of Default, Secured
Party shall have the right, without notice to any Grantor, to transfer to or to
register in the name of Secured Party or any of its nominees any or all of the
Investment Property, subject only to the revocable rights specified herein. In
addition, upon the occurrence and during the existence of an Event of Default,
Secured Party shall have the right at any time to exchange certificates or
instruments representing or evidencing Investment Property for certificates or
instruments of smaller or larger denominations.
(ii) Each Grantor hereby consents to the pledge of the Partnership
Interests by each other Grantor in each Partnership pursuant to the terms
hereof, and, subject to Section 7, to the transfer of such Partnership Interests
to Secured Party or its nominee and to the substitution of Secured Party or its
nominee as a substituted Partner or each such Partnership with all the rights,
powers and duties of a general partner or a limited partners, as the case may
be.
(iii) Each Grantor hereby consents to the pledge of the LLC Interests
by each other Grantor in each LLC pursuant to the terms hereof, and, subject to
Section 7, to the transfer of such LLC Interests to Secured Party or its nominee
and to the substitution of Secured Party or its nominee as a substituted member
of the LLC with all the rights, powers and duties of a member of the LLC in
question.
(b) Covenants. Each Grantor shall not permit any issuer of Pledged Shares
to merge or consolidate unless all the outstanding capital stock of the
surviving or resulting corporation is, upon such merger or consolidation,
pledged hereunder (except in connection with a merger or consolidation
constituting a Permitted Sale) and no cash, securities or other property is
distributed in respect of the outstanding shares of any other constituent
corporation; provided, if the surviving or resulting corporation upon any such
merger or consolidation involving an issuer of Pledged Shares which is a
controlled foreign corporation is a controlled foreign corporation, then such
Grantor shall only be required to pledge outstanding capital stock of such
surviving or resulting corporation possessing up to but not exceeding 65% of the
voting power of all classes of capital stock of such issuer entitled to vote;
cause each issuer of Pledged Shares not to issue any stock or other securities
in addition to or in substitution for the Pledged Shares issued by such issuer,
except to Grantor; promptly deliver to Secured Party
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notice of the conversion of any partnership interests in a Partnership Agreement
or any membership interests in a LLC to certificated form; not cancel or
terminate any of the Partnership Agreements or LLC Agreements or consent to or
accept any cancellation or termination thereof, sell, assign (by operation of
law or otherwise) or otherwise dispose of any part of its limited or general
partnership interest in any of the Partnerships or its membership interest in
any of the LLCs (except for Permitted Sale), amend, supplement or otherwise
modify any of the Partnership Agreements or any of the LLC Agreements (as in
effect on the date hereof that could reasonably be expected to have Material
Adverse Effect), waive, fail to enforce, forgive or release any right, interest
or entitlement of any kind, howsoever arising, under or in respect of any of the
Partnership Agreements or any of the LLC Agreements or vary or agree to the
variation in any respect of any of the provisions of any of the Partnership
Agreements or any of the LLC Agreements or the performance of any Other Person
under any of the Partnership Agreements or any of the LLC Agreements, or
petition, request or take any other legal or administrative action which seeks,
or may reasonably be expected, to rescind, to terminate or to suspend any of the
Partnership Agreements or any of the LLC Agreements or to amend or modify any of
the Partnership Agreements or any of the LLC Agreements, in each case if such
action could reasonably be expected to have a Material Adverse Effect; at its
expense perform and comply in all material respects with all terms and
provisions of the Partnership Agreements and the LLC Agreements required to be
performed or complied with by it, maintain the Partnership Agreements and the
LLC Agreements to which it is a party in full force and effect, and enforce each
of the Partnership Agreements and each of the LLC Agreements to which it is a
party in accordance with its terms; not vote to permit the Partnerships or the
LLCs to enter into any transaction of merger or consolidation, or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution except for
Permitted Sales); and pledge hereun der, immediately upon its acquisition
(directly or indirectly) thereof, any and all shares of stock of any Person
that, after the date of this Agreement, becomes, as a result of any occurrence,
a direct Subsidiary of any Grantor; provided, notwithstanding anything contained
in this clause (ix) to the contrary, such Grantor shall only be required to
pledge the outstanding capital stock of a controlled foreign corporation
possessing up to but not exceeding 65% of the voting power of all classes of
capital stock of such controlled foreign corporation entitled to vote.
