<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EVOLVING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7389 84-1010843
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
6892 SOUTH YOSEMITE
ENGLEWOOD, COLORADO 80112
(303) 802-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
J. RICHARD ABRAMSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVOLVING SYSTEMS, INC.
6892 SOUTH YOSEMITE
ENGLEWOOD, COLORADO 80112
(303) 802-8258
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES C. T. LINFIELD, ESQ. S. MICHAEL DUNN, P.C.
REX R. O'NEAL, ESQ. JEREMY W. MAKARECHIAN, ESQ.
COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP
2595 CANYON BOULEVARD, SUITE 250 1125 SEVENTEENTH STREET, SUITE 2525
BOULDER, COLORADO 80302-6737 DENVER, COLORADO 80202
(303) 546-4000 (303) 293-0760
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the 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 of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value... 4,600,000 shares $12.00 $55,200,000 $16,284
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</TABLE>
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(1) Includes 600,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
----------------
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 THAT 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 COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
4,000,000 SHARES
[LOGO OF EVOLVING SYSTEMS, INC. APPEARS HERE]
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
Of the 4,000,000 shares of Common Stock offered hereby, 3,090,909 shares are
being sold by Evolving Systems, Inc. and 909,091 shares are being sold by the
Selling Stockholders. See "Principal and Selling Stockholders". The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10 and $12 per share. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total(3)........... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $875,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted to the Underwriters
an option for 30 days to purchase up to an additional 600,000 shares at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. If such option is exercised in full, the
total initial public offering price, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST
UBS SECURITIES
-----------
The date of this Prospectus is , 1998.
<PAGE>
STRATEGIC ARCHITECTURE FOR OPERATIONAL SUPPORT SYSTEMS
"OSS encompass a broad array of software and systems that perform critical
functions for telecommunications carriers, including ordering, provisioning,
service assurance and billing. Competition and regulations are driving the
need for telecommunications carriers to implement enterprise-wide, standards-
based data sharing among multiple, interoperable OSS. Evolving Systems'
approach to these requirements is through a strategic MetOSS architecture that
includes a common database, a shared services platform, applications and an
application development environment".
DATABASE APPLICATIONS
"The MetOSS-GEM Enterprise In- "MetOSS applications provide and
formation Model provides a data- enhance OSS functionality and
base designed to enable data are designed to be implemented
sharing across all OSS applica- as modular, plug-and-play car-
tions operating on the MetOSS- tridges. Applications will in-
GEM Shared Services Platform". clude Evolving Systems' and
third-party products for order-
ing, provisioning, service as-
surance and billing".
[Color graphic appears here depicting the relationship of the
functional elements of the typical OSS and the Company's
current and future products]
SHARED SERVICES PLATFORM APPLICATIONS DEVELOPMENT
ENVIRONMENT
"The MetOSS-GEM Shared Services
Platform provides common servic- "The MetOSS-GEM Development En-
es, such as transaction process- vironment is designed to provide
ing and security, among all ap- the application development
plications, enabling rules, standards and application
interoperability". programming interfaces which
govern how applications are de-
veloped in order to be
interoperable and compliant with
the MetOSS-GEM Shared Services
Platform and database".
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
<PAGE>
METOSS--EVOLVING SYSTEMS' NEXT
GENERATION OPERATIONAL SUPPORT
SYSTEMS
"MetOSS is Evolving Systems'
family of current and planned
OSS offerings, incorporating an
enterprise database, a gateway
to external systems, and a
shared services platform upon
which a range of OSS
applications provided by the
Company and third parties can
operate".
GATEWAY
"The Gateway is designed to
provide inter- and intra-carrier
communications and interfaces
and to support most common
external and legacy OSS".
[Color graphic appears here
representing the relationship of
the Company's current LNP
products and planned OSS
application products to the
planned OSS platform products]
CURRENT APPLICATIONS
"Current MetOSS LNP applications
include OrderPath, NumberManager
and NodeMaster, applications
designed to address carriers'
LNP requirements. These products
enable carriers to meet
regulatory requirements and
rapidly address competition".
<PAGE>
THIRD-PARTY APPLICATIONS
"Additional OSS applications for
ordering, service assurance and
billing are targeted for development
by third party software developers
utilizing the MetOSS Application
Development Environment, expanding the
range of OSS offerings available to
MetOSS customers".
FUTURE APPLICATIONS
"Future MetOSS applications under
development include MetOSS-Local
Service Exchange, which addresses
carriers' requirements for responding
to increased local competition and
corresponding inter-carrier
transactions, and MetOSS-Number
Exchange, which enables carriers to
address telephone number pooling,
number allocation and call origination
and termination requirements created as
a result of LNP".
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.
Unless otherwise indicated, all information contained in this Prospectus (i)
reflects the conversion of all outstanding shares of Non-voting Common Stock
(the "Non-voting Common Stock") and Preferred Stock of the Company into shares
of voting Common Stock (the "Common Stock") of the Company, (ii) has been
adjusted to reflect a one-for-two reverse stock split of the Non-voting Common
Stock and Common Stock to be effected immediately prior to the completion of
this offering and (iii) assumes no exercise of the Underwriters' over-allotment
option. Certain terms used herein are defined under the heading "Glossary of
Terms".
THE COMPANY
Evolving Systems, Inc. ("Evolving Systems" or the "Company") is a leading
provider of selected software solutions and services that enable
telecommunications carriers to address the technical challenges to their
operational support systems created by the industry's rapidly changing
competitive and regulatory environment. The Company's first-to-market local
number portability ("LNP") software solution, which enables carriers to meet
the requirement that customers retain their local phone number when changing
service providers, has been chosen by two of the five Regional Bell Operating
Companies ("RBOCs") and two of the three leading long distance carriers. The
Company believes that the implementation of LNP will require significant
changes in a broad range of carriers' software and systems that perform mission
critical functions such as ordering, provisioning, service assurance and
billing, collectively known as Operational Support Systems ("OSS").
Historically, telecommunications carriers operated in a highly regulated
environment with both local and long distance telephone service providers
operating as monopolies with little competition. The Telecommunications Act of
1996 and regulations promulgated thereunder (collectively, the "Act") provide
for the introduction of competition in local telephone service, allowing long
distance, wireless and other carriers to enter local telephone markets. The Act
requires RBOCs, wireless and other incumbent local exchange carriers
(collectively, "ILECs") to offer LNP. The Act also mandates that carriers
unbundle local services and facilities, thereby allowing competing
telecommunications carriers access to ILECs' OSS. These requirements pose
significant technological challenges to existing OSS, which are already
strained by the incremental changes necessitated by long distance deregulation
and the introduction of value-added services such as voice mail and call
waiting. Existing carriers must develop new systems that are interoperable with
their legacy systems, not only to support the LNP and unbundling requirements
of the Act but also to enable them to respond to increasing competitive
challenges. In addition, carriers entering local telephone markets require LNP
solutions that do not depend on an existing OSS infrastructure and that can be
deployed quickly and cost-effectively. Thus, the Company believes that
carriers' OSS are evolving from back-office legacy systems to strategic
business systems that play an increasingly important role in enhancing
competitiveness as well as enabling compliance with the requirements of the
Act.
3
<PAGE>
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions to satisfy technically challenging
OSS requirements to position itself as a provider of next-generation OSS
solutions. From its inception in 1985 through 1996, the Company focused on
providing custom software development services to a limited number of
telecommunications companies. Beginning in 1996, the Company made a strategic
decision to shift its focus to becoming a developer of standard software
products to capitalize on the market demand for OSS solutions to implement LNP
and related services. The Company's current LNP software products, OrderPath,
NumberManager and NodeMaster, allow carriers to accommodate customer requests
to change carriers while retaining the same telephone number, and to obtain and
disseminate call routing data to the carriers' networks. To date, customers for
the Company's LNP solutions include Ameritech Corporation ("Ameritech"),
Pacific Bell, Inc. ("Pacific Bell"), SBC Communications, Inc. ("Southwestern
Bell"), Sprint Corporation ("Sprint") and WorldCom, Inc. ("WorldCom").
The Company intends to leverage its initial LNP success to address the
evolving needs of carriers and telecommunications service providers by
developing and providing a family of innovative OSS solutions. The Company's
LNP and future OSS products are being designed to provide comprehensive,
flexible, reliable and scalable solutions to meet the rapidly changing needs of
today's multi-carrier environment. The Company is developing its OSS platform,
an OSS environment that supports multiple applications and includes a scalable,
extensible database, application program interfaces ("APIs") for third-party
developers to write compatible applications, business logic that governs the
data dissemination throughout other OSS platforms and standard legacy
application interfaces to facilitate rapid implementation. The Company's
approach seeks to offer carriers time-to-market advantages, protection of
legacy system investments and cost-effective OSS deployment, staffing,
operation and maintenance.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 3,090,909 shares
Common Stock offered by the Selling
Stockholders................................... 909,091 shares
Common Stock to be outstanding after this
offering....................................... 10,830,756 shares(1)
Use of Proceeds................................. Repayment of indebtedness, working capital
and other general corporate purposes. See
"Use of Proceeds".
Proposed Nasdaq National Market Symbol.......... EVOL
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 1,877,528 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1997 under the Company's Amended and
Restated Stock Option Plan, at a weighted average exercise price of $4.91
per share, and (ii) 910,633 shares of Common Stock issuable upon exercise
of warrants outstanding as of December 31, 1997, at a weighted average
exercise price of $.80 per share. Assumes no other exercise of stock
options or warrants after December 31, 1997. See "Management--Employee
Benefit Plans", "Description of Capital Stock--Warrants" and Note 4 of
Notes to Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees and
related services...... $ -- $ -- $ -- $ -- $ 882 $ 835 $14,482
Other services......... 8,971 17,810 33,032 45,355 36,036 26,587 15,552
------ ------- ------- ------- ------- ------- -------
Total revenue.......... 8,971 17,810 33,032 45,355 36,918 27,422 30,034
Cost of revenue:
License fees and
related services...... -- -- -- -- 450 450 5,069
Other services......... 5,957 11,327 18,181 26,589 24,081 18,342 14,033
------ ------- ------- ------- ------- ------- -------
Total cost of revenue.. 5,957 11,327 18,181 26,589 24,531 18,792 19,102
------ ------- ------- ------- ------- ------- -------
Gross margin............ 3,014 6,483 14,851 18,766 12,387 8,630 10,932
Operating income (loss). 1,802 4,109 8,150 6,815 246 (275) (15)
Income (loss) before
income taxes........... 1,807 4,062 8,014 6,126 (1,176) (1,404) (1,094)
Provision for (benefit
from) income taxes..... -- -- -- -- 81 (9) (948)
------ ------- ------- ------- ------- ------- -------
Net income (loss)....... $1,807 $ 4,062 $ 8,014 $ 6,126 $(1,257) $(1,395) $ (146)
====== ======= ======= ======= ======= ======= =======
Pro forma (1):
Income (loss) before
income taxes.......... $1,807 $ 4,062 $ 8,014 $ 6,126 $(1,176) $(1,404)
Provision for (benefit
from) income taxes.... 663 1,626 3,007 2,301 (298) (356)
------ ------- ------- ------- ------- -------
Net income (loss)...... $1,144 $ 2,436 $ 5,007 $ 3,825 $ (878) $(1,048)
====== ======= ======= ======= ======= =======
Pro forma net loss per
common share (2)(3).... $ (0.16) $ (0.02)
======= =======
Pro forma weighted
average shares of
Common Stock
outstanding (2)........ 7,747 7,934
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED (4)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 3,134 $21,039
Working capital........................................ 5,593 23,984
Total assets........................................... 28,428 46,333
Long-term obligations.................................. 16,486 4,552
Stockholders' equity................................... 1,044 31,789
</TABLE>
- --------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
state income tax purposes, and, accordingly, the Company's income was taxed
directly to the Company's stockholders. Pro forma adjustments reflect the
federal and state income tax expense if the Company had not been an S
corporation prior to January 6, 1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
computation of net income (loss) per common share and weighted average
common shares outstanding.
(3) Supplemental net income (loss) per share for the year ended December 31,
1996 and the nine months ended September 30, 1997, assuming the
subordinated debt with stockholders was not outstanding during any of the
periods, would be $(.07) and $.04, respectively. See "Use of Proceeds" and
Note 1 of Notes to Financial Statements.
(4) Pro forma as adjusted to reflect the receipt of the estimated net proceeds
from the sale of 3,090,909 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company and the anticipated
application of the net proceeds therefrom excluding any loss on
extinguishment of debt on the repayment of the Subordinated Notes and the
Stockholder Notes (as defined herein). See "Capitalization" and "Use of
Proceeds".
----------------
MetOSS(TM), OrderPath(TM), NumberManager(TM) and NodeMaster(TM) are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in this Prospectus are the property of the respective owners
thereof.
5
<PAGE>
RISK FACTORS
In addition to other information contained in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. All
statements, trend analysis and other information contained in this Prospectus
relative to markets for the Company's products and trends in revenue, gross
margin and anticipated expense levels, as well as other statements including
such words as "anticipate", "believe", "plan", "estimate", "expect" and
"intend" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
in the section entitled "Business", as well as those discussed elsewhere in
this Prospectus.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock. Although the Company was profitable in each of the
last two quarters, there can be no assurance that the Company will continue to
be profitable in the future or that the Company's level of profitability will
not vary significantly between quarters. These quarterly fluctuations may
result from a number of factors, including the magnitude, timing and signing
of new contracts; the Company's rate of progress under such contracts; the
timing of customer and market acceptance of the Company's product and service
offerings; actual or anticipated changes in government laws and regulations
related to the telecommunications market or judicial or administrative actions
with respect to such laws or regulations; the nature and pace of enforcement
of the Act; product lifecycles; the Company's success in effecting its planned
transition to a product-based business; the mix of products and services sold;
changes in demand for the Company's products and services; the timing of
third-party contractors' delivery of software and hardware; budgeting cycles
of the Company's customers; changes in the renewal rate of support agreements;
the timing and amount of expenditures made by the Company for research and
development and sales, general and administrative expenses; competition by
existing and emerging competitors in the telecommunications software markets;
the Company's success in developing and marketing new products, controlling
costs, attracting and retaining qualified personnel, and expanding its sales
and marketing programs; regional office expansion; software defects and other
product quality problems; changes in the Company's strategy; the extent of
industry consolidation; expansion of the Company's international operations;
and general economic conditions.
A significant portion of the Company's revenue has been and is expected to
continue to be derived from a small number of customers. Accordingly, the loss
of any significant customer, delays in delivery or acceptance of any of the
Company's products or delays in the performance of services could have a
material adverse effect on the Company's business, financial condition and
results of operations. Historically, the Company has recognized both license
fees and service fee revenue under its customer contracts using the
percentage-of-completion method. The Company is shifting its primary strategic
focus to the development and sale of software products. To the extent that the
Company is successful in doing so, the Company expects that it may be able to
record future revenue from license fees upon the delivery of a software
product to a customer. The Company's ability to recognize revenue on software
licenses as packaged software solutions at the time of delivery depends on its
ability to engage third parties to implement its software and to separately
license the software and separately sell implementation services, as well as
technical factors and customer expectations and requirements. There can be no
assurance that the Company will be able to achieve or maintain a sales model
that allows the Company to record license fees when software products are
delivered to customers. Software companies that account for revenue from
license fees upon delivery of software
6
<PAGE>
products may be exposed to increased risk of quarterly fluctuations. To the
extent that this pattern develops at the Company, any failure or delay in the
delivery of orders during any given quarter could have a material adverse
effect on the Company's business, financial condition and results of
operations. The timing of revenue recognition from the Company's contracts has
caused and may continue to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis.