(c) Voting and Distributions. (i) So long as no Event of Default shall
have occurred and be continuing, each Grantor shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Investment Property
or any part thereof for any purpose not inconsistent with the terms of this
Agreement or the Credit Agreement; provided, no Grantor shall exercise or
refrain from exercising any such right if Secured Party shall have notified
Grantor that, in Secured Party's reasonable judgment, such action would have a
material adverse effect on the value of the Investment Property or
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any part thereof; and provided further, Grantor shall give Secured Party at
least two Business Days' prior written notice of the manner in which it intends
to exercise, or the reasons for refraining from exercising, any such right (it
being understood, however, that neither the voting by Grantor of any Pledged
Shares for or Grantor's consent to the election of directors at a regularly
scheduled annual or other meeting of stockholders or with respect to incidental
matters at any such meeting, nor Grantor's consent to or approval of any action
otherwise permitted under this Agreement and the Credit Agreement shall be
deemed inconsistent with the terms of this Agreement or the Credit Agreement
within the meaning of this Section, and no notice of any such voting or consent
need be given to Secured Party); Grantor shall be entitled to receive and
retain, and to utilize free and clear of the lien of this Agreement, any and all
dividends and interest paid in respect of the Investment Property; provided, any
and all dividends and interest paid or payable other than in cash in respect of,
and instruments and other property received, receivable or otherwise distributed
in respect of, or in exchange for, any Investment Property, dividends and other
distributions paid or payable in cash in respect of any Investment Property in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in-surplus, and cash paid,
payable or otherwise distributed in respect of principal or in redemption of or
in exchange for any Investment Property, shall be, and shall forthwith be
delivered to Secured Party to hold as, Investment Property and shall, if
received by Grantor, be received in trust for the benefit of Secured Party, be
segregated from the other property or funds of Grantor and be forthwith
delivered to Secured Party as Investment Property in the same form as so
received (with all necessary endorsements); and Secured Party shall promptly
execute and deliver (or cause to be executed and delivered) to Grantor all such
proxies, dividend payment orders and other instruments as Grantor may from time
to time reasonably request for the purpose of enabling Grantor to exercise the
voting and other consensual rights when and to the extent which it is entitled
to exercise pursuant to clause (1) above and to receive the dividends, principal
or interest payments which it is authorized to receive and retain pursuant to
clause (2) above.
(ii) Upon the occurrence and during the continuation of an Event of
Default, upon written notice from Secured Party to any Grantor, all rights of
Grantor to exercise the voting and other consensual rights which it would
otherwise be entitled to exercise pursuant hereto shall cease at the election of
Secured Party, and all such rights shall thereupon become vested in Secured
Party who shall thereupon have the sole right to exercise such voting and other
consensual rights; all rights of Grantor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain pursuant
hereto shall cease at the election of Secured Party, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the sole right
to receive and hold as Investment Property such dividends and interest payments;
and
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all payments which are received by Grantor contrary to the provisions of
clause (2) above shall be received in trust for the benefit of Secured Party,
shall be segregated from other funds of Grantor and shall forthwith be paid over
to Secured Party as Investment Property in the same form as so received (with
any necessary endorsements); and (4) all rights of such Grantor or receive any
and all payments under or in connection with the Partnership Agreements and/or
the LLC Agreements, including but not limited to the profits, dividends, and
other distributions which it would otherwise be authorized to receive and retain
pursuant hereto, shall cease at the election of Secured Party, and all such
rights shall thereupon become vested in Secured Party who shall thereupon have
the sole right to receive and hold such payments as collateral.
(iii) IN ORDER TO PERMIT SECURED PARTY TO EXERCISE THE VOTING AND OTHER
CONSENSUAL RIGHTS WHICH IT MAY BE ENTITLED TO EXERCISE PURSUANT HERETO AND TO
RECEIVE ALL DIVIDENDS AND OTHER DISTRIBUTIONS WHICH IT MAY BE ENTITLED TO
RECEIVE HEREUNDER, GRANTOR SHALL PROMPTLY EXECUTE AND DELIVER (OR CAUSE TO BE
EXECUTED AND DELIVERED) TO SECURED PARTY ALL SUCH PROXIES, DIVIDEND PAYMENT
ORDERS AND OTHER INSTRUMENTS AS SECURED PARTY MAY FROM TIME TO TIME REASONABLY
REQUEST, AND WITHOUT LIMITING THE EFFECT OF CLAUSE (1) ABOVE, GRANTOR HEREBY
GRANTS TO SECURED PARTY AN IRREVOCABLE PROXY TO VOTE THE PLEDGED SHARES AND TO
EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND REMEDIES TO WHICH A HOLDER OF
THE PLEDGED SHARES WOULD BE ENTITLED (INCLUDING GIVING OR WITHHOLDING WRITTEN
CONSENTS OF SHAREHOLDERS, CALLING SPECIAL MEETINGS OF SHAREHOLDERS AND VOTING AT
SUCH MEETINGS), WHICH PROXY SHALL BE EFFECTIVE, AUTOMATICALLY AND WITHOUT THE
NECESSITY OF ANY ACTION (INCLUDING ANY TRANSFER OF ANY PLEDGED SHARES ON THE
RECORD BOOKS OF THE ISSUER THEREOF) BY ANY OTHER PERSON (INCLUDING THE ISSUER OF
THE PLEDGED SHARES OR ANY OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE AND
DURING THE CONTINUATION OF AN EVENT OF DEFAULT, AND WHICH PROXY SHALL ONLY
TERMINATE UPON THE PAYMENT IN FULL OF THE SECURED OBLIGATIONS.
5.3. Intellectual Property Collateral.
(a) Covenants. Each Grantor shall hereafter use commercially reasonable
efforts so as not to permit the inclusion in any contract to which it hereafter
becomes a party of any provision that could or might in any way materially
impair or prevent the creation of a security interest in, or the assignment of,
Grantor's rights and interests in
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any property included within the definitions of any Intellectual Property
Collateral acquired under such contracts; take all steps reasonably necessary to
protect the secrecy of all trade secrets relating to the products and services
sold or delivered under or in connection with the Intellectual Property
Collateral, including, without limitation, entering into confidentiality
agreements with employees and labeling and restricting access to secret
information and documents; use proper statutory notice in connection with its
use of any of the Intellectual Property Collateral; use consistent standards of
high quality (which may be consistent with Grantor's past practices) in the
manufacture, sale and delivery of products and services sold or delivered under
or in connection with the Intellectual Property Collateral; and furnish to
Secured Party from time to time statements and schedules further identifying and
describing any Intellectual Property Collateral and such other reports in
connection with such Collateral as Secured Party may reasonably request, all in
reasonable detail.
(b) Collections. Except as otherwise provided in this Section 5.3, each
Grantor shall continue to collect, at its own expense, all amounts due or to
become due to Grantor in respect of the Intellectual Property Collateral or any
portion thereof. In connection with such collections, each Grantor may take
(and, at Secured Party's reasonable direction if an Event of Default shall have
occurred and be continuing, shall take) such action as Grantor or Secured Party
may deem reasonably necessary or advisable to enforce collection of such
amounts; provided, Secured Party shall have the right at any time, upon the
occurrence and during the continuation of an Event of Default and upon written
notice to Grantor of its intention to do so, to notify the obligors with respect
to any such amounts of the existence of the security interest created hereby and
to direct such obligors to make payment of all such amounts directly to Secured
Party, and, upon such notification and at the expense of Grantor, to enforce
collection of any such amounts and to adjust, settle or compromise the amount or
payment thereof, in the same manner and to the same extent as Grantor might have
done. After receipt by any Grantor of the notice from Secured Party referred to
in the proviso to the preceding sentence and during the continuation of any
Event of Default, (i) all amounts and proceeds (including checks and other
instruments) received by Grantor in respect of amounts due to Grantor in respect
of the Collateral or any portion thereof shall be received in trust for the
benefit of Secured Party hereunder, shall be segregated from other funds of
Grantor and shall be forthwith paid over or delivered to Secured Party in the
same form as so received (with any necessary endorsement) to be held as cash
Collateral and applied first, to the payment of any amounts payable to Secured
Party pursuant to Section 9 of the Credit Agreement, second, to the extent of
any excess, to the payment of any other outstanding Secured Obligations in such
order as Secured Party shall elect, and third, to the extent of any further
excess, to the payment to whomsoever shall be lawfully entitled to receive such
funds.
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(c) Applications and Registrations. Each Grantor shall have the duty,
subject to the exercise of its commercially reasonable judgment, to prosecute,
file and/or make, unless and until Grantor, in its commercially reasonable
judgment, decides otherwise, (i) any application relating to any of the
Intellectual Property Collateral owned, held or used by Grantor and identified
on Schedule 1(c), that is pending as of the date of this Agreement, (ii) any
Registration on any existing or future unregistered but copyrightable works
(except for works of nominal commercial value or with respect to which Grantor
has determined in the exercise of its commercially reasonable judgment that it
shall not seek registration), (iii) application on any existing patent or future
patentable but unpatented invention comprising Intellectual Property Collateral,
and (iv) any Trademark opposition and cancellation proceedings, renew Trademark
Registrations and Copyright Registrations and do any and all acts which are
necessary or desirable, as determined in such Grantor's commercially reasonable
judgment, to preserve and maintain all rights in all Intellectual Property
Collateral. Any expenses incurred in connection therewith shall be borne solely
by Grantor. Subject to the foregoing, Grantor shall give Secured Party prior
written notice of any abandonment of any Intellectual Property Collateral or any
right to file a patent application or any pending patent application or any
Patent that could reasonably be expected to have Material Adverse Effect.
(d) Litigation. Except as provided herein, each Grantor shall have the
right to commence and prosecute in its own name, as real party in interest, for
its own benefit and at its own expense, such suits, proceedings or other actions
for infringement, unfair competition, dilution, misappropriation or other
damage, or reexamination or reissue proceedings as are in its commercially
reasonable judgment necessary to protect the Intellectual Property Collateral.