The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's products and services is rapidly
evolving and the Company's sales cycle and the size and timing of significant
contracts vary substantially among customers. Accordingly, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue. For example, GTE Corporation ("GTE"), which had been the
Company's largest customer from 1991 through 1995, significantly reduced its
demand for the Company's services in 1995. Although the Company reduced its
workforce in late 1995, the Company incurred operating losses during the
quarter ended March 31, 1996. The Company also sustained an operating loss in
the quarter ended March 31, 1997 as the Company incurred higher development
costs as it began its transition to a product-based business. More recently,
in anticipation of expected growth, the Company increased its workforce by 54
new employees in 1997 and expects to continue hiring additional consulting,
support and development employees during 1998. Any significant shortfall from
anticipated levels of demand for the Company's products and services could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter
to quarter. As a result, quarter-to-quarter comparisons of operating results
are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business
or generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
DEPENDENCE UPON TELECOMMUNICATIONS INDUSTRY; REGULATORY UNCERTAINTIES
The market for the Company's LNP products was created and has primarily been
driven by the adoption of regulations under the Act requiring RBOCs to
implement LNP as a condition to being permitted to provide long distance
services. Therefore any changes to such regulations, or the adoption of new
regulations by federal or state regulatory authorities under the Act, or any
legal challenges to the Act, could have a material adverse effect upon the
market for the Company's products and services. Although the Act was designed
to expand competition in the telecommunications industry, the realization of
the objectives of the Act is subject to many uncertainties, including judicial
and administrative proceedings designed to define rights and obligations
pursuant to the Act, actions or inactions by ILECs and other carriers that
affect the pace at which the changes contemplated by the Act occur, resolution
of questions concerning which parties will finance such changes and other
regulatory, economic and political factors.
The Company is aware of certain litigation challenging the validity of the
Act and the local telephone competition rules adopted by the Federal
Communications Commission ("FCC") to implement the Act. The U.S. Eighth
Circuit Court of Appeals has invalidated the pricing methodology and
unbundling requirements adopted by the FCC while upholding a portion of the
FCC's local competition rules, and both the government and the ILECs have
filed petitions for review with the Supreme Court. In a recent decision, a
U.S. District Court in Texas held that the provisions of the Act
7
<PAGE>
which require RBOCs to comply with certain conditions, including LNP, in order
to receive regulatory approval to enter long distance markets are
unconstitutional. The U.S. Justice Department, representing the FCC, has
appealed this decision. Such litigation may serve to delay implementation of
the Act, which could adversely affect demand for the Company's products and
services. Any delays in the deadlines imposed by the Act or the FCC, or any
invalidation, repeal or modification in the requirements imposed by the Act or
the FCC, could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, customers may
require, or the Company otherwise deem it necessary or advisable, that the
Company modify its products or services to address actual or anticipated
changes in the regulatory environment. Any other delay in implementation of
the Act, or other regulatory changes, could materially adversely affect the
Company's business, financial condition and results of operations.
Virtually all of the Company's revenue is derived from sales of products and
services for telecommunications and data communications applications. These
markets are characterized by intense competition, regulatory and legal
uncertainty, rapid technological change and short product life cycles. In
addition, the telecommunications market has undergone a period of rapid growth
and consolidation in the last few years. The Company's business, financial
condition and results of operations would be materially adversely affected in
the event of a significant slowdown in these markets. See "Business--Industry
Background--The Telecommunications Industry".
SHIFT IN STRATEGIC FOCUS FROM CUSTOM SERVICES TO SOFTWARE PRODUCTS
The Company is shifting its primary strategic focus to offering standard
software products and related integration services from its historic focus on
consulting and custom development services. This shift in the Company's
primary strategic focus entails a number of risks. Prior to the introduction
of the Company's initial LNP products, the Company derived virtually all of
its revenue from contracts for consulting and custom development services.
Although the Company intends to continue to offer such services, the Company
anticipates that such services will represent a declining percentage of the
Company's total revenue if the Company's transition strategy is successful.
Approximately one-half of the Company's revenue for the nine months ended
September 30, 1997 has been attributable to its LNP products and related
services, and the Company believes that its revenue, at least through 1999,
will continue to be substantially dependent upon LNP products and related
services. In addition, the potential for future revenue growth is
substantially dependent upon market acceptance of the Company's LNP products
and of the Company's MetOSS products under development. The Company's
principal customers for its LNP products to date have been major
telecommunications service providers, who historically have developed or
purchased highly customized solutions. Such customers may resist the use of
standardized products and product modules. In addition, such customers
historically have sought to be exclusive licensees of the Company's solutions.
Such customers may resist licensing products on a non-exclusive basis, which
may lengthen the Company's sales cycle and affect the Company's ability to
enter into contracts with new customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
MetOSS Products".
Many of the Company's initial LNP customers are ILECs, which have been
implementing LNP systems due to the requirements of the Act. Accordingly, once
such providers have complied with the provisions of the Act, demand may fall
for the Company's LNP products. Although a number of new carriers have entered
the local telephone market, the decisions by potentially competitive carriers
to enter the local telephone service market depend on a number of competitive,
regulatory and business factors, and the extent and pace of competitive entry
cannot be predicted. Recently, several large telecommunications carriers have
announced that they are deferring plans to enter the local telephone service
market. The Company's future revenue opportunities depend to a significant
extent on the
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Company's success in broadening the customer base for its LNP products and
services, successfully completing the development of new MetOSS products and
gaining acceptance of such products by existing and new customers. If, as a
result of judicial or regulatory action, carriers no longer believe that it is
necessary to implement LNP in a timely manner, the market for the Company's
LNP and related products and services would be materially adversely affected.
There can be no assurance that the Company will successfully expand its base
of LNP customers, that its new MetOSS products will be successfully developed
in a timely manner or that such products will achieve acceptance by existing
or new customers. If the Company's current or future competitors release new
products that have more advanced features, offer better performance or are
more price competitive than the Company's products, demand for the Company's
products may decline. Moreover, delays in entry to the local telephone service
market by competitive carriers could adversely affect demand for the Company's
products. Any decline in demand for the Company's products as a result of
competition, technological change or other factors would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition".
The Company has made a number of changes in its management and is making
extensive changes in its business processes in connection with the transition
of its strategic focus. During 1996 and 1997, the Company experienced
significant employee turnover as it underwent this strategic transition, and
there can be no assurance that the Company will retain key personnel as it
continues this transition. Development and implementation of new business
processes can be time-consuming and expensive. There can be no assurance that
the Company will successfully complete this transition, or that it will not
incur unanticipated difficulties or costs in doing so, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "--Changes in Management; Management of Growth;
Dependence on Key Personnel".
RELIANCE ON SIGNIFICANT CUSTOMERS
Historically, a substantial portion of the Company's revenue has been
derived from a limited number of customers. Ameritech, GTE, Lockheed-Martin
IMS Corporation ("Lockheed"), Lucent Technologies, Inc. ("Lucent"), formerly
part of American Telephone & Telegraph Company ("AT&T"), Southwestern Bell and
Sprint each accounted for more than 10% of the Company's revenue in the first
nine months of 1997, and these customers in the aggregate accounted for 89% of
the Company's revenue for this period. AT&T, BellSouth Telecommunications,
Inc. ("BellSouth"), GTE, Lockheed and Lucent each accounted for more than 10%
of the Company's revenue in 1996, and these customers in the aggregate
accounted for 73% of the Company's revenue in 1996. In addition, GTE and
Lucent accounted for 58% and 20%, respectively, of the Company's total revenue
in 1995. The Company expects to continue to depend on large contracts with a
small number of significant customers, which can cause its revenue and
earnings to fluctuate between quarters based on the timing of contracts and
installation of the Company's products by these customers. None of the
Company's major customers has any obligation to purchase additional products
or services. Consequently, the failure by the Company to develop relationships
with significant new customers would have a material adverse effect on the
Company's business, financial condition and results of operations.
Additionally, business or marketplace consolidations affecting one or more of
the Company's major customers could result in the loss of that customer, which
also could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Business--Customers" and
Note 1 of Notes to Financial Statements.
LENGTHY IMPLEMENTATION PROCESS; CUSTOMER ACCEPTANCE OF LNP PRODUCTS
Implementation of the Company's software is a relatively complex and lengthy
process that involves significant allocation of resources by the Company in
order to adapt and customize such
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software for each customer's unique environment. Moreover, certain of the
Company's customers may require rapid deployment of the Company's software
products, resulting in pressure on the Company to meet demanding delivery and
implementation schedules. Delays in implementation may result in customer
dissatisfaction and/or damage to the Company's reputation and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's existing contracts, including LNP contracts, provide for
acceptance testing by the customer before the contract is considered complete.
To date, none of the Company's LNP customers has notified the Company of their
final acceptance of the Company's software. Unanticipated difficulties or
delays in the customer acceptance process could result in higher costs and
delayed payments. Moreover, if the Company fails to satisfy acceptance
criteria within prescribed times, the customer may be entitled to cancel its
contract and receive a refund of all or a portion of amounts previously paid
or other amounts as liquidated damages, which could exceed related contract
revenue and which could result in a future charge to earnings. Any failure or
delay in achieving final acceptance of the Company's software and services
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
LENGTHY SALES CYCLE
The Company's software products and services are generally used by large
telecommunications service providers for enterprise-wide, mission critical
purposes, involving significant capital expenditures and lengthy
implementation plans. Prospective customers typically commit significant
resources to the technical evaluation of the Company's products and services
and require the Company to expend substantial time, effort and money providing
education regarding the Company's solutions. This evaluation process often
results in an extensive and lengthy sales cycle, typically ranging between six
and 12 months, making it difficult for the Company to forecast the timing and
magnitude of sales contracts. Delays associated with customers' internal
approval and contracting procedures, procurement practices, and testing and
acceptance process are common. For example, customers' budgetary constraints
and internal acceptance reviews may cause potential customers to delay or
forego a purchase. The delay or failure to complete one or more large
contracts could have a material adverse effect on the Company's business,
financial condition or results of operations and cause the Company's operating
results to vary significantly from quarter to quarter. See "Business--
Marketing and Sales".
FIXED-PRICE CONTRACTS
The Company had historically derived a majority of its revenue from
contracts that were billed on a time-and-materials basis. Beginning in mid-
1996, a majority of the Company's revenue has been derived from contracts that
were billed on a fixed-price basis. To the extent that the Company continues
to provide custom software development or consulting services, it anticipates
that customers will continue to request that the Company provide software and
implementation services as a total solution on a fixed-price basis. These
contracts specify certain obligations and deliverables to be met by the
Company regardless of actual costs incurred by the Company. There can be no
assurance that the Company can successfully complete these contracts on
budget, and the Company's inability to do so could have a material adverse
effect on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW VERSIONS AND NEW
PRODUCTS; RISKS OF SOFTWARE DEFECTS
The market for the Company's products and services is subject to rapid
technological changes, evolving industry standards, changes in carrier
requirements and preferences and frequent new
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product introductions and enhancements. The introduction of products that
incorporate new technologies and emergence of new industry standards can
render existing products obsolete and unmarketable. To compete successfully,
the Company must continue to design, develop and sell enhancements to existing
products and new products that provide higher levels of performance and
reliability in a timely manner, take advantage of technological advancements
and changes in industry standards and respond to new customer requirements.
There can be no assurance that the Company will successfully identify new
product opportunities or will achieve market acceptance of new products
brought to market. Products developed by others may render the Company's
products obsolete or noncompetitive. Any failure by the Company to anticipate
or respond adequately to changes in technology and customer preferences,
failure of the Company's products to perform satisfactorily or any significant
delay in product development or introductions could have a material adverse
effect on its business, financial condition or results of operations.
The Company intends to issue interim and new releases of its family of
software products periodically. As a result of the complexities inherent in
software development, major new product enhancements and new products can
require long development and testing periods before they are commercially
released. There can be no assurance that delays will not occur in the future.
The Company's products consist of software developed by the Company and
others. Errors or compatibility problems in the Company's products, including
those in licensed third-party software, which are detected prior to a new
product release could cause the Company to delay the introduction of new
products and incur additional expense. The Company's new products and new
versions of existing products also may contain errors or compatibility
problems which may not be discovered until after the product has been
installed and used by customers. There can be no assurance that errors will
not be found in new versions of the Company's products before or after
commencement of commercial use, or that any such errors will not result in
adverse customer reaction, negative publicity regarding the Company and a loss
of or delay in market acceptance and have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The Company's primary markets are intensely competitive and are subject to
rapid technological change, evolving industry standards and regulatory
developments. The Company faces continuous demand for improved product
performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements.
The Company's existing and potential competitors include many large domestic
and international companies, including certain of the Company's customers,
that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases
and longer-standing relationships with customers than the Company. The
Company's principal competitors in the LNP market include Bell Communications
Research, Inc. ("Bellcore"), Lucent, Northern Telecom, Inc. ("Nortel") and
Tekelec, Inc. ("Tekelec"). The Company believes that competitors of its MetOSS
products will include AG Communications Systems Corporation ("AG
Communications"), Bellcore, Cincinnati Bell Informational Services ("CBIS"),
Ericcson, Inc. ("Ericcson") and Lucent. The Company expects competition to
increase in the future from existing competitors and from other companies that
may enter the Company's existing or future markets with solutions which may be
less costly, provide higher performance or additional features or be
introduced earlier than the Company's solutions. Many telecommunications
companies have large internal development organizations which develop software
solutions and provide services similar to the Company's products and services.
In addition, customers who have purchased custom software solutions from the
Company are not precluded from competing with the Company.
The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, quality and reliability of the
Company's and its competitors' products and services, price, project
management
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capabilities, technical subject matter expertise, quality of customer service
and support, the emergence of new industry standards, the development of
technical innovations, the attraction and retention of qualified personnel,
regulatory changes and general market and economic conditions. A variety of
potential actions by the Company's competitors, including a reduction of
product prices or increased promotion, announcement or accelerated
introduction of new or enhanced products, or cooperative relationships among
competitors, could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully with existing or new
competitors or will properly identify and address the demands of new markets.
The failure by the Company to adapt to emerging market demands, respond to
regulatory and technological changes or to compete successfully with existing
and new competitors would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Competition".
CHANGES IN MANAGEMENT; MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
Most of the senior management team joined the Company recently and have
worked together at the Company for only a brief period. J. Richard Abramson,
President and Chief Executive Officer, Jeffrey J. Finn, Senior Vice President
and General Manager of Product Development and Distribution, James M. Ross,
Senior Vice President and General Manager of Services, and Roger A. Barnes,
Senior Vice President of Finance and Chief Financial Officer, joined the
Company in August 1996, July 1996, June 1997 and November 1997, respectively.
The loss of one or more key employees could have a material adverse effect on
the Company. The Company does not maintain key man insurance policies on any
members of senior management. The Company does not have employment agreements
with any of its executive officers.