Secured Party shall provide, at Grantor's expense, all reasonable and necessary
cooperation in connection with any such suit, proceeding or action including,
without limitation, joining as a necessary party. Each Grantor shall promptly,
following its becoming aware thereof, notify Secured Party of the institution
of, or of any adverse determination in, any proceeding (whether in the United
States Patent and Trademark Office, the United States Copyright Office or any
federal, state, local or foreign court) or regarding Grantor's ownership, right
to use, or interest in any Intellectual Property Collateral that could
reasonably be expected to have a Material Adverse Effect. Grantor shall provide
to Secured Party any information with respect thereto requested by Secured
Party.
In addition, each Grantor hereby grants to Secured Party and its
employees, representatives and agents the right to visit Grantor's and any of
its Affiliate's or subcontractor's plants, facilities and other places of
business that are utilized in connection with the manufacture, production,
inspection, storage or sale of products and services sold or delivered under any
of the Intellectual Property Collateral
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(or which were so utilized during the prior six month period), and to inspect
the quality control and all other records relating thereto upon reasonable
advance written notice to Grantor and at reasonable dates and times and as often
as may be reasonably requested. If and to the extent that any Grantor is
permitted to license the Intellectual Property Collateral, Secured Party shall
promptly enter into a non-disturbance agreement or other similar arrangement, at
Grantor's request and expense, with Grantor and any licensee of any Intellectual
Property Collateral permitted hereunder in form and substance reasonably
satisfactory to Secured Party pursuant to which (i) Secured Party shall agree
not to disturb or interfere with such licensee's rights under its license
agreement with Grantor so long as such licensee is not in default thereunder,
and (ii) such licensee shall acknowledge and agree that the Intellectual
Property Collateral licensed to it is subject to the security interest created
in favor of Secured Party and the other terms of this Agreement.
5.4 Inventory. Each Grantor shall, with respect to Inventory included in
the Collateral:
(a) keep the Inventory in the jurisdictions specified on Schedule 3.4 or
upon 30 days' written notice to Secured Party, in such other jurisdictions where
all action that Secured Party may reasonably request, in order to perfect and
protect any security interest granted or purported to be granted hereby, or to
enable Secured Party to exercise and enforce its rights and remedies hereunder,
with respect to such Inventory shall have been taken; provided that the
foregoing requirement shall not apply to Inventory located in any state the
aggregate value of which does not exceed $100,000 in such state.
5.5. Accounts and Related Contracts. Each Grantor shall:
(a) keep its chief place of business and chief executive office and the
office where it keeps its records concerning the Accounts and Related Contracts,
and all originals of all chattel paper that evidence Accounts, at the location
therefor specified on Schedule 5.5 or, upon 30 days' written notice to Secured
Party following any change in location, at such other location in a jurisdiction
where all action that Secured Party may request, in order to perfect and protect
any security interest granted or purported to be granted hereby, or to enable
Secured Party to exercise and enforce its rights and remedies hereunder, with
respect to such Accounts and Related Contracts shall have been taken. Promptly
upon the reasonable request of Secured Party, such Grantor shall deliver to
Secured Party complete and correct copies of each Related Contract;
(b) maintain complete records of all Accounts, including records of all
payments received, credits granted and merchandise returned, and all
documentation relating thereto in accordance with prudent business practices;
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(c) except as otherwise provided in this subsection (c), continue to
collect, at its own expense, all amounts due or to become due to such Grantor
under the Accounts and Related Contracts, and in connection with such
collections, such Grantor shall take such action as such Grantor or Secured
Party may reasonably deem necessary or advisable to enforce collection of
amounts due or to become due under the Accounts; provided, Secured Party shall
have the right at any time, upon the occurrence and during the continuation of
an Event of Default and upon written notice to such Grantor of its intention to
do so, to notify the account debtors or obligors under any Accounts of the
assignment of such Accounts to Secured Party and to direct such account debtors
or obligors to make payment of all amounts due or to become due to such Grantor
thereunder directly to Secured Party, to notify each Person maintaining a
lockbox or similar arrangement to which account debtors or obligors under any
Accounts have been directed to make payment to remit all amounts representing
collections on checks and other payment items from time to time sent to or
deposited in such lockbox or other arrangement directly to Secured Party and,
upon such notification and at the expense of such Grantor, to enforce collection
of any such Accounts and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as such Grantor might have
done. After receipt by any Grantor of the notice from Secured Party referred to
in the proviso to the preceding sentence, any payments of Accounts, received by
such Grantor shall be forthwith (and in any event within two Business Days)
deposited by such Grantor in the exact form received, duly indorsed by such
Grantor to the Secured Party if required, in a Collateral Account maintained
under the sole dominion and control of the Secured Party, subject to withdrawal
by the Secured Party for the account of the Secured Parties only as provided in
Section 10.3, until so turned over in accordance with the preceding subsection
(i), all amounts and proceeds (including checks and other instruments) received
by such Grantor in respect of the Accounts and the Related Contracts shall be
received in trust for the benefit of Secured Party hereunder and shall be
segregated from other funds of such Grantor and such Grantor shall not adjust,
settle or compromise the amount or payment of any Account, or release wholly or
partly any account debtor or obligor thereof, or allow any credit or discount
thereon.
SECTION 6. SECURED PARTY APPOINTED ATTORNEY-IN-FACT
Each Grantor hereby irrevocably appoints Secured Party as Grantor's
attorney-in-fact, with full authority in the place and stead of Grantor and in
the name of Grantor, Secured Party or otherwise, from time to time in Secured
Party's discretion to take any action and to execute any instrument that Secured
Party may deem reasonably necessary or advisable to accomplish the purposes of
this Agreement, at any time upon the occurrence and during the continuance of an
Event of Default including (a) to obtain
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and adjust insurance required to be maintained by Grantor or paid to Secured
Party pursuant to the Credit Agreement; (b) upon the occurrence and during the
continuation of any Event of Default, to ask for, demand, collect, sue for,
recover, compound, receive and give acquittance and receipts for moneys due and
to become due under or in respect of any of the Collateral; (c) upon the
occurrence and during the continuation of any Event of Default, to receive,
endorse and collect any drafts or other instruments, documents and chattel paper
in connection with clause (b) above; (d) to file any claims or take any action
or institute any proceedings that Secured Party may deem necessary or desirable
for the collection of any of the Collateral or otherwise to enforce the rights
of Secured Party with respect to any of the Collateral; (e) to pay or discharge
taxes or Liens (other than Liens permitted under this Agreement or the Credit
Agreement) levied or placed upon or threatened against the Collateral, the
legality or validity thereof and the amounts necessary to discharge the same to
be determined by Secured Party in its sole discretion, any such payments made by
Secured Party to become obligations of Grantor to Secured Party, due and payable
immediately without demand; and (f) upon the occurrence and during the
continuation of an Event of Default, generally to sell, transfer, pledge, make
any agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though Secured Party were the absolute owner thereof for
all purposes, and to do, at Secured Party's option and Grantor's expense, at any
time or from time to time, all acts and things that Secured Party deems
reasonably necessary to protect, preserve or realize upon the Collateral and
Secured Party's security interest therein in order to effect the intent of this
Agreement, all as fully and effectively as Grantor might do.
SECTION 7. REMEDIES
7.1. Generally. If any Event of Default shall have occurred and be
continuing, Secured Party may exercise in respect of the Collateral, in addition
to all other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the Uniform
Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether
or not the Code applies to the affected Collateral), and also may require any
Grantor to, and each Grantor hereby agrees that it will at its expense and upon
request of Secured Party forthwith, assemble all or part of the Collateral as
directed by Secured Party and make it available to Secured Party at a place to
be designated by Secured Party that is reasonably convenient to both parties;
enter onto the property where any Collateral is located and take possession
thereof with or without judicial process; prior to the disposition of the
Collateral, store, process, repair or recondition the Collateral or otherwise
prepare the Collateral for disposition in any manner to the extent Secured Party
deems appropriate; without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public
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or private sale, at any of Secured Party's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such price or prices
and upon such other terms as Secured Party may deem commercially reasonable; and
exercise dominion and control over, and refuse to permit further withdrawals
(whether of money, securities, instruments or other property) from any deposit
account maintained with Secured Party constituting part of the Collateral.
Secured Party or any Lender or Lender Counterparty may be the purchaser of any
or all of the Collateral at any such sale and Secured Party, as agent for and
representative of Lenders and Lender Counterparties (but not any Lender or
Lenders or Lender Counterparties in its or their respective individual
capacities unless Requisite Lender shall otherwise agree in writing), shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any such public
sale, to use and apply any of the Secured Obligations as a credit on account of
the purchase price for any Collateral payable by Secured Party at such sale.