The Company is currently experiencing a period of rapid growth in license
fees and related services revenue, placing significant demands on its
administrative, operations and financial personnel and systems. The Company's
ability to manage future expansion, if any, effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate
new management and employees into its overall operations and to continue to
improve its operational, financial and management systems. The Company
anticipates that it will need to hire additional research and development
personnel. Competition for research and development and other technical
personnel is intense, and there can be no assurance that the Company will be
able to hire additional personnel on a timely basis, if at all. Because of the
complexity of the Company's software products, a significant time lag exists
between the hiring date of technical and sales personnel and the time at which
they become fully productive. Although the Company has increased the number of
its sales, marketing, service and support personnel in recent years, the
Company has at times experienced and continues to experience difficulty in
recruiting such personnel. Any failure by the Company to hire qualified
personnel on a timely basis could materially adversely affect the Company's
business, financial condition and results of operations.
The Company is currently in the process of implementing new financial and
project accounting software packages. The Company's ability to implement these
new systems is likely to place substantial demands on certain of the Company's
managerial resources. In addition, if the Company is unable to implement these
software packages in a timely manner, the Company's ability to accurately
forecast and manage its business may be adversely affected. The Company's
failure to manage any expansion effectively, including any failure to
integrate new management and employees or failure to continue to implement and
improve financial, operational and management controls, systems and
procedures, could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS OF PLANNED INTERNATIONAL EXPANSION
Although the Company derived no revenue from international markets in 1997
or prior years, the Company has recently begun to pursue such opportunities.
Regulatory standards and the pace of
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adoption of new telecommunications technologies vary widely from country to
country and may be different from those in the U.S. To the extent that such
regulatory standards and market conditions do not encourage the deployment of
products similar to the Company's, the Company may not be able to develop
international markets for its products or services, which could have an
adverse impact on the Company's future marketing prospects.
International expansion of the Company's business will require significant
management attention and financial resources. Traditionally, international
operations may be characterized by higher operating expenses, such as the
establishment of foreign offices, the hiring of additional personnel, the
localization and marketing of its products for particular foreign markets and
the development of relationships with international service providers. As a
result, if international revenue is generated, operating margins may be
adversely affected. Moreover, in order to expand internationally, the Company
will be required to establish relationships with distributors and third-party
integrators. There can be no assurance that the Company will be able to
effectively establish such relationships. If international revenue is not
adequate to offset the additional expense of expanding foreign operations, the
Company's business, financial condition and results of operations could be
materially adversely affected.
PRODUCT LIABILITY
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential liability for damages
arising out of use of or defects in the Company's products. The nature and
extent of such limitations, however, tend to vary from customer to customer
and it is possible that such limitations of liability provisions may not be
effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions. There can be no assurance that the Company
will not be subject to such claims. Since the Company's software products may
be used in critical business applications, a successful product liability
claim brought against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. Defending
such a suit, regardless of its merits, could involve substantial expense and
require the time and attention of key management personnel, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's business
reputation could be adversely affected by product liability claims, regardless
of their merit or the eventual outcome of such claims.
YEAR 2000 CAPABILITY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies
are expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase software products such as those offered by the
Company. Many potential customers may also defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus
resulting in potentially deferred sales. Conversely, Year 2000 issues may
cause other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products.
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Additionally, Year 2000 issues could cause a significant number of companies,
including current customers of the Company, to reevaluate their current system
needs, and as a result consider switching to other systems or suppliers. This
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company currently offers software products that are designed to be Year
2000 compatible, and the Company's current contracts with its customers
require that the Company warrant Year 2000 capability. Although the Company
has designed its products to be Year 2000 capable and tests third-party
software that is incorporated with the Company's products, there can be no
assurance that the Company's software products, particularly when such
products incorporate third-party software, contain all necessary date code
changes.
The Company utilizes off-the-shelf and custom software developed internally
and by third parties. To the extent that such software and systems do not
comply with Year 2000 requirements, there can be no assurance that potential
systems interruptions or the cost necessary to update such software will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect its
proprietary rights. The Company presently has no patents, but has patent
applications pending in the U.S. on its three LNP products, NumberManager,
OrderPath and NodeMaster. In addition, the Company has registered or filed for
registration of certain of its trademarks. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently through reverse engineering or other means. In
addition, the laws of some foreign countries do not adequately protect the
Company's proprietary rights. There can be no assurance that the Company's
means of protecting its proprietary rights in the U.S. or abroad will be
adequate or that others will not independently develop technologies that are
similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. Moreover, litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of management time
and resources and could have a material adverse effect on the Company's
business, financial condition and results of operations.
There has been substantial litigation in the software industry regarding
intellectual property rights, and there can be no assurance that third parties
will not claim infringement by the Company of their intellectual property
rights. If the Company were found to have infringed the intellectual property
rights of any third party, the Company could be subject to liabilities for
such infringement, which liabilities could be material. The Company could be
required to seek licenses from other companies or to refrain from using or
selling certain products or using certain processes. Although holders of
patents and other intellectual property rights may offer licenses to their
patent or other intellectual property rights, no assurance can be given that
licenses would be offered or that the terms of any offered license would be
acceptable to the Company. Any need to redesign the products or to enter into
any royalty or licensing agreement could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies on certain other technology which it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to
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perform certain key functions. In particular, the Company's core LNP products,
OrderPath, NumberManager and NodeMaster, all contain certain core software
licensed from a current customer under a non-exclusive license, which may be
licensed to other parties, including competitors of the Company. This license
is terminable by the customer if the Company fails to meet certain contractual
obligations. In addition, there can be no assurances that such third-party
products do not infringe the intellectual property rights of others. Although
the licenses provided to the Company by such third parties typically contain
intellectual property warranties and indemnification clauses, such clauses
often are not as broad as those required by the Company's customers. Even when
the indemnity that the Company received from a third-party licensor is as
broad as the indemnity that the Company provides to its customers, the third-
party licensors from which the Company would be receiving indemnity are often
not well-capitalized and may not be able to indemnify the Company in the event
that such third-party technology infringes the proprietary rights of others.
Accordingly, the Company could have substantial exposure in the event that the
technology licensed from a third party infringes another party's proprietary
rights.
SECURITY
The Company has included security features in certain of its products that
are intended to protect the privacy and integrity of customer data. Despite
the existence of these security features, the Company's software products may
be vulnerable to breaches in security due to defects in the security
mechanisms, as well as vulnerabilities inherent in the operating system or
hardware platform on which the product runs, and/or the networks attached to
that platform. Security vulnerabilities, regardless of origin, could
jeopardize the security of information stored in and transmitted through the
computer systems of the Company's customers. On all projects to date, the
Company's customers have accepted responsibility for security issues
associated with the operating system, hardware platform and network
configuration; however, this may change in the future. Solving any future
security problems may require significant capital expenditures and affect the
Company's reputation and product acceptance, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's current directors and
executive officers and their respective affiliates will beneficially own
approximately 52.4% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal and Selling Stockholders".
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Company's Common Stock will develop or be sustained after this offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the Underwriters. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, changes in financial estimates by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company, general stock market and
economic considerations and other events or factors. In addition, the stock
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market has experienced volatility that has particularly affected the market
prices of equity securities of many technology companies and that often has
been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the trading price of the Company's
Common Stock. As a result of the foregoing factors, there can be no assurance
that the Company's Common Stock will trade at or higher than the initial
public offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock will suffer an immediate and substantial
dilution in the net tangible book value per share of the Common Stock from the
proposed initial public offering price. To the extent that options or warrants
to purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution".
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this offering, the Company will have 10,831,318 shares of
Common Stock outstanding, of which the 3,090,909 shares offered hereby by the
Company and the 909,091 shares offered hereby by the Selling Stockholders will
be freely tradable without restriction or registration under the Securities
Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company as that term is defined under the Securities Act
and the regulations promulgated thereunder. The remaining 6,831,318 shares of
Common Stock are "restricted securities" as that term is defined by Rule 144
promulgated under the Securities Act. Beginning 90 days from the date of this
Prospectus, approximately 24,028 shares will be eligible for sale in the
public market pursuant to the provisions of Rule 144 and Rule 701 under the
Securities Act. The Company, the Selling Stockholders, the directors,
executive officers and certain other stockholders and optionees of the
Company, holding in the aggregate approximately 6,807,290 shares of Common
Stock, have agreed that they will not, directly or indirectly, offer to sell,
dispose of or transfer any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock for a period
of 180 days from the date of this Prospectus without the prior written consent
of Goldman, Sachs & Co. on behalf of the Underwriters. Upon the expiration of
this 180-day lock-up period, all of such shares will become available for sale
in the public market subject to compliance with Rule 144, Rule 144(k) or Rule
701. Holders of 6,740,909 shares of Common Stock have the right, under certain
conditions, to participate in future Company registrations or to cause the
Company to register certain shares of Common Stock owned by them.
Additionally, holders of the Company's outstanding warrants to purchase
910,633 shares of Common Stock are entitled to registration rights upon the
exercise of such warrants. In addition, the Company intends to file a
registration statement on Form S-8, which will result in registration of a
total of approximately 3,315,511 shares of Common Stock reserved for issuance
under the Company's Amended and Restated Stock Option Plan (the "Stock Option
Plan") and Employee Stock Purchase Plan (the "Purchase Plan"), of which
options to purchase 1,875,528 shares were outstanding at December 31, 1997.
Sales of substantial amounts of Common Stock in the public market may have an
adverse impact on its market price. See "Description of Capital Stock--
Warrants", "--Registration Rights", "Shares Eligible for Future Sale" and
"Underwriting".
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. Such issuance of Preferred Stock, while providing desired flexibility
in connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the
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<PAGE>
Company. The Company has no current plans to issue shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of Section
203 of Delaware General Corporation Law, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in the prescribed manner. The application of Section 203 and certain
provisions of the Company's Restated Certificate of Incorporation, including a
classified Board of Directors, may have the effect of delaying or preventing
changes in control of management of the Company, which could adversely affect
the market price of the Company's Common Stock by discouraging or preventing
takeover attempts that might result in the payment of a premium price to the
Company's stockholders. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Charter Provisions".
SUBSTANTIAL DISCRETION IN USE OF PROCEEDS
The Company currently has no specific plans for a portion of the net
proceeds of this offering. As a consequence, the Company's management will
have the discretion to allocate this portion of the net proceeds of this
offering to uses that the stockholders may not deem desirable, and there can
be no assurance that these proceeds can or will be invested to yield a
significant return. See "Use of Proceeds".
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,090,909 shares of
Common Stock offered by the Company hereby are estimated to be $30,744,999
($32,730,550 if the Underwriters' over-allotment option is exercised in full),
based on an assumed public offering price of $11.00 per share and after
deducting the underwriting discounts and estimated offering expenses payable
by the Company. The Company will not receive any proceeds from the sale of the
shares being sold by the Selling Stockholders. See "Principal and Selling
Stockholders".
The Company intends to use the net proceeds of this offering primarily for
repayment of its obligations under the Subordinated Notes and Stockholder
Notes (as defined herein), working capital and other general corporate
purposes. The respective principal amounts outstanding under the Subordinated
Notes and the Stockholder Notes are $6,841,635 and $5,092,859 and bear
interest at the rates of 9% (with deferred interest accrued at the rate of
12%) and 7.25%, respectively, with respective maturity dates of June 1, 2004
and January 2, 2006. The amounts actually expended by the Company for working
capital purposes will depend upon a number of factors, including future
revenue growth, the amount of cash generated by the Company's operations and
the progress of the Company's product development efforts. The Company may
also use a portion of such net proceeds to acquire or invest in businesses,
products and technologies that are complementary to those of the Company,
although no specific acquisitions are planned as of the date of this
Prospectus, and no portion of the net proceeds has been allocated for any
particular acquisition.
Pending the uses described above, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY AND S CORPORATION STATUS
From June 7, 1985 to January 5, 1996, the Company was, for federal income
tax purposes, an S corporation under the Internal Revenue Code of 1986, as
amended (the "Code"), and was also an S corporation for state income tax
purposes under comparable state laws. As a result, the Company's net income
during this period was taxed for federal and certain state income tax purposes
directly to the Company's existing stockholders at that time at their
individual federal and state income tax rates, rather than to the Company.
During the fiscal years ended December 31, 1995 and December 31, 1996, the
Company made aggregate S corporation distributions to its stockholders in the
amounts of $5,811,810 and $7,257,623, respectively.
Since January 5, 1996, at which time the Company ceased to be an S
corporation, the Company has not declared or paid any cash dividends. The
Company currently intends to retain future earnings, if any, to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future.
18
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company, as of
September 30, 1997, was approximately $(1,275,000) or $(0.16) per share. Pro
forma net tangible book value (deficit) per share is equal to the Company's
total tangible assets less its total liabilities, divided by the number of
outstanding shares of Common Stock. After giving effect to the sale of the
3,090,909 shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $11.00 per share), the pro forma net tangible
book value of the Company at September 30, 1997 would have been approximately
$16,629,000 or $1.54 per share. This represents an immediate increase in such
net tangible book value of $1.70 per share to existing stockholders and an
immediate dilution of $9.46 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $11.00
Pro forma net tangible book value per share................... $(0.16)
Increase per share attributable to new investors(2)........... 1.70
------
Pro forma net tangible book value per share after this
offering(3).................................................... 1.54
------
Dilution per share to new investors............................. $ 9.46
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1997, the difference between the number of shares purchased from the Company,
the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed
initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 7,731,468 71.5% $ 65,450 .2% $ .01
New investors.............. 3,090,909 28.5 33,999,999 99.8 11.00
------------ ------- ----------- ----- -----
Totals................... 10,822,377 100.0% $34,065,449 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) Excludes 1,775,480 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of September 30, 1997 under the
Company's Stock Option Plan, at a weighted average exercise price of $5.95
per share, and 910,633 shares of Common Stock reserved for issuance upon
exercise of warrants outstanding as of September 30, 1997, at a weighted
average exercise price of $.80 per share. In addition, in December 1997,
the Board of Directors adopted an Employee Stock Purchase Plan and
reserved an aggregate of 250,000 shares for issuance thereunder. To the
extent that outstanding options and warrants are exercised in the future,
there will be further dilution to new investors. See "Management--Employee
Benefit Plans" and "Description of Capital Stock--Warrants".
(2) Does not give effect to the exercise of the Underwriters' over-allotment
option.
(3) After deducting underwriting discounts and commissions and offering
expenses of approximately $875,000 payable by the Company.
19
<PAGE>
CAPITALIZATION
The following table sets forth the long-term obligations and capitalization
of the Company as of September 30, 1997, (i) on an actual basis, (ii) on a pro
forma basis after giving effect to the conversion of all outstanding shares of
Non-voting Common Stock and Preferred Stock into Common Stock and (iii) pro
forma as adjusted to give effect to the sale of 3,090,909 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share (after deducting the estimated underwriting
discounts and commissions and offering expenses) and the application of the
estimated net proceeds therefrom. This table should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term
obligations....................... $ 2,548 $ 2,548 $ 2,548
=========== =========== ===========
Long-term obligations.............. $ 13,938 $ 13,938 $ 2,004
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value;
8,160 shares authorized, 8,160
shares outstanding actual; no
shares outstanding pro forma and
pro forma as adjusted........... $ -- $ -- $ --
Common Stock, $.001 par value;
4,930,000 non-voting shares
authorized and 1,611,758 shares
outstanding actual; 10,700,000
voting shares authorized and
7,731,468 shares outstanding pro
forma; 25,000,000 shares
authorized and 10,822,377
outstanding pro forma as
adjusted(1)..................... 2 8 11
Additional paid-in capital....... 2,416 2,410 33,152
Deferred compensation............ (1,214) (1,214) (1,214)
Accumulated deficit.............. (160) (160) (160)
----------- ----------- -----------
Total stockholders' equity..... 1,044 1,044 31,789
----------- ----------- -----------
Total capitalization........... $ 14,982 $ 14,982 $ 33,793
=========== =========== ===========
</TABLE>
- --------
(1) Excludes 1,775,480 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of September 30, 1997 under the
Company's Stock Option Plan, at a weighted average exercise price of $5.95
per share, and 910,633 shares of Common Stock reserved for issuance upon
exercise of warrants outstanding as of September 30, 1997, at a weighted
average exercise price of $.80 per share. In addition, in December 1997,
the Board of Directors adopted an Employee Stock Purchase Plan and
reserved an aggregate of 250,000 shares for issuance thereunder. To the
extent that outstanding options and warrants are exercised in the future,
there will be further dilution to new investors. See "Management--Employee
Benefit Plans" and "Description of Capital Stock--Warrants".