Each purchaser at any such sale shall hold the property sold absolutely free
from any claim or right on the part of any Grantor, and each Grantor hereby
waives (to the extent permitted by applicable law) all rights of redemption,
stay and/or appraisal which it now has or may at any time in the future have
under any rule of law or statute now existing or hereafter enacted. Each Grantor
agrees that, to the extent notice of sale shall be required by law, at least ten
days' notice to Grantor of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. Secured Party shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. Secured Party may
adjourn any public or private sale from time to time by announce ment at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. Each Grantor hereby
waives any claims against Secured Party arising by reason of the fact that the
price at which any Collateral may have been sold at such a private sale was less
than the price which might have been obtained at a public sale, even if Secured
Party accepts the first offer received and does not offer such Collateral to
more than one offeree, as long as such sale is otherwise made in a commercially
reasonable manner. If the proceeds of any sale or other disposition of the
Collateral are insufficient to pay all the Secured Obligations, Grantors shall
be liable for the deficiency and the fees of any attorneys employed by Secured
Party to collect such deficiency. Each Grantor further agrees that a breach of
any of the covenants contained in this Section will cause irreparable injury to
Secured Party, that Secured Party has no adequate remedy at law in respect of
such breach and, as a consequence, that each and every covenant contained in
this Section shall be specifically enforceable against Grantor, and Grantor
hereby waives and agrees not to assert any defenses against an action for
specific performance of such covenants except for a defense that no default has
occurred giving rise to the Secured Obligations becoming due and payable prior
to their stated maturities. Nothing in this Section shall in any way alter the
rights of Secured Party hereunder.
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7.2. Investment Property. Each Grantor recognizes that, by reason of
certain prohibitions contained in the Securities Act and applicable state
securities laws, Secured Party may be compelled, with respect to any sale of all
or any part of the Investment Property conducted without prior registration or
qualification of such Investment Property under the Securities Act and/or such
state securities laws, to limit purchasers to those who will agree, among other
things, to acquire the Investment Property for their own account, for investment
and not with a view to the distribution or resale thereof. Each Grantor
acknowledges that any such private sales may be at prices and on terms less
favorable than those obtainable through a public sale without such restrictions
(including a public offering made pursuant to a registration statement under the
Securities Act) and, notwithstanding such circumstances each Grantor agrees that
any such private sale shall be deemed to have been made in a commercially
reasonable manner and that Secured Party shall have no obligation to engage in
public sales and no obligation to delay the sale of any Investment Property for
the period of time necessary to permit the issuer thereof to register it for a
form of public sale requiring registration under the Securities Act or under
applicable state securities laws, even if such issuer would, or should, agree to
so register it. If Secured Party determines to exercise its right to sell any
or all of the Investment Property, upon written request, each Grantor shall and
shall cause each issuer of any Pledged Shares to be sold hereunder, each
Partnership and each LLC from time to time to furnish to Secured Party all such
information as Secured Party may request in order to determine the number and
nature of interest, shares or other instruments included in the Investment
Property which may be sold by Secured Party in exempt transactions under the
Securities Act and the rules and regulations of the Securities and Exchange
Commission thereunder, as the same are from time to time in effect.
7.3. Intellectual Property Collateral. (a) Anything contained herein to
the contrary notwithstanding, upon the occurrence and during the continuation of
an Event of Default, (i) Secured Party shall have the right (but not the
obligation) to bring suit, in the name of any Grantor, Secured Party or
otherwise, to enforce any Intellectual Property Collateral, in which event
Grantor shall, at the request of Secured Party, do any and all lawful acts and
execute any and all documents required by Secured Party in aid of such
enforcement and Grantor shall promptly, upon demand, reimburse and indemnify
Secured Party as provided in Section 10.2 of the Credit Agreement in connection
with the exercise of its rights under this Section, and, to the extent that
Secured Party shall elect not to bring suit to enforce any Intellectual Property
Collateral as provided in this Section, each Grantor agrees to use all
reasonable measures, whether by action, suit, proceeding or otherwise, to
prevent the infringement of any of the Intellectual Property Collateral by
others and for that purpose agrees to diligently maintain any action, suit or
proceeding against any Person so infringing necessary to prevent such
infringement; (ii) upon written demand from Secured Party, each Grantor
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shall execute and deliver to Secured Party an assignment or assignments of the
Intellectual Property Collateral and such other documents as are necessary or
appropriate to carry out the intent and purposes of this Agreement; (iii) each
Grantor agrees that such an assignment and/or recording shall be applied to
reduce the Secured Obligations outstanding only to the extent that Secured Party
(or any Lender) receives cash proceeds in respect of the sale of, or other
realization upon, the Intellectual Property Collateral; and (iv) within five
Business Days after written notice from Secured Party, Grantor shall make
available to Secured Party, to the extent within Grantor's power and authority,
such personnel in Grantor's employ on the date of such Event of Default as
Secured Party may reasonably designate, by name, title or job responsibility, to
permit Grantor to continue, directly or indirectly, to produce, advertise and
sell the products and services sold or delivered by Grantor under or in
connection with the Trademarks, Trademark Registrations and Trademark Rights,
such persons to be available to perform their prior functions on Secured Party's
behalf and to be compensated by Secured Party at Grantor's expense on a per
diem, pro-rata basis consistent with the salary and benefit structure applicable
to each as of the date of such Event of Default.