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the financial statements and the notes thereto and other
financial information included elsewhere in this Prospectus. The statement of
operations data set forth below for the years ended December 31, 1994, 1995
and 1996 and the nine-month period ended September 30, 1997 and the balance
sheet data as of December 31, 1995 and 1996 and as of September 30, 1997 are
derived from, and are qualified by reference to, the audited financial
statements of the Company appearing elsewhere in this Prospectus. The
statements of operations data for the years ended December 31, 1992 and 1993
and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived
from audited financial statements of the Company not included in this
Prospectus. The unaudited statement of operations data for the nine-month
period ended September 30, 1996 are derived from unaudited financial
statements included in this Prospectus which have been prepared on the same
basis as the audited financial statements and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
which are necessary to present fairly the results of operations and financial
position of the Company for the period in accordance with generally accepted
accounting principles. Historical results are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees and
related services...... $ 0 $ 0 $ 0 $ 0 $ 882 $ 835 $14,482
Other services......... 8,971 17,810 33,032 45,355 36,036 26,587 15,552
------ ------- ------- ------- ------- ------- -------
Total revenue.......... 8,971 17,810 33,032 45,355 36,918 27,422 30,034
------ ------- ------- ------- ------- ------- -------
Cost of revenue:
License fees and
related services...... -- -- -- -- 450 450 5,069
Other services......... 5,957 11,327 18,181 26,589 24,081 18,342 14,033
------ ------- ------- ------- ------- ------- -------
Total cost of revenue.. 5,957 11,327 18,181 26,589 24,531 18,792 19,102
------ ------- ------- ------- ------- ------- -------
Gross margin............ 3,014 6,483 14,851 18,766 12,387 8,630 10,932
Operating expense:
Sales and marketing.... 421 881 1,898 3,405 2,913 1,920 3,436
General and
administrative........ 684 1,280 4,321 7,725 8,587 6,351 6,345
Research and
development........... 107 213 482 821 641 634 1,166
------ ------- ------- ------- ------- ------- -------
Total operating
expense............... 1,212 2,374 6,701 11,951 12,141 8,905 10,947
------ ------- ------- ------- ------- ------- -------
Operating income (loss). 1,802 4,109 8,150 6,815 246 (275) (15)
Other income (expense),
net.................... 5 (47) (136) (689) (1,422) (1,129) (1,079)
------ ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,807 4,062 8,014 6,126 (1,176) (1,404) (1,094)
Provision for (benefit
from) income taxes..... 0 0 0 0 81 (9) (948)
------ ------- ------- ------- ------- ------- -------
Net income (loss)....... $1,807 $ 4,062 $ 8,014 $ 6,126 $(1,257) $(1,395) $ (146)
====== ======= ======= ======= ======= ======= =======
Pro forma(1):
Income (loss) before
income taxes.......... $1,807 $ 4,062 $ 8,014 $ 6,126 $(1,176) $(1,404)
Provision for (benefit
from) income taxes.... 663 1,626 3,007 2,301 (298) (356)
------ ------- ------- ------- ------- -------
Net income (loss)...... $1,144 $ 2,436 $ 5,007 $ 3,825 $ (878) $(1,048)
====== ======= ======= ======= ======= =======
Pro forma net loss per
common share(2)(3)..... $ (0.16) $ (0.02)
======= =======
Pro forma weighted aver-
age common shares out-
standing(2)............ 7,747 7,934
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $2,382 $3,964 $ 8,186 $ 1,269 $ 3,184 $ 3,134
Working capital....... 1,274 2,484 4,728 3,174 6,390 5,593
Total assets.......... 4,780 8,527 17,901 19,203 24,356 28,428
Long-term obligations. 478 1,128 2,610 6,059 18,096 16,486
Stockholders' equity.. 2,241 3,863 8,859 9,173 996 1,044
</TABLE>
- -------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
state income tax purposes, and, accordingly, the Company's income was
taxed directly to the Company's stockholders at that time. Pro forma
adjustments reflect the federal and state income taxes that would have
been payable if the Company had not been an S corporation prior to January
6, 1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
computation of net income (loss) per common share and weighted average
common shares outstanding.
(3) Supplemental net income (loss) per share for the year ended December 31,
1996 and the nine months ended September 30, 1997, assuming the
subordinated debt with stockholders was not outstanding during any of the
periods, and using the net proceeds of the offering, would be $(.07) and
$.04, respectively. See "Use of Proceeds" and Note 1 of Notes to Financial
Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Prospectus relative to markets for
the Company's products and services, and trends in revenue, gross margin and
anticipated expense levels, as well as other statements including words such
as "anticipate", "believe", "plan", "estimate", "expect" and "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this Prospectus.
OVERVIEW
The Company designs, develops, markets and supports OSS products for the
telecommunications industry and provides a broad range of both fixed-price and
time-and-materials custom software solutions. From its inception in 1985
through 1996, the Company focused on providing custom software development
services, primarily to two telecommunications companies. Beginning in mid-
1995, one of the Company's major customers substantially reduced its purchases
of custom software development services. The Company did not adjust its
expenditures for personnel, facilities and equipment correspondingly,
resulting in a significant downturn in profitability through 1996.
In May 1996, the Company obtained financing from new investors and
reconstituted its Board of Directors. The new Board of Directors replaced the
Company's senior management team beginning in July 1996. Under the direction
of new management, the Company further reduced headcount to 270 employees by
the end of 1996, representing a decrease of 44% from a high of 480 employees
in the second quarter of 1995. The Company also made a strategic decision to
shift its emphasis from being a time-and-materials based custom software
developer to a provider of standard software products and related services in
order to capitalize on the market opportunity for LNP solutions. In the fourth
quarter of 1996, the Company began marketing its first LNP products and
generating license and related services revenue that accounted for 48% of the
Company's total revenue for the nine-month period ended September 30, 1997. As
the Company increasingly focuses on licensing standard software products, the
Company believes that license and related services revenue as well as
associated maintenance revenue will increase, and other services revenue will
decline, as a percentage of total revenue. See "Risk Factors--Shift in
Strategic Focus From Custom Services to Software Products".
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed-
price and time-and-materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's LNP products and related
services. Other services revenue consists of custom programming, systems
integration of third-party products, maintenance and training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services and is generally
recognized using the percentage-of-completion method of accounting. The
percentage-of-completion for each contract is determined based on the ratio of
direct labor hours incurred to total estimated direct labor hours. Amounts
billed and collected in advance of services being performed are recorded as
unearned revenue. Unbilled work-in-progress represents revenue earned but not
yet billable under the terms of the fixed-price contracts and all such amounts
are expected to be billed and collected during the succeeding 12 month period.
22
<PAGE>
Services revenue provided under fixed-price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed. Maintenance revenue is
recorded as deferred revenue and recognized ratably over the service period,
which is generally 12 months. Revenue from training is recognized as the
training is performed. When maintenance and training services are bundled with
the original license fee arrangement, their fair value is deferred and
recognized during the period such services are performed.
The Company may encounter cost overruns on fixed-price contracts caused by
increased material, labor or overhead costs. Adjustments to cost estimates are
made in the periods in which the facts requiring such revisions become known.
Estimated losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract cost indicate a loss. The
Company does not anticipate a change in the timing of revenue recognition upon
adoption of Statement of Position 97-2, "Software Revenue Recognition". See
"Risk Factors--Fixed-Price Contracts" and "--Lengthy Implementation Process;
Customer Acceptance of LNP Products".
During the years ended December 31, 1994 and 1995, the Company recognized
approximately 70% and 78% of total revenue from two customers, each of which
accounted for greater than 10% of the Company's revenue in such periods.
During the year ended December 31, 1996 and the nine- month period ended
September 30, 1997, the Company recognized approximately 73% and 89% of total
revenue from five and six customers, respectively, each of which accounted for
greater than 10% of the Company's revenue in such periods. As of December 31,
1995, 1996 and September 30, 1997, these customers accounted for 65%, 75% and
87% of contract receivables, respectively. The Company's payment terms
generally range from 30 to 60 days from the date of invoice following
achievement of specified contractual milestones. See "Risk Factors--Reliance
on Significant Customers".
23
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
contained in the Company's statement of operations reflected as a percentage
of total revenue:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and related
services...................... 0.0% 0.0% 2.4% 3.0% 48.2%
Other services................. 100.0 100.0 97.6 97.0 51.8
------- ------- ------- ------ ------
Total revenue................ 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------ ------
Cost of revenue:
License fees and related
services...................... 0.0 0.0 1.2 1.6 16.9
Other services................. 55.0 58.6 65.2 66.9 46.7
------- ------- ------- ------ ------
Total cost of revenue........ 55.0 58.6 66.4 68.5 63.6
------- ------- ------- ------ ------
Gross margin..................... 45.0 41.4 33.6 31.5 36.4
Operating expenses:
Sales and marketing............ 5.7 7.5 7.9 7.0 11.5
General and administrative..... 13.1 17.0 23.3 23.2 21.1
Research and development....... 1.5 1.8 1.7 2.3 3.9
------- ------- ------- ------ ------
Total operating expenses..... 20.3 26.3 32.9 32.5 36.5
------- ------- ------- ------ ------
Operating income (loss).......... 24.7 15.1 0.7 (1.0) (0.1)
Other income (expense), net...... (0.4) (1.5) (3.9) (4.1) (3.5)
------- ------- ------- ------ ------
Income (loss) before income
taxes........................... 24.3 13.6 (3.2) (5.1) (3.6)
Provision for (benefit from)
income taxes.................... 0.0 0.0 0.2 0.1 (3.1)
------- ------- ------- ------ ------
Net income (loss)................ 24.3% 13.6% (3.4)% (5.2)% (0.5)%
======= ======= ======= ====== ======
Pro forma provision for (benefit
from) income taxes.............. 9.1 5.1 (0.8) (1.3)
------- ------- ------- ------
Pro forma net income (loss)...... 15.2% 8.5% (2.4)% (3.8)%
======= ======= ======= ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUE. License fees and related services revenue increased by $13.6
million, or 1,634%, to $14.5 million for the nine months ended September 30,
1997 from $835,000 for the nine months ended September 30, 1996. This increase
reflects the successful introduction of the Company's initial LNP products in
October 1996. Other services revenue, a majority of which was custom software
development projects, decreased by $11.0 million, or 42%, to $15.6 million for
the nine months ended September 30, 1997 from $26.6 million for the nine
months ended September 30, 1996. License fees and related services as a
percentage of total revenue increased to 48% for the first nine months of 1997
from 3% for the first nine months of 1996. Other services revenue as a
percentage of total revenue decreased to 52% for the first nine months of 1997
from 97% for the first nine months of 1996. Changes in the Company's strategy
resulted in the increased sales of standard software products and associated
integration services, and lower revenue from custom development projects.
COST OF REVENUE. Cost of revenue consists primarily of personnel-related
costs, equipment depreciation and facilities costs and the cost of third-party
software. Cost of license fees and related services increased by $4.6 million,
or 1,026%, to $5.1 million for the nine months ended September 30, 1997 from
$450,000 for the nine months ended September 30, 1996. As a percentage of
total revenue, cost of license fees and related services increased to 17% for
the first nine months of
24
<PAGE>
1997 from 2% for the first nine months of 1996. These increases reflected
increased sales of LNP software products and related services consistent with
management's decision to change the Company's strategy. Cost of other services
decreased $4.3 million, or 23%, to $14 million for the nine months ended
September 30, 1997 from $18.3 million for the nine months ended September 30,
1996. As a percentage of total revenue, cost of other services decreased to
47% for the first nine months of 1997 from 67% for the first nine months of
1996. The absolute amount of other services costs decreased in connection with
the reduction in the Company's lease commitments and increased productivity of
Company personnel. However, as a percentage of other services revenue, other
services costs were negatively impacted by personnel costs incurred in
anticipation of the signing of customer contracts.
SALES AND MARKETING. Sales and marketing expenses consist principally of
compensation costs (including commissions), travel expenses, field sales
office expenses and marketing communication expenses. Sales and marketing
expenses increased by $1.5 million, or 79%, to $3.4 million for the nine
months ended September 30, 1997 from $1.9 million for the nine months ended
September 30, 1996. As a percentage of revenue, sales and marketing expenses
increased to 12% in the nine months ended September 30, 1997 from 7% in the
nine months ended September 30, 1996. This increase is attributable to the
Company's expansion of its direct sales force by 12 persons to 16 to support
sales of the new standard software products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
compensation costs for administration, facilities, finance, human resources,
quality assurance and general management personnel, as well as legal and
accounting expenses. General and administrative expenses totaled $6.3 million
in both of the nine month periods ended September 30, 1997 and 1996. As a
percentage of revenue, general and administrative expenses decreased to 21% in
the nine months ended September 30, 1997 from 23% in the nine months ended
September 30, 1996. This decrease reflects the implementation of cost and
headcount controls, partially offset by additional investments to improve the
Company's operational, financial, management information and software
development processes.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment, developmental tools and supplies.
Research and development expenses increased by $532,000, or 84%, to $1.2
million for the nine months ended September 30, 1997 from $634,000 for the
nine months ended September 30, 1996. As a percentage of revenue, research and
development expenses increased to 4% in the nine months ended September 30,
1997 from 2% in the nine months ended September 30, 1996. This increase
resulted from additional staffing and associated costs in connection with the
Company's strategic commitment to the development of MetOSS software product
offerings. In addition, significant research and development expenses were
recorded as cost of revenue in the nine month period ended September 30, 1997.
This resulted from the Company entering into a license with a major customer
prior to completion of the development effort. No research and development
expenses were recorded as cost of revenue in the nine month period ended
September 30, 1996.
OTHER INCOME (EXPENSE), NET. Other income (expense), net includes interest
expense on the Company's debt financing and capital lease obligations and
interest income on cash. Other expense, net of other income, totaled $1.1
million in both of the nine month periods ended September 30, 1997 and 1996.
As a percentage of revenue, other expense remained constant at 4% in the nine
months ended September 30, 1997 and the nine months ended September 30, 1996.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company recorded an income
tax benefit in the nine months ended September 30, 1997 of $948,000, which
resulted primarily from the Company's pretax loss coupled with significant
research and development tax credits generated during this period. The
increased benefit in 1997 was a result of research and development tax credits
and the effect of the Company's conversion to a taxable corporate status
during the nine months ended September 30, 1996. Prior to January 6, 1996, the
Company operated as an S corporation for tax purposes and did not pay taxes at
the corporate level. On a pro forma basis, assuming the Company had been a
taxable
25
<PAGE>
basis, assuming the Company had been a taxable entity since its inception,
income tax benefit would have been approximately $356,000 for the nine months
ended September 30, 1996, resulting in an effective income tax rate of 25%.
The pro forma effective rate was lower than the federal statutory rate
primarily because of a permanent difference associated with cancellation of
indebtedness.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue decreased by $8.5 million, or 19%, to $36.9 million
in 1996 from $45.4 million in 1995. The decrease was primarily the result of a
significant reduction in custom software consulting revenue from a major
customer and the inability of the Company to replace the lost revenue with new
customer contracts.
COST OF REVENUE. Cost of revenue decreased by $2.1 million, or 8%, in 1996
to $24.5 million from $26.6 million in 1995. As a percentage of revenue, cost
of revenue increased to 66% in 1996 from 59% in 1995. Staff reductions were
implemented in the fourth quarter of 1995 in response to reduced customer
orders as described above. However, costs did not decrease proportionately
with the decrease in revenue as commitments that had been made in prior
periods under facilities, equipment and consulting contracts contributed to
higher than desired expense levels.
SALES AND MARKETING. Sales and marketing expenses decreased by $492,000, or
14%, to $2.9 million in 1996 from $3.4 million in 1995. As a percentage of
revenue, sales and marketing expenses remained constant at 8% for 1996 and
1995. The decrease in absolute dollars was primarily due to the transfer of
marketing personnel to custom software development projects.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$862,000, or 11%, in 1996 to $8.6 million from $7.7 million in 1995. As a
percentage of revenue, general and administrative expenses increased to 23% in
1996 from 17% in 1995. This increase as a percentage of revenue was
attributable to a decline in revenue and the opening of a new development
facility, offset by a reduction in headcount.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$180,000, or 22%, to $641,000 in 1996 from $821,000 in 1995. As a percentage
of revenue, research and development expenses remained constant at 2% in 1996
and 1995. This absolute dollar decrease reflected management's decision to
reduce staff and support costs in response to the loss of revenue.
OTHER INCOME (EXPENSE), NET. Net other expense increased by $733,000, or
106%, to $1.4 million in 1996 from $689,000 in 1995. As a percentage of
revenue, other expense increased to 4% in 1996 from 2% in 1995. The increase
resulted primarily from the interest expense incurred on subordinated debt
issued by the Company in May 1996.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Prior to January 6, 1996, the
Company operated as an S corporation for tax purposes and, accordingly, no
income tax provision or liability was recorded because the results of the
Company's operations were included in the returns of the individual
stockholders. The tax benefit in 1996 differed from expected income tax rates
primarily as a result of the conversion to a taxable corporation. On a pro
forma basis, assuming the Company had been a taxable entity since its
inception, income tax benefit would have been approximately $298,000 in 1996
compared to income tax expense in 1995 of $2.3 million, for an effective pro
forma income tax rate of 25% and 38%, respectively. The pro forma effective
rate for the year ended December 31, 1996 was lower than the federal statutory
rate primarily because of a permanent difference associated with cancellation
of indebtedness.
26
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Total revenue increased by $12.4 million, or 37%, to $45.4 million
in 1995 from $33.0 million in 1994. Revenue in both years was derived almost
entirely from the Company's custom software development projects. Revenue
peaked in the first quarter of 1995 at $12.5 million and began to decline
throughout the remainder of that year due to customer project reductions.
COST OF REVENUE. Cost of revenue increased by $8.4 million, or 46%, to $26.6
million in 1995 from $18.2 million in 1994. As a percentage of revenue, cost
of revenue increased to 59% in 1995 from 55% in 1994. This increase as a
percentage of revenue was attributable to increases in personnel, equipment,
depreciation and facilities costs.
SALES AND MARKETING. Sales and marketing expenses increased by $1.5 million,
or 79%, to $3.4 million in 1995 from $1.9 million in 1994. As a percentage of
revenue, sales and marketing expenses increased to 8% in 1995 from 6% in 1994.
Sales and marketing expenses increased due to the Company's increase in sales
staff from three employees as of December 31, 1994 to nine as of December 31,
1995, as well as an expansion in marketing activity. These increases were a
result of the Company's efforts to reverse the decline in revenue in response
to the project curtailment by a major customer.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$3.4 million, or 79%, to $7.7 million in 1995 from $4.3 million in 1994. As a
percentage of revenue, general and administrative expenses increased to 17% in
1995 from 13% in 1994. This increase was primarily the result of costs
relating to new facilities and infrastructure, as well as a staff increase of
33 employees to support significant projects which were later curtailed by a
major customer. In addition, this increased cost structure reflected
professional service personnel, whose salaries otherwise would have been
charged to cost of revenue but whose salaries were accounted for as general
and administrative expenses during periods when they were underutilized.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$339,000, or 70%, to $821,000 in 1995 from $482,000 in 1994. As a percentage
of total revenue, research and development expenses remained constant at 2% in
1995 and 1994. The majority of research and development expenditures in 1995
were focused on the development of non-LNP software products.
OTHER INCOME (EXPENSE), NET. Net other expense increased by $553,000, or
407%, to $689,000 in 1995 from $136,000 in 1994. As a percentage of revenue,
other expense increased to 2% in 1995 from 0% in 1994. The primary increase
was interest cost due to an additional $4.4 million in capital lease
obligations.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company had no tax provision
in either 1995 or 1994 due to its non-taxable status. On a pro forma basis,
assuming the Company had been a taxable entity since its inception, the
provision for income taxes would have been $2.3 million and $3.0 million in
1995 and 1994, respectively, representing an effective income tax rate of 38%
for both years. The rates were above the federal statutory rate primarily
because of state income taxes.
QUARTERLY RESULTS OF OPERATIONS
The Company has experienced quarterly fluctuations in its operating and
financial results, due to many factors, including fluctuating demand for
custom software development projects, the timing and magnitude of new
projects, cancellations or delays of projects, the timing of the introduction
and market acceptance of its LNP products and fluctuations in costs,
particularly personnel, equipment and facilities costs, associated with the
Company's infrastructure. The Company expects quarterly fluctuations to
continue as the Company introduces new software releases, new products and
continues its expansion. Quarterly fluctuations may also result from the
timing of introduction of products and services by the Company's competitors
and other market factors. See "Risk Factors--Fluctuations in Quarterly Results
of Operations".
27
<PAGE>
The tables below present unaudited quarterly statement of operations data
for each of the seven quarters through September 30, 1997. 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 the opinion of the Company, includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the information. These unaudited
quarterly results should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License fees and
related services...... $ 500 $ 0 $ 335 $ 47 $ 2,200 $ 5,370 $ 6,912
Other services......... 8,258 9,665 8,664 9,449 5,873 4,924 4,755
------- ------ ------ ------ ------- ------- -------
Total revenue.......... 8,758 9,665 8,999 9,496 8,073 10,294 11,667
------- ------ ------ ------ ------- ------- -------
Cost of revenue:
License fees and
related services...... 300 -- 150 -- 1,555 1,964 1,550
Other services......... 5,939 6,524 5,879 5,739 4,205 4,267 5,561
------- ------ ------ ------ ------- ------- -------
Total cost of revenue.. 6,239 6,524 6,029 5,739 5,760 6,231 7,111
------- ------ ------ ------ ------- ------- -------
Gross margin............ 2,519 3,141 2,970 3,757 2,313 4,063 4,556
Operating expenses:
Sales and marketing.... 690 512 718 993 762 1,120 1,554
General and
administrative........ 2,373 1,738 2,240 2,236 2,008 2,265 2,072
Research and
development........... 419 205 10 7 597 221 348
------- ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 3,482 2,455 2,968 3,236 3,367 3,606 3,974
------- ------ ------ ------ ------- ------- -------
Operating income (loss). (963) 686 2 521 (1,054) 457 582
Other expense, net...... (290) (384) (455) (293) (365) (404) (310)
------- ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes........... (1,253) 302 (453) 228 (1,419) 53 272
Provision for (benefit
from) income taxes..... (82) 117 (44) 90 (1,228) 46 234
------- ------ ------ ------ ------- ------- -------
Net income (loss)....... $(1,171) $ 185 $ (409) $ 138 $ (191) $ 7 $ 38
======= ====== ====== ====== ======= ======= =======
Pro Forma:
Income (loss) before
income taxes.......... $(1,253) $ 302 $ (453) $ 228
Provision for (benefit
from) income taxes.... (318) 77 (115) 58
------- ------ ------ ------
Net income (loss)...... $ (935) $ 225 $ (338) $ 170
======= ====== ====== ======
AS A PERCENT OF TOTAL
REVENUE:
Revenue:
License fees and
related services...... 5.7% 0.0% 3.7% 0.5% 27.3% 52.2% 59.2%
Other services......... 94.3 100.0 96.3 99.5 72.7 47.8 40.8
------- ------ ------ ------ ------- ------- -------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------ ------ ------ ------- ------- -------
Cost of revenue:
License fees and
related services...... 3.4 0.0 1.7 0.0 19.2 19.1 13.3
Other services......... 67.8 67.5 65.3 60.4 52.1 41.4 47.6
------- ------ ------ ------ ------- ------- -------
Total cost of revenue.. 71.2 67.5 67.0 60.4 71.3 60.5 60.9
------- ------ ------ ------ ------- ------- -------
Gross margin............ 28.8 32.5 33.0 39.6 28.7 39.5 39.1
Operating expenses:
Sales and marketing.... 7.9 5.3 8.0 10.5 9.4 10.9 13.3
General and
administrative........ 27.1 18.0 24.9 23.5 24.9 22.0 17.8
Research and
development........... 4.8 2.1 0.1 0.1 7.4 2.1 3.0
------- ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 39.8 25.4 33.0 34.1 41.7 35.0 34.1
------- ------ ------ ------ ------- ------- -------
Operating income (loss). (11.0) 7.1 0.0 5.5 (13.0) 4.5 5.0
Other expense, net...... (3.3) (4.0) (5.1) (3.1) (4.5) (3.9) (2.7)
------- ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes........... (14.3) 3.1 (5.1) 2.4 (17.5) 0.6 2.3
Provision for (benefit
from) income taxes..... (0.9) 1.2 (0.5) 0.9 (15.2) 0.4 2.0
------- ------ ------ ------ ------- ------- -------
Net income (loss)....... (13.4)% 1.9% (4.6)% 1.5% (2.3)% 0.2% 0.3%
======= ====== ====== ====== ======= ======= =======
Pro Forma:
Income (loss) before
income taxes.......... (14.3)% 3.1% (5.1)% 2.4%
Provision for (benefit
from) income taxes.... (3.6) 0.8 (1.3) 0.6
------- ------ ------ ------
Net income (loss)...... (10.7)% 2.3% (3.8)% 1.8%
======= ====== ====== ======
</TABLE>
28
<PAGE>
During 1996, license fees and related services revenue of approximately
$900,000 reflected the delivery of non-LNP products to a major customer
primarily in the first and third quarters. License fees and related services
revenue significantly increased in the quarters ended March 31, June 30, and
September 30, 1997, reflecting market acceptance of the Company's LNP
products, rising to 59% of total revenue in the quarter ended September 30,
1997. Other services revenue fluctuated during 1996 due to the timing and
completion of customer software development projects. In the fourth quarter of
1996, significant services revenue resulted from the completion of a major
custom software development project at BellSouth, which did not continue into
1997. Furthermore, other services revenue declined substantially in absolute
dollar terms in 1997 as a result of the Company's strategic shift to a
product-based business. Other services revenue was adversely impacted in the
second and third quarters of 1997 due to delays in signing contracts with two
major customers for which work had commenced. See "Risk Factors--Fluctuations
in Quarterly Results of Operations", "--Reliance on Significant Customers" and
"--Shift in Strategic Focus From Custom Services to Software Products".
Total cost of revenue has remained relatively constant in absolute dollar
terms from the quarter ended March 31, 1996 through the quarter ended
September 30, 1997. However, cost of revenue as a percentage of revenue has
varied significantly from quarter to quarter, reflecting quarterly
fluctuations in revenue. Total cost of revenue in the quarter ended March 31,
1996 as a percentage of revenue was significantly higher than the three
succeeding quarters, a result of cost overruns on two projects completed in
that quarter. Total cost of revenue as a percentage of revenue in the quarter
ended December 31, 1996 declined from previous quarters as a result of
increased revenue associated with the completion of the BellSouth contract. In
the first and second quarters of 1997, significant research and development
expenses were charged to cost of revenue. This resulted from the Company
entering into a license with a major customer prior to completion of the
internal development effort. Total cost of revenue in the quarters ended June
30 and September 30, 1997 as a percentage of revenue declined significantly
from the immediately preceding quarter, as license fees and related services
revenue, which has a lower cost, significantly increased as percentage of
total revenue. Cost of license fees and related services in the first three
quarters of 1997 reflect increasing productivity in the installation of LNP
software as well as license cost. Cost of other services in the third quarter
of 1997 was increased as a result of personnel costs incurred in anticipation
of the signing of customer contracts.
Sales and marketing expense declined in absolute dollars and as a percentage
of revenue in the quarter ended June 30, 1996 as a result of staff reduction.
As the Company began to implement its strategic shift to LNP products and
related services in late 1996, the Company reorganized its sales and marketing
organization to implement its new product strategy, resulting in the gradual
hiring of 16 individuals and the establishment of five sales offices.
Additionally, product launch expenses caused a higher than normal spending
level in the quarter ended December 31, 1996.
29
<PAGE>
In the quarter ended March 31, 1996, general and administrative expense
increased in part due to the Company increasing its bad debt reserve by
approximately $577,000. In the quarter ended September 30, 1996, the Company
increased its provision for pension plan liabilities by $430,000. Both of
these changes significantly impacted operating results in the respective
periods. In addition, general and administrative expenses increased in 1996
because of the allocation to general and administrative expense of the
salaries and other expenses associated with underutilized custom development
personnel. From the quarter ended March 31, 1997 through the quarter ended
September 30, 1997, general and administrative expense has declined as a
percentage of revenue, reflecting improved productivity, partially offset by
investments in management, financial and quality control systems to support
the Company's anticipated growth.
Research and development expense in quarters prior to June 30, 1996 was
related to non-LNP products. Following the strategic decision to invest in
standard software products, in late 1996, a software development laboratory
was established, personnel were hired, and overall spending increased
significantly. In the quarters ended September 30, 1996 and December 31, 1996,
the cost of certain development personnel was allocated from research and
development to the cost of performing a specific custom development project.
This caused abnormally low levels of research and development expense in
absolute terms and as a percentage of revenue in such periods. In addition,
significant research and development expenses were recorded as cost of revenue
in the first two quarters of 1997.
The Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has recently
experienced revenue growth, in particular with respect to software license
revenue, such growth should not be considered indicative of future revenue
growth, if any, or of future operating results. Failure by the Company, for
any reason, to increase revenue would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Fluctuations in Quarterly Results of Operations".