(b) If (i) an Event of Default shall have occurred and, by reason of cure,
waiver, modification, amendment or otherwise, no longer be continuing, (ii) no
other Event of Default shall have occurred and be continuing, (iii) an
assignment to Secured Party of any rights, title and interests in and to the
Intellectual Property Collateral shall have been previously made and shall have
become absolute and effective, and (iv) the Secured Obligations shall not have
become immediately due and payable, upon the written request of Grantor, Secured
Party shall promptly execute and deliver to Grantor such assignments as may be
necessary to reassign to Grantor any such rights, title and interests as may
have been assigned to Secured Party as aforesaid, subject to any disposition
thereof that may have been made by Secured Party; provided, after giving effect
to such reassignment, Secured Party's security interest granted pursuant hereto,
as well as all other rights and remedies of Secured Party granted hereunder,
shall continue to be in full force and effect; and provided further, the rights,
title and interests so reassigned shall be free and clear of all Liens other
than Liens (if any) encumbering such rights, title and interest at the time of
their assignment to Secured Party and Permitted Liens.
7.4. Accounts. In addition to the rights of the Secured Party and the
Secured Parties specified in Section 10 with respect to payments of Accounts, if
an Event of Default shall occur and be continuing, upon request of the Secured
Party, all proceeds received by any Grantor consisting of cash, checks and other
near-cash items shall be held by such Grantor in trust for the Secured Party and
the Secured Parties, segregated from other funds of such Grantor, and shall,
forthwith upon receipt by such Grantor, be
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turned over to the Secured Party in the exact form received by such Grantor
(duly indorsed by such Grantor to the Secured Party, if required) and held by
the Secured Party in the Collateral Account. All proceeds while held by the
Secured Party in the Collateral Account (or by the Borrower in trust for the
Secured Party and the Secured Parties) shall continue to be held as collateral
security for all the Obligations and shall not constitute payment thereof until
applied as provided in Section 7.5.
7.5. Application of Proceeds. Except as expressly provided elsewhere in
this Agreement, all proceeds received by Secured Party in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
shall be applied as provided in the Credit Agreement.
SECTION 8. SECURED PARTY AS AGENT
Secured Party has been appointed to act as Secured Party hereunder by
Lenders. Secured Party shall be obligated, and shall have the right hereunder,
to make demands, to give notices, to exercise or refrain from exercising any
rights, and to take or refrain from taking any action (including the release or
substitution of Collateral), solely in accordance with this Agreement and the
Credit Agreement. All rights and remedies hereunder may be exercised solely by
Secured Party for the benefit of Lenders in accordance with the Terms of this
Section. Secured Party shall at all times be the same Person that is
Administrative Agent under the Credit Agreement. Written notice of resignation
by Administrative Agent pursuant to terms of the Credit Agreement shall also
constitute notice of resignation as Secured Party under this Agreement; removal
of Administrative Agent pursuant to the terms of the Credit Agreement shall also
constitute removal as Secured Party under this Agreement; and appointment of a
successor Administrative Agent pursuant to the terms of the Credit Agreement
shall also constitute appointment of a successor Secured Party under this
Agreement. Upon the acceptance of any appointment as Administrative Agent under
the terms of the Credit Agreement by a successor Administrative Agent, that
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring or removed Secured
Party under this Agreement, and the retiring or removed Secured Party under this
Agreement shall promptly (i) transfer to such successor Secured Party all sums,
securities and other items of Collateral held hereunder, together with all
records and other documents necessary or appropriate in connection with the
performance of the duties of the successor Secured Party under this Agreement,
and (ii) execute and deliver to such successor Secured Party such amendments to
financing statements, and take such other actions, as may be necessary or
appropriate in connection with the assignment to such successor Secured Party of
the security interests created hereunder, whereupon such retiring or removed
Secured Party
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shall be discharged from its duties and obligations under this Agreement. After
any retiring or removed Administrative Agent 's resignation or removal hereunder
as Secured Party, the provisions of this Agreement shall inure to its benefit as
to any actions taken or omitted to be taken by it under this Agreement while it
was Secured Party hereunder.
SECTION 9. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS
This Agreement shall create a continuing security interest in the
Collateral and shall (a) remain in full force and effect until the payment in
full of the Secured Obligations, and the cancellation or termination of the
Commitments, (b) be binding upon each Grantor, its successors and assigns, and
(c) inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Parties and their successors, transferees and assigns.
Without limiting the generality of the foregoing clause (c), but subject to the
terms of the Credit Agreement, any Lender may assign or otherwise transfer any
Loans held by it to any other Person, and such other Person shall thereupon
become vested with all the benefits in respect thereof granted to Lenders herein
or otherwise. Upon the payment in full of all Secured Obligations and the
cancellation or termination of the Commitments, the security interest granted
hereby shall terminate hereunder and of record and all rights to the Collateral
shall revert to Grantor. Upon any such termination Secured Party will, at
Grantors' expense, execute and deliver to Grantors such documents as Grantors
shall reasonably request to evidence such termination.