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash flow from operations and borrowings. In addition, on May 31, 1996, the
Company completed a private placement of $6.5 million in subordinated debt. At
September 30, 1997, the Company's principal sources of liquidity included $3.3
million of cash and cash equivalents, a $7.0 million secured bank line of
credit and a term loan agreement of $1.5 million, both of which expire in
September 1998. The Company had outstanding letters of credit under the line
of credit in the amount of approximately $664,000, and $667,000 outstanding
with respect to the term debt as of September 30, 1997. During December 1997,
the Company increased total available borrowings under its line of credit to
$10.0 million. The Company intends to renew these credit facilities in 1998;
however, there can be no assurance that the Company will be able to obtain
adequate credit facilities on commercially reasonable terms or at all. The
Company is required under the credit line to comply with certain financial
covenants, with which the Company was in compliance at September 30, 1997 or
waivers had been obtained.
The Company has senior subordinated promissory notes payable to stockholders
in the amount of $6.8 million bearing semi-annual interest payments at a rate
of 9% beginning April 1996, and principal repayments of $1.6 million due semi-
annually beginning in 2000. The Company also has notes payable to stockholders
in the amount of $5.1 million bearing annual interest payments of 7.25%,
30
<PAGE>
with the principal due in 2006. The loan agreements contain covenants,
including the maintenance of certain amounts of working capital and tangible
net worth and limits on loans to related parties. The Company expects to use a
portion of the proceeds of this offering to retire all of its subordinated
promissory and stockholder notes and related accrued interest. See "Use of
Proceeds".
Net cash provided by operating activities totaled $1.8 million in 1995, $1.5
million in 1996 and $4.2 million in the nine months ended September 30, 1997.
Net cash provided by operations in the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 were substantially impacted by
net income (loss) and non-cash charges, particularly depreciation and
amortization expense, which totaled $2.5 million, $3.5 million and $2.9
million in the respective periods. In 1995 and 1996, net contract receivables,
unbilled work-in-progress, unearned revenue and customer deposits used
operating cash of $6.5 million and $2.6 million in the respective periods.
Such cash usage was higher in 1995 due to several large contracts in the
fourth quarter of 1995 which were billed and not collected, or in certain
cases, not yet billed because project milestones had not been met. In 1997,
the Company shifted predominantly to fixed-price contracts from time-and-
materials billings. Such contracts typically include large milestone payments
and initial down payments which may be billed and collected prior to actual
completion of the related integration and consulting effort. As a result,
unearned revenue and customer deposits provided $5.8 million in operating cash
flow for the nine months ended September 30, 1997. Contract receivables and
unbilled work-in-progress at September 30, 1997 used $3.2 million in operating
cash flow.
Net cash used in investing activities totaled $1.9 million in 1995, $2.1
million in 1996 and $2.1 million in the nine months ended September 30, 1997.
Net cash used in each period related primarily to purchases of furniture,
fixtures and computer equipment.
Financing activities used $6.8 million in 1995, provided $2.6 million in
1996 and used $2.2 million in the nine months ended September 30, 1997. In
1995, as an S corporation, the Company distributed $5.8 million to
stockholders and had a net repayment of long-term obligations totaling $1.0
million. In 1996, the Company obtained aggregate financing of $10.8 million,
of which $7.7 million was used to repay long-term obligations. Financing
activities in the nine months ended September 30, 1997 were primarily
repayments of capital lease obligations totaling $2.3 million.
At September 30, 1997, the Company had $5.6 million in working capital. The
Company's principal commitments at September 30, 1997 were leases on its three
facilities in the Denver metropolitan area and other operating leases totaling
$23.2 million, net of sublease income, and capital lease obligations totaling
$4.3 million. There were no material commitments for future capital
expenditures at that date. The Company believes that the proceeds from the
sale of the Common Stock in the offering, combined with existing cash
balances, available credit facilities and funds generated by operations will
be sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months.
31
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of the recently issued
Statement of Position 97-2, "Software Revenue Recognition" and Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", No.
129, "Disclosures of Information about Capital Structure", No. 130, "Reporting
Comprehensive Income", and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", will not have a material impact on the
timing of the Company's revenue recognition or its footnote disclosures. The
pro forma effect of SFAS No. 128 is disclosed in the Notes to the Financial
Statements included herein.
32
<PAGE>
BUSINESS
Evolving Systems is a leading provider of selected software solutions and
services that enable telecommunications carriers to address the technical
challenges to their operational support systems created by the industry's
rapidly changing competitive and regulatory environment. The Company's first-
to-market LNP software solution, which enables carriers to meet the
requirements that customers retain their local phone number when changing
service providers, has been chosen by two of the five RBOCs and two of the
three leading long distance carriers. The Company believes that the
implementation of LNP will require significant changes in a broad range of
carriers' software and systems that perform mission critical functions such as
ordering, provisioning, service assurance and billing, collectively known as
OSS.
INDUSTRY BACKGROUND
THE TELECOMMUNICATIONS INDUSTRY
Historically, telecommunications carriers operated in a highly regulated
environment, with both local and long distance telephone service providers
operating as monopolies with little competition. More recently, however, the
U.S. and many foreign governments have begun to deregulate the
telecommunications industry in order to reduce prices and improve
telecommunications services through increased competition. Deregulation and
the widespread adoption of new telecommunications technologies, such as fiber
optics, digital wireless telephony and Internet-based services, have
significantly increased the number of telecommunications carriers and created
an increasingly competitive market. New entrants to the telecommunications
service market include competitive local carriers, alternate access providers
and wireless operators. To be competitive in this new environment,
telecommunications service providers are seeking to rapidly enter new markets
by offering differentiated services in a cost-effective manner.
The U.S. long distance market was opened to competition beginning in the
early 1980s. More recently, the Act provides for the introduction of
competition in local telephone service, allowing long distance, wireless and
other carriers to enter local telephone markets. The Act, among other things,
requires RBOCs and other ILECs to offer LNP, which allows customers to retain
their local phone numbers regardless of the carrier providing local telephone
service. The Act also requires that carriers unbundle local services and
facilities, which requires that access to ILECs' ordering, service
provisioning and billing systems be made available to competing carriers.
Similar initiatives to deregulate local telephone service have been adopted
or are being considered in a number of foreign markets, including Australia,
Belgium, Canada, Germany, Holland, Hong Kong and the United Kingdom. Recent
adoption of the World Trade Organization agreement on basic telecommunications
services may accelerate this trend. For example, the Canadian Radio-Television
& Telecommunications Commission (the "CRTC") issued a report in 1995 in which
LNP was identified as the critical catalyst to encourage competition among
local telephone carriers. In 1997, the CRTC issued Decision 97-8, under which
all service providers would gain equal access to local markets, providing
impetus for the implementation of LNP throughout Canada.
These new competitive and regulatory pressures have created significant
technological challenges for both existing and new carriers. Existing carriers
must develop new systems that are interoperable with their legacy systems, not
only to support the LNP and unbundling requirements of the Act but also to
enable them to respond to increasing competitive challenges. In addition, new
entrants to local telephone markets require LNP solutions that do not depend
on an existing OSS infrastructure and that can be deployed quickly and cost-
effectively. Thus, the Company believes that carriers' OSS are evolving from
back-office legacy systems to strategic business systems that play an
increasingly important role in enhancing competitiveness as well as enabling
compliance with the requirements of the Act.
33
<PAGE>
OPERATIONAL SUPPORT SYSTEMS
OSS encompass a broad array of software and systems that perform critical
functions for telecommunications carriers, including ordering, provisioning,
service assurance and billing. Ordering systems allow carriers to collect
customer information, retrieve current service information, capture and
validate new service requests, verify the availability of selected services
and transmit completed orders to one or more provisioning OSS. Carriers use
provisioning systems to install services for new customers and to change or
add services for existing customers. Service assurance systems allow carriers
to perform the testing, monitoring and reporting necessary to maintain network
availability and feed operational data to other business systems. Billing
systems are used by carriers to collect, collate, manage and report billing
information. The following diagram depicts four areas of OSS and the key
functions they provide.
[DIAGRAM APPEARS HERE DEPICTING THE OSS FUNCTIONAL AREAS, INCLUDING ORDERING,
PROVISIONING, SERVICE ASSURANCE AND BILLING]
Historically, as existing carriers have added new services, such as wireless
or Internet-based services, they have developed multiple, distinct OSS. These
legacy, proprietary OSS have typically been mainframe-based systems that in
many cases utilize incompatible software and technologies, making
communication among systems difficult. These OSS are further strained by the
many incremental changes that have been made in order to accommodate new
technologies, such as client/server technology and advancements in data
networking, and the proliferation of value-added services, such as call
waiting, call forwarding and voice mail. Despite these difficulties, carriers
are unable to completely replace existing OSS due to the large investments and
vast amounts of historical data contained in these systems. As a result,
carriers continue to make incremental modifications to these OSS, further
increasing their complexity and interoperability difficulties.
LNP CHALLENGES TO CURRENT OSS
The LNP requirements of the Act pose significant technological challenges to
existing carriers' OSS, which are already strained by the changes caused by
increasing competition, new technologies and the introduction of value-added
services. LNP invalidates a fundamental design assumption of many existing
OSS, which is the association between a customer's telephone number and the
geographic location of a carrier's particular physical switch. Provisioning
systems now must be able to receive and distribute on a real-time basis
certain customer data in order to assure proper call handling, routing and
completion. If the LNP data from ported numbers are not properly distributed
to all carriers, calls to and from that number will not be routed correctly
causing service problems for customers. Moreover, carriers that have not
implemented LNP may incur substantial call termination or "dip" charges if
they direct calls to regions where LNP has been mandated. After altering
provisioning systems, carriers must then implement changes throughout many of
their other OSS. These OSS are "hard-coded" in that each telephone number
corresponds to a physical switch for the ordering, service assurance and
billing systems. The implementation of LNP also requires new systems to pool,
allocate and assign telephone numbers. Changes will be required to existing
billing systems, which currently associate a telephone number with a fixed
geographic location. As a result of these challenges, the Company believes a
significant market opportunity exists for a range of LNP and OSS solutions
that address the following needs of existing and new carriers:
. ROBUST LNP PROVISIONING SOLUTION. Carriers require flexible, scalable LNP
provisioning solutions that allow them to cost-effectively support number
portability for customers, as well as to address regulatory requirements.
ILECs require LNP solutions that interface with regional number portability
databases operated by the Number Portability Administration Centers ("NPACs"),
which maintain and track data on ported telephone numbers, existing OSS,
network switches and components. New wireless or other competitive local
exchange carriers ("CLECs") require LNP
34
<PAGE>
solutions that do not depend on an existing OSS infrastructure and that can be
deployed quickly and cost-effectively. These LNP solutions should be based on
industry standards to allow carriers flexibility with respect to subsequent
OSS decisions and implementation. Additionally, solutions should be based on
standard software products to minimize custom development efforts and
deployment timeframes.
. INTEROPERABILITY AMONG CARRIERS. LNP and other requirements of the Act
give rise to a variety of inter-carrier transactions by which services and
access to facilities are bought and sold. When a customer ports a telephone
number to a new service provider, the new service provider typically needs to
provide, at a minimum, the range of services and facilities offered by the
previous service provider. These services may include, for example, voice
mail, call forwarding, directory assistance, calling card and operator
services. If the new service provider does not offer all of these services, it
may need to purchase certain services from the previous service provider.
Although inter-carrier transactions can be processed manually, the Company
believes that as the volume and complexity of inter-carrier transactions
increase, both existing and new carriers will seek new OSS to process such
transactions in order to reduce costs and minimize errors.
. SEAMLESS DATA DISSEMINATION THROUGHOUT CARRIERS' OSS. By introducing
fundamental changes in the relationships among carriers' various OSS, LNP
requires changes in how data are managed and disseminated within carriers. LNP
allows carriers or customers to initiate changes in data relating to a
customer or telephone number. Therefore, carriers must be able to disseminate
LNP-related data throughout their OSS on a real-time basis. Thus, LNP creates
the need for an OSS environment that supports multiple applications and that
provides carriers with a central database to which other OSS can interface to
obtain data on the carrier and the location of the switch servicing the
telephone number. These data also include billing addresses to be utilized for
rating purposes, and the facilities and value-added services now being
provided for customer service, network management and maintenance purposes.
Such an OSS environment should also contain standard legacy application
interfaces to minimize implementation time.
. EXPERIENCED AND RELIABLE IMPLEMENTATION PROVIDER. To provide necessary
support services for these LNP and LNP-related solutions, carriers will need
vendors with significant telecommunications software and OSS-related domain
expertise. ILECs need such vendors in order to integrate LNP and LNP-related
solutions into their multiple legacy systems. CLECs that do not have personnel
with the required expertise will need vendors to provide such services and
expertise. These needs are further complicated by the fact that LNP
implementation only began to occur in 1997, and few solution providers have
experience in implementing LNP.
THE EVOLVING SYSTEMS SOLUTION
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions for satisfying technically
challenging OSS requirements to position itself as a provider of next-
generation OSS solutions. The Company has initially focused on developing LNP
products to address the immediate needs of carriers, quickly establishing
itself as a leading supplier of LNP-based OSS solutions. The Company intends
to leverage its initial LNP success to address the evolving needs of
telecommunications service providers by developing and providing a family of
innovative service provisioning and OSS solutions. The Company's MetOSS family
of product offerings, including current LNP products and future LNP-related
provisioning and OSS platform products, is designed to provide comprehensive,
flexible, reliable and scalable solutions to meet carriers' needs in today's
rapidly changing multi-carrier market. The Company's approach seeks to offer
carriers time-to-market advantages, protection for legacy system investments,
and cost-effective OSS deployment, staffing, operation and maintenance.
35
<PAGE>
The Company's LNP and OSS solutions are designed to offer the following
benefits:
. LEADING LNP SOLUTIONS. The Company delivered the first-to-market LNP OSS
solution, which has been chosen by two of the five RBOCs and two of the three
leading long distance carriers. The Company's MetOSS LNP products, OrderPath,
NumberManager and NodeMaster, allow any telecommunications service provider to
meet the mandates of the Act by enabling LNP when a customer changes carriers.
The Company was a pioneer in developing standards and interface requirements
for carriers to communicate with the NPACs, regional third-party
clearinghouses required by the Act to oversee, mediate, track and resolve all
customer LNP-related issues among U.S. carriers. The Company acted as the
primary software architect and developer for the systems software used by
Lockheed, one of two companies chosen as NPAC administrators.This enabled the
Company to gain considerable time-to-market advantages and comprehensive
knowledge of the operational and technical challenges facing the industry in
commercially developing and releasing an LNP solution for carriers. The
Company has developed an open, client/server based-LNP solution that allows
carriers significant flexibility and rapid LNP deployment. Additionally, the
Company's solutions comply with OSS interoperability standards governed by the
Telecommunications Management Network ("TMN"), a global standards body for
carriers, facilitating future changes to their OSS. The Company's solution
also allows carriers to avoid the potentially significant "dip" charges that
might otherwise be imposed based upon termination of calls in regions where
LNP has been mandated.
. LNP-RELATED APPLICATIONS TO PROVIDE INTEROPERABILITY AMONG CARRIERS. The
Company intends to release new OSS provisioning applications that are designed
to enable carriers to effectively perform LNP-related inter-carrier
provisioning transactions. Targeted for release by the end of 1998 or early
1999, the Company's new MetOSS provisioning applications, Local Service
Exchange and Number Exchange, are designed to facilitate interoperability
among carriers. Carriers utilizing Local Service Exchange will be able to
coordinate the provisioning of facilities and services for LNP customers who
wish to receive the same or similar services provided by their previous
service provider. Local Service Exchange will enable carriers to initiate and
process local service requests ("LSRs"). Local Service Exchange will allow
carriers to track service provisioning response and turnaround times with
other carriers and should reduce the number of errors associated with the
manual processing of LSRs. Number Exchange will address the telephone number
pooling, allocation and assignment requirements brought about by LNP, as well
as provide a database to support call origination and termination
identification thereby enabling accurate rating and billing for calls to or
from regions which have implemented LNP.
. OSS PLATFORM TO FACILITATE DATA DISSEMINATION. The Company is developing
its MetOSS-Global Enterprise Management System ("GEM") platform, an OSS
environment that supports multiple applications and includes a scalable,
extensible database, APIs for third-party developers to write compatible
applications, business logic that governs the data dissemination throughout
other OSS platforms and standard legacy application interfaces to facilitate
rapid implementation. This platform is designed to provide a common,
enterprise-wide and standards-based data scheme so that all of carriers' OSS
can easily obtain data that has been affected by LNP.The GEM platform offers a
high degree of modularity, with the first modules targeted for release by the
end of 1998 or early 1999. The Company's platform is designed to provide
interoperability standards and interfaces, allowing customers to select OSS
applications developed by the Company or other third-party developers. The
Company believes that customers adopting the MetOSS-GEM platform will realize
savings on training, operations and maintenance due to the common user and
operational interfaces.
. COMPREHENSIVE RANGE OF SERVICES. The Company offers a comprehensive array
of professional services, including product and system integration, custom
software development and consulting services. The Company's service offerings
build on more than a decade of experience with leading telecommunications
companies such as GTE and Lucent, which has enabled the Company to
36
<PAGE>
develop significant expertise in implementing highly complex, technically
challenging OSS solutions. The Company also provides customer support,
including system installation, testing, training, enhancements and upgrades,
help desk support, user group seminars and software audits. The Company
believes that this full range of professional and customer support services
represents a source of competitive advantage.
THE EVOLVING SYSTEMS STRATEGY
The Company's objective is to become a leading provider of next-generation
OSS solutions to telecommunications companies. Key elements of the Company's
strategy include:
. MAINTAIN MARKET LEADERSHIP IN SERVICE PROVISIONING PRODUCTS. The Company
intends to continue leveraging its LNP market position to obtain leadership
positions in future provisioning applications and OSS products, as well as to
influence standards in these areas. By targeting OSS areas where the Company
possesses domain knowledge and expertise, the Company believes it can rapidly
capture market share. The Company believes that its close relationship with
Lockheed, which is one of two NPAC administrators and the firm responsible for
third-party administration of telephone numbers, affords the Company industry
foresight into the future direction and needs of carriers' LNP-related
provisioning and other OSS requirements. For example, the Company's Local
Service Exchange and Number Exchange provisioning products, which are expected
to be released by late 1998 or early 1999, are designed to facilitate
interoperability among carriers.
. DEVELOP NEXT-GENERATION OSS APPLICATIONS PLATFORM. The Company's MetOSS-
GEM platform is designed to offer carriers an OSS environment that supports
multiple applications developed by the Company or by third-party developers.
The Company plans to incorporate interoperability standards in its platform
architecture to allow service providers and third-party software developers to
design applications using the Company's development environment and APIs. The
Company believes that this platform product, slated for initial release by
late 1998 or early 1999, will enable carriers to effectively disseminate LNP-
related data throughout carriers' OSS infrastructures. The Company's OSS
platform is being designed to offer carriers an integrated migration path to
solve future OSS challenges, reduce training and staffing costs and extend the
life of OSS investments and technologies.
. LEVERAGE TELECOMMUNICATIONS DOMAIN EXPERTISE. The Company intends to
leverage its considerable domain expertise in telecommunications software and
systems integration services to develop its MetOSS product offerings,
including the platform, provisioning and other OSS products. The Company
believes that its experience with large telecommunications companies over the
past decade in developing pioneering solutions for critical needs in the areas
of customer provisioning, network management and wireless data has allowed it
to develop broad domain expertise and technical skills. The Company also
intends to selectively maintain custom software development projects with
leading telecommunication companies in order to maintain its domain expertise.
. EXPAND STRATEGIC PARTNERSHIPS. The Company intends to facilitate the
development of third- party software applications that are compatible with its
MetOSS-GEM platform by introducing in late 1998 or early 1999 a third-party
software application development environment and a set of application
specifications for its platform. By developing partnerships with leading
ordering, billing and service assurance application providers, the Company
believes carriers that adopt its OSS platform will be able to adopt point
applications from multiple vendors while maintaining data interoperability
across such applications. In order to broaden its sales presence and further
penetrate selected accounts and international markets, the Company plans to
complement its direct sales efforts through relationships with systems
integrators and services organizations.
37
<PAGE>
. MAINTAIN PROFESSIONAL SERVICE EXPERTISE. The Company intends to maintain a
strong focus on its professional services and systems integration business
activities in order to facilitate sales of software products and gain ongoing
insight into customer requirements. The Company will continue to perform
systems integration in key OSS domain areas and in implementation of its
MetOSS products. For example, the Company intends to provide product
integration and support services to customers who have licensed third-party
applications that support the Company's MetOSS platform products.
METOSS APPLICATION AND PLATFORM ARCHITECTURE
The Company's existing LNP applications and future provisioning applications
are designed as open client/server applications, supporting Windows 95,
Windows NT, and Java-based clients, HP/UX-based server operating systems and
Oracle relational database software. The applications use object-oriented
application methodologies and afford users a modular, scalable solution. The
Company has a strong commitment to the Internet as all current and future
applications are being designed to incorporate the use of Java and web
browsers. The Company's applications are designed to function either on a
standalone basis or concurrently with other applications on the Company's
MetOSS-GEM platform.
The Company's MetOSS-GEM platform is being designed and developed to support
multiple, interoperable OSS applications running concurrently in a
distributed, scalable network computing environment. The platform will support
the HP/UX-based server operating system and Oracle relational database
software, and incorporates selected components from third-party middleware
suppliers. The Company has published rules and standards on the use of the
platform for its internal, third-party and customer software developers,
including user interface and API specifications, as well as guidelines for
data extensibility between OSS.
METOSS PRODUCTS
The Company's MetOSS products include its LNP-based service provisioning
products, its future provisioning products, which will address carrier
requirements created as a result of LNP, and its future OSS platform products.
LNP PRODUCTS
The Company's LNP products enable carriers to accommodate customer requests
to change carriers while retaining the same phone number, and to obtain and
disseminate call routing data to carriers' networks. The Company currently
offers three LNP products, which were released in the first half of 1997. The
Company's LNP products are licensed under perpetual licenses and may be
licensed separately or bundled as a complete solution. The prices for such
licenses are based upon modules selected by the customer and the number of
access lines or wireless subscribers serviced by the customer. Prices start at
approximately $200,000 for a limited-use license and are graduated in
intervals to over $1 million for unlimited access line/subscriber use.
Customers licensing an application on a limited usage basis pay additional
license fees as their number of access lines/subscribers increases. The
Company is currently in the process of enhancing its LNP products to address
the marketplace requirements and standards being developed for the wireless
industry. General software upgrades and enhancements for all products are
planned. The following diagram depicts the Company's current LNP products and
how they are designed to interface to legacy and other OSS applications and
gateways.
[Diagram appears here depicting the
relationship between the Company's
current LNP products and other
elements of the OSS]
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<PAGE>
ORDERPATH enables carriers to process requests by customers for changing
carriers while retaining the same telephone number. OrderPath provides a
direct link by the carrier to any of the NPACs, and supports NPAC systems
operated by Lockheed and by Perot Systems ("Perot"). The Company's products
are also sold with a number of standard interfaces to legacy systems, such as
Bellcore's SOAC system. Consistent with the Company's standards-based
approach, the product complies with North American Numbering Council
specifications, which specify carrier interoperability with the NPAC.
NUMBERMANAGER enables carriers to receive downloads from NPACs, allowing
carriers to update their network switches, provisioning systems and other OSS
on a real-time basis as numbers are ported. NumberManager supports both
Lockheed and Perot-operated NPACs, as well as a number of standard interfaces
to switching equipment from leading vendors, such as Nortel, Ericsson, Lucent,
and Bellcore.
NODEMASTER complements OrderPath and NumberManager by providing an interface
between NumberManager and the carriers' physical network infrastructures.
NodeMaster is also sold with standard interfaces to hardware switches and
equipment from leading vendors. NodeMaster was designed to provide carriers
with the flexibility to operate in a multi-vendor hardware environment.
FUTURE SERVICE PROVISIONING PRODUCTS
The Company believes that as carriers implement LNP solutions they will see
a need for other OSS products that interface with these solutions. The Company
plans to develop a family of complementary OSS products based upon its MetOSS
architecture that will streamline customer provisioning and support. The
Company expects these products to be released by late 1998 or early 1999, and
to be licensed on a perpetual basis with pricing similar to the Company's LNP
products. The following diagram illustrates how the Company's MetOSS-GEM
platform is designed to extend a carrier's OSS environment to support multiple
applications developed by the Company or third-party developers.
[Diagram appears here depicting the Company's
current and planned products in relation to
the Company's MetOSS-GEM platform]
The Company has the following MetOSS products under development.
LOCAL SERVICE EXCHANGE is being designed to automate the creation and
exchange of LSRs between carriers. LSRs contain the details of customers'
services such as call waiting, call forwarding and voice mail. This product
automates the LSR process, which is currently performed in a costly manual
fashion. The Company expects LSR processing volume to increase as a result of
deregulation and LNP. The product provides an interface between carriers and
meets industry standards, such as the Order and Billing Forum specifications,
which define interfaces and record formats for the electronic exchange of
orders and billing data.
NUMBER EXCHANGE is being designed to address the telephone number management
and allocation requirements of service providers who have implemented LNP
solutions. Upon the introduction of LNP, service providers will be required to
implement systems which provide more efficient and automated telephone number
pooling, number management, allocation and reservations,
39
<PAGE>
as well as interface with the new third-party telephone number administrator.
Number Exchange provides carriers with interfaces to these telephone number
administrators, allowing carriers control of their number pooling,
administration and assignment, which were previously under the control of
ILECs. NumberManager also is being designed to track the coordinates of call
origination and termination, in order to ensure accurate rating of calls for
billing purposes.
FUTURE PLATFORM PRODUCTS
The Company is currently developing MetOSS-GEM, an OSS environment that
supports multiple applications, that is designed to enable carriers to
effectively disseminate LNP and other data throughout carriers' OSS
infrastructures. Carriers that adopt the Company's platform will be able to
choose among leading third-party applications in ordering, provisioning,
service assurance and billing, share data effectively among these applications
and rapidly implement multiple applications. The Company expects to sell the
modules both separately and as an integrated solution. The Company anticipates
the first release of the platform by late 1998 or early 1999.
The first release of the Company's MetOSS-GEM platform product is scheduled
to incorporate three functional modules. The specifications for the Shared
Services Module set forth standards for the design and development of both the
Company's and third parties' OSS applications written to the platform. The
Shared Services Module is intended to provide common services, such as
transaction processing, data sharing and security among all applications
operating on the platform. While the initial version of the Shared Services
Module will be comprised primarily of non-proprietary, commercially available
software products from third-party vendors, future versions of the Shared
Services Module are anticipated to add proprietary functionality, as well as
the rules and standards for use of third-party components. The Enterprise
Information Module is being designed to provide data warehousing and a single
enterprise data view across all applications. The data and information in the
Enterprise Information Module is intended to be accessed and utilized for a
wide range of applications and reporting, such as parity reporting and churn
analysis. The Development Environment Module will provide the rules and
programming interfaces to be used by internal, third-party, or customer
software application developers for compatibility with MetOSS.
The Company is developing two additional MetOSS modules for subsequent
release, the Gateway Module and the Extensibility Module. The Gateway Module
is being designed to provide the mechanism for integrating external systems
into the MetOSS environment, thus allowing carriers to benefit from rapid
implementation and data communication throughout their OSS. The Gateway Module
will be utilized for both inter- and intra-carrier systems and will support
the most common interface protocols and devices. The Extensibility Module will
define data formatting and user interfaces specifications for applications,
ensuring common user interfaces, data exchange and sharing among applications.
See "Risk Factors--Rapid Technological Change; Risks Associated With New
Versions and New Products; Risks of Software Defects".
SERVICES
The Company's professional services are focused primarily on product
integration, systems integration and customer support. The Company prices its
professional services on either a fixed-price or a time-and-materials basis.
PRODUCT INTEGRATION. The Company's proprietary Product Integration Review
("PIR") process defines customer requirements associated with the installation
and integration of the Company's software products. The Company's PIR produces
a set of documents that describe the project deliverables, installation
process, any legacy system interfaces and software development requirements,
as well as the project timeline and milestones. The Company believes its PIR
positions it for a successful customer relationship and creates opportunities
for additional product sales or services engagements.
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<PAGE>
SYSTEMS INTEGRATION AND CUSTOM SOFTWARE DEVELOPMENT. The Company provides a
range of systems integration services, including system design, database
design, network design, network configuration and other system-development
areas of expertise. The Company also provides systems integration services for
third-party software products. The Company provides its custom software
customers with software development services spanning the complete system
development lifecycle from feasibility and requirements gathering through
development and production rollout.
CUSTOMER SUPPORT. The Company provides a broad array of customer support
services, including 24 hour per day help desk support, problem resolution,
software maintenance and scheduled software upgrades, complete training and
documentation for products and services, and quality assurance. The Company's
typical software maintenance agreement has a 12-month term.
CUSTOMERS
The Company markets its products and services to a range of existing service
providers, including ILECs, CLECs, interexchange carriers and competitive
local exchange carriers. Historically, the Company's revenue has been
generated from sales to customers in the U.S. The Company's LNP and custom
software development customers by market are described below. See "Risk
Factors--Reliance on Significant Customers".
INCUMBENT LOCAL EXCHANGE CARRIERS. The Company's offerings to ILECs include
LNP solutions, OSS provisioning, order activation solutions, consulting and
custom software development. The Company's LNP customers include Ameritech,
Southwestern Bell and Pacific Bell, and the Company has supplied custom
software development projects for BellSouth, GTE, Pacific Bell and
Southwestern Bell.
WIRELESS SERVICE PROVIDERS. The Company provides wireless service providers
with over-the-air provisioning and service activation software, wireless data
applications and billing and cellular digital packet data ("CDPD") solutions.
The Company has supplied custom software and consulting services to AT&T
Wireless, Bell Atlantic Mobile, GTE Mobilenet, Southern New England Telephone
and Sprint PCS.
INTEREXCHANGE SERVICE PROVIDERS. The Company has supplied LNP and custom
software for WorldCom and Sprint.
COMPETITIVE LOCAL EXCHANGE COMPANIES. The Company provides organizations
such as ICG Communications Inc., TCG and WorldCom with OSS provisioning, order
entry, order activation, billing and customer care solutions, as well as
professional services such as systems integration and custom software
development.
NETWORK EQUIPMENT SUPPLIERS. The Company provides software and services to
equipment suppliers such as Lucent, Nortel, Ericsson and Stratus Computer,
Inc., which is either integrated into hardware products or sold separately.
The Company also works with these and other network equipment vendors to
develop interfaces between the Company's MetOSS products and network switches
and systems.