SECTION 10. STANDARD OF CARE; SECURED PARTY MAY PERFORM.
The powers conferred on Secured Party hereunder are solely to protect its
interest in the Collateral and shall not impose any duty upon it to exercise any
such powers. Except for the exercise of reasonable care in the custody of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, Secured Party shall have no duty as to any Collateral or as to the
taking of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral. Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of Collateral in its
possession if such Collateral is accorded treatment substantially equal to that
which Secured Party accords its own property. If any Grantor fails to perform
any agreement contained herein and an Event of Default has occurred and is
continuing, Secured Party may itself perform, or cause performance of, such
agreement, and the expenses of Secured Party incurred in connection therewith
shall be payable by each Grantor under Section 10.2 of the Credit Agreement.
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SECTION 11. INDEMNITY AND EXPENSES
(a) Each Grantor agrees:
(i) to indemnify Secured Party and each Secured Party from and
against any and all claims, losses and liabilities in any way relating to,
growing out of or resulting from this Agreement and the transactions
contemplated hereby (including without limitation enforcement of this
Agreement), except to the extent such claims, losses or liabilities result from
Secured Party's or such Secured Party's gross negligence, bad faith, or willful
misconduct as determined by a court of competent jurisdiction; and
(ii) to pay to Secured Party promptly following written demand the
amount of any and all reasonable costs and reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents in
accordance with the terms and conditions of the Credit Agreement.
(b) The obligations of each Grantor in this Section 11 shall survive the
termination of this Agreement and the discharge of such Grantor's other
obligations under this Agreement, the Credit Agreement and any other Credit
Documents.
SECTION 12. MISCELLANEOUS
Any notice required or permitted to be given under this Agreement shall be
given in accordance with Section 10.1 of the Credit Agreement. No failure or
delay on the part of Secured Party in the exercise of any power, right or
privilege hereunder or under any other Credit Document shall impair such power,
right or privilege or be construed to be a waiver of any default or acquiescence
therein, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other power,
right or privilege. All rights and remedies existing under this Agreement and
the other Credit Documents are cumulative to, and not exclusive of, any rights
or remedies otherwise available. In case any provision in or obligation under
this Agreement shall be invalid, illegal or unenforceable in any jurisdiction,
the validity, legality and enforceability of the remaining provisions or
obligations, or of such provi sion or obligation in any other jurisdiction,
shall not in any way be affected or impaired thereby. All covenants hereunder
shall be given independent effect so that if a particular action or condition is
not permitted by any of such covenants, the fact that it would be permitted by
an exception to, or would otherwise be within the limitations of, another
covenant shall not avoid the occurrence of a Default or an Event of Default if
such action is taken or condition exists. This Agreement shall be binding upon
and inure to
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the benefit of Secured Party and Grantors and their respective successors and
assigns. No Grantor shall, without the prior written consent of Secured Party or
except as permitted under the Credit Agreement, assign any right, duty or
obligation hereunder. This Agreement and the other Credit Documents embody the
entire agreement and understanding between Grantors and Secured Party and
supersede all prior agreements and understandings between such parties relating
to the subject matter hereof and thereof. Accordingly, the Credit Documents may
not be contradicted by evidence of prior, contemporaneous or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties. This Agreement may be executed in one or more counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
THE PROVISIONS OF THIS AGREEMENT REGARDING THE PERFEC TION OF THE LIENS AND
SECURITY INTERESTS HEREIN GRANTED SHALL BE GOVERNED BY AND CONSTRUED UNDER THE
LAWS OF THE UNIFORM COMMERCIAL CODE OF THE STATE IN WHICH THE COLLATERAL OR
DEBTOR IS LOCATED, AS APPLICABLE. ALL OTHER PROVISIONS OF THIS AGREEMENT AND
THE RIGHTS AND OBLIGATIONS OF EACH GRANTOR AND SECURED PARTY SHALL BE GOVERNED
BY, AND SHALL BE CON STRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, each Grantor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
CONVERGENT COMMUNICATIONS, INC.,
as a Grantor
By: /s/ JOHN R. EVANS
______________________________________
Name: John R. Evans
Title: CEO
CONVERGENT COMMUNICATIONS
SERVICES, INC.,
as a Grantor
By: /s/ JOHN R. EVANS
______________________________________
Name: John R. Evans
Title: CEO
CONVERGENT CAPITAL CORPORATION,
as a Grantor
By: /s/ JOHN R. EVANS
______________________________________
Name: John R. Evans
Title: CEO
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Agent
By: /s/ RICHARD KATZ
______________________________________
Name: Richard Katz
Title: VICE PRESIDENT
S-1
<PAGE>
EXHIBIT 21.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 5, 1999, except for Note 16, as to which the date is April
29, 1999, relating to the financial statements of Convergent Communications,
Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Selected Financial Data" and "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Denver, Colorado
June 24, 1999