MARKETING AND SALES
The Company's marketing efforts include direct marketing to targeted
accounts, participation in selected trade shows, advertising in specific
industry trade journals, presentations at industry conferences and forums,
press releases to the industry and certain other marketing initiatives. The
primary objectives of the Company's marketing efforts are to generate market
awareness and qualified leads. The Company's sales activities are primarily
conducted through a direct sales and sales support
41
<PAGE>
organization, complemented by other sales channels including strategic
distribution partners who help to identify and qualify leads. The Company
assigns a dedicated account manager to each major customer. As of December 31,
1997, the Company's direct sales force consisted of 16 individuals, located in
six cities in the U.S. Due to the complex nature of the Company's products and
services and to the procurement processes of its customers, the sales cycle
can range from 60 days to more than a year.
The Company's marketing and sales efforts have been focused primarily on
facility-based local exchange, interexchange and wireless service providers in
the U.S., and substantially all of the Company's sales have been to U.S.
customers. The Company believes that significant demand exists for new OSS
products and services outside of the U.S. due to increased deregulation and
resulting competition. The Company intends to expand its sales and marketing
efforts outside of the U.S. through a combination of direct sales in selected
markets, partnering with specific third-party systems integrators and software
suppliers and the extension of its relationships with existing customers as
they expand into international markets. See "Risk Factors--Risk of Planned
International Expansion".
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily focused on
identifying market requirements and performing design and development
functions. These activities follow the Company's Product Development Process
("PDP") that governs the product lifecycle from concept through product launch
and subsequent retirement from the marketplace through the use of cross-
functional teams. The PDP provides the Company's senior management with a
series of decision milestones that allows management to consider ongoing
projects on a regular basis. The Company's research and development
expenditures for 1996 were $641,000, representing 2% of total revenue, and for
the first nine months of 1997 were $1.2 million, representing 4% of total
revenues. See "Risk Factors--Rapid Technological Change; Risks Associated with
New Versions and New Products; Risks of Software Defects".
COMPETITION
The Company's primary markets are intensely competitive and are subject to
rapid technological change, evolving industry standards and regulatory
developments. The Company faces continuous demand for improved product
performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements.
The Company's existing and potential competitors include many large domestic
and international companies, including certain of the Company's customers,
that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases
and longer-standing relationships with customers than the Company. The
Company's principal competitors in the LNP market include Bellcore, Lucent,
Nortel and Tekelec. The Company believes that competitors of its MetOSS
products will include AG Communications, Bellcore, CBIS, Ericsson, and Lucent.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with solutions which may be less costly, provide higher
performance or additional features or be introduced earlier than the Company's
solutions. Many telecommunications companies have large internal development
organizations which develop software solutions and provide services similar to
the Company's products and services. In addition, customers who have purchased
custom software solutions from the Company are not precluded from competing
with the Company.
The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, quality and reliability of the
Company's and its competitors' products and services, price, project
management capabilities, technical subject matter expertise, quality of
customer service and support, the emergence
42
<PAGE>
of new industry standards, the development of technical innovations, the
attraction and retention of qualified personnel, regulatory changes and general
market and economic conditions. A variety of potential actions by the Company's
competitors, including a reduction of product prices or increased promotion,
announcement or accelerated introduction of new or enhanced products, or
cooperative relationships among competitors, could have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors or will properly identify and
address the demands of new markets. The failure by the Company to adapt to
emerging market demands, respond to regulatory and technological changes or to
compete successfully with existing and new competitors would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Competition".
INTELLECTUAL PROPERTY
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect its proprietary
rights. The Company presently has no patents, but has patent applications
pending in the U.S. on elements of three of its LNP products, NumberManager,
OrderPath and NodeMaster. In addition, the Company has registered or filed for
registration of certain of its trademarks. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
products or technology without authorization, or to develop similar technology
independently through reverse engineering or other means. In addition, the laws
of some foreign countries do not adequately protect the Company's proprietary
rights. There can be no assurance that the Company's means of protecting its
proprietary rights in the U.S. or abroad will be adequate or that others will
not independently develop technologies that are similar or superior to the
Company's technology, duplicate the Company's technology or design around any
patent of the Company. Moreover, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to determine the validity
and scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of management time and resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Protection of Intellectual Property; Risks of
Infringement".
EMPLOYEES
As of December 31, 1997, the Company employed a total of 313 employees, of
which 61 are research and development staff, 167 professional services staff,
65 are general and administrative staff, and 20 are marketing and sales staff.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes that its relations with its
employees are good.
FACILITIES
The Company leases office space at three locations in the Denver, Colorado
metropolitan area, including two in the Englewood area (Meridian and Southgate)
and one in the Boulder area (Centennial Valley). The Southgate office contains
the corporate headquarters, administrative, legal, and sales and marketing,
with software development and customer support performed at the Meridian,
Southgate and the Boulder locations. The Company also leases sales offices in
Dallas, Chicago, Atlanta, San Francisco and Washington, D.C. The Company's
leases in the Denver, Colorado metropolitan area are shown below:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
-------- -------------- ----------------
<S> <C> <C>
Meridian............................... 120,281 11/30/2016
Southgate.............................. 68,566 12/31/2000
Centennial Valley...................... 10,992 10/31/2002
</TABLE>
43
<PAGE>
The Company believes that its current office space, together with the
additional Meridian space that will become available in 1998, will be adequate
to meet the Company's current needs through approximately 1999.
LEGAL PROCEEDINGS
From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the ordinary course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceedings, the adverse outcome of which would, in management's opinion, have
a material adverse effect on the Company's business, financial condition and
results of operations.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George A. Hallenbeck(1)(2)....... 55 Chairman of the Board of Directors
J. Richard Abramson.............. 49 President, Chief Executive Officer and Director
Roger A. Barnes.................. 49 Senior Vice President of Finance, Chief
Financial Officer, Treasurer and Assistant
Secretary
Jeffrey J. Finn.................. 39 Senior Vice President and General Manager of
Product Development and Distribution
James M. Ross.................... 55 Senior Vice President and General Manager of
Services
Marilu C. Crosby................. 50 Vice President of Human Resources
Robert M. Gahan.................. 46 Vice President of Corporate Development
David J. Molny................... 39 Vice President, Chief Technical Officer and
Director
Anita T. Moseley................. 45 Vice President of Legal Services, General
Counsel and Secretary
Terry C. Porter.................. 45 Vice President of Sales and Sales Support
Harry B. Fair(1)(2).............. 47 Vice Chairman of the Board of Directors
Donald R. Dixon(2)............... 50 Director
Robert J. Loarie(1).............. 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
GEORGE A. HALLENBECK was a founder of the Company in June 1985 and has
served as Chairman and a member of the Board of Directors since that time. Mr.
Hallenbeck served as the Company's Chief Executive Officer from June 1985
until December 1996 and as its President from June 1985 until December 1988.
Mr. Hallenbeck currently provides independent consulting services to
technology companies. Mr. Hallenbeck received a B.A. from the University of
Colorado.
J. RICHARD ABRAMSON joined the Company as its President and Chief Operating
Officer in August 1996, serving in such capacities until December 1996 when he
became the President and Chief Executive Officer. Mr. Abramson has been a
member of the Company's Board of Directors since November 1996. From May 1990
through January 1996, Mr. Abramson served as the Chairman of the Board of
Directors, President and Chief Executive Officer of Prairie Systems, Inc., a
privately-held company which provides software products and services for the
telecommunications industry ("Prairie Systems"). Before 1990, Mr. Abramson
held various executive management positions with Applied Communications, Inc.
(which was acquired by U.S. West in 1986) and ACI Telecom, companies which
provide software and services for the banking and telecommunications industry,
and various sales and marketing management positions at First Data Resources
and IBM. Mr. Abramson holds a B.S. from the University of Nebraska.
ROGER A. BARNES joined the Company in November 1997 as Senior Vice President
of Finance, Chief Financial Officer, Treasurer and Assistant Secretary. From
February 1996 to June 1997, Mr. Barnes served as President, Chief Executive
Officer and Director of Formida Software Corporation, a privately-held company
which provides software products for the development of applications utilizing
advanced object relational database technology. From February 1995 to February
1996, Mr. Barnes held the position of Director, Technology Corporate Finance
at Arthur Andersen & Co., LLP, where he
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established the firm's technology corporate finance advisory practice. Between
1991 and 1994, Mr. Barnes served as President and Chief Executive Officer of
Centur Consulting Group, his own financial advisory consulting company.
Earlier in his career, Mr. Barnes held various executive management positions
at American President Companies, Ltd. and ROLM Corporation. Mr. Barnes holds a
B.S. from the University of Nebraska.
JEFFREY J. FINN joined the Company in July 1996 as Vice President of Sales
and Marketing and held that position until September 1997 when he assumed the
position of Senior Vice President and General Manager of Product Development
and Distribution. From 1990 until 1996, Mr. Finn served as the Senior Vice
President of Prairie Systems. Earlier in his career, Mr. Finn held various
positions at ACI Telecom and IBM. Mr. Finn holds a B.S. from the University of
Nebraska.
JAMES M. ROSS joined the Company in June 1997 as Vice President of
Integration Services and held that position until September 1997 when he
assumed the position of Senior Vice President and General Manager of Services.
Mr. Ross served as Senior Vice President of APAC Teleservices Inc., a customer
care outsourcing company, from June 1996 until May 1997, and as Senior Vice
President and General Manager of Cap Gemini Sogeti, an international
information technology and systems integration company, from December 1994
until May 1996. From August 1991 to June 1994, Mr. Ross served as Executive
Vice President - Managing Director, Worldwide Telecommunications of SHL
Systemhouse Inc., a global information technology and systems integration
company. Mr. Ross holds a B.A. from Rutgers University.
MARILU C. CROSBY joined the Company in December 1996 as Vice President of
Human Resources. From July 1996 to December 1996, she served as a principal
with Crosby, Bowen & McCoy, Inc., a benefits outsourcing company, and, from
December 1992 until June 1996, she was the Vice President of Human Resources
at Wadley Medical Center. Ms. Crosby holds a B.A. from Augusta College and an
M.A. from the University of South Carolina.
ROBERT M. GAHAN joined the Company in May 1997 as Director of Business
Development and held that position until August 1997 when he assumed the
position of Vice President of Corporate Development. From January 1993 until
December 1996, Mr. Gahan served as National Sales Director at Qwest
Communications, a Denver-based telecommunications company. Previously, Mr.
Gahan held the positions of General Manager at Bakersfield Cellular Telephone
Company, a business unit of BellSouth Cellular Corporation, a
telecommunications company, and Senior Sales Manager for U.S. West Cellular.
Mr. Gahan holds a B.A. from the University of Iowa.
DAVID J. MOLNY joined the Company in February 1987, serving as a system
architect and group manager on numerous development projects, until September
1997 when he assumed the positions of Vice President and Chief Technical
Officer of the Company. Mr. Molny has served as a member of the Company's
Board of Directors since November 1996. Previously, Mr. Molny held various
positions at AT&T Bell Laboratories and AT&T Network Systems, both
telecommunications companies. Mr. Molny holds a B.S. from the State University
of New York at Potsdam and an M.S. from the University of Southern California.
ANITA T. MOSELEY joined the Company in May 1994 as corporate counsel of the
Company and held that position until June 1997 when she assumed the positions
of Vice President of Legal Services, General Counsel and Secretary of the
Company. Between September 1991 and May 1994, she held an in-house corporate
counsel position with the Federal Deposit Insurance Corporation/Resolution
Trust Corporation. Ms. Moseley holds a B.A. from Syracuse University and a
J.D. from the University of Utah.
TERRY C. PORTER joined the Company in May 1997 as Director of Sales and
Sales Support and held that position until September 1997 when he assumed the
position of Vice President of Sales and Sales Support. From March 1996 until
May 1997, Mr. Porter was the Managing Director of U.S. Operations,
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<PAGE>
responsible for middleware sales and support, at Siemens Nixdorf Information
Systems. Prior to 1996, Mr. Porter served in various executive management
positions at Covia Technologies, a company providing interoperable message-
based product groups. Mr. Porter holds a B.S. from Purdue University.
HARRY B. FAIR has served as Vice Chairman of the Board of Directors since
April 1996. Mr. Fair is one of the founders of the Company and has served on
the Company's Board of Directors since 1986. Mr. Fair served as President of
the Company between December 1988 and April 1996. Mr. Fair currently is the
General Manager of several companies that provide infrastructure commercial
data and voice communications, internet solutions and technical solutions for
credit unions. Mr. Fair holds a B.A. from the University of Denver. Following
this offering, it is anticipated that the Vice Chairman of the Board of
Directors position will be eliminated and Mr. Fair will serve as a member of
the Company's Board of Directors.
DONALD R. DIXON has served as a member of the Company's Board of Directors
since December 1997 and previously served as a member of the Company's Board
of Directors from May 1996 to November 1996. Since 1993, Mr. Dixon has been
associated with Trident Capital, L.P., a venture capital firm ("Trident"),
which he helped found. From 1988 to 1993, Mr. Dixon served as Co-President of
Partech International, a private equity fund manager associated with Banque
Paribas. Mr. Dixon serves as a director of Bank America Merchant Services,
Inc., Pegasus Systems, Inc., Platinum Software Corporation, as well as several
privately-held companies. Trident manages Information Associates L.P. and
Information Associates, C.V., both of which are stockholders of the Company.
Mr. Dixon holds a B.S. from Princeton University and an M.B.A. from Stanford
University.
ROBERT J. LOARIE has served as a member of the Company's Board of Directors
since May 1996. Since August 1992, Mr. Loarie has been a Principal of, and
since December 1997, a Managing Director of, Morgan Stanley & Co.
Incorporated, a diversified investment firm, and a general partner of Morgan
Stanley Venture Partners, L.P. and Morgan Stanley Venture Partners II, L.P.,
venture capital investment partnerships. Since November 1996, Mr. Loarie has
also served as a managing member of Morgan Stanley Venture Partners III,
L.L.C., a venture capital investment company. Mr. Loarie also serves as a
director of Adaptec, Inc., TelCom Semiconductor, Inc. and several privately-
held companies. Mr. Loarie holds a B.S. from the Illinois Institute of
Technology and an M.B.A. from the Harvard University Graduate School of
Business.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Fair, Hallenbeck and Loarie. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent certified public
accountants and reviews the Company's annual financial statements.
The Compensation Committee consists of Messrs. Dixon, Fair and Hallenbeck.
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for officers and employees of
the Company and reviews the performance of the Chief Executive Officer.
DIRECTOR COMPENSATION
The Company's directors do not receive any compensation for serving on the
Board of Directors; however, directors are reimbursed for reasonable out-of-
pocket expenses incurred in connection with attending Board of Directors or
committee meetings.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Dixon, Fair and Hallenbeck. Mr. Fair previously served as the
Company's President and currently serves as Vice Chairman of the Board of
Directors of the Company. Mr. Hallenbeck previously served as the Company's
President and Chief Executive Officer and currently serves as the Chairman of
the Board of Directors of the Company. Mr. Dixon was not at any time during
fiscal 1997, nor at any other time, an officer or employee of the Company. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1997 to the Company's Chief Executive
Officer and each of the Company's five other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company during the fiscal year ended December 31, 1997
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION(1)
- --------------------------- ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Richard Abramson..... 1997 $306,000 $112,094 427,500 $9,600
President, Chief
Executive Officer and
Director
Jeffrey J. Finn......... 1997 235,026(2) 54,297 240,750 9,600
Senior Vice President
and General Manager of
Product Development and
Distribution
Marilu C. Crosby........ 1997 102,000 18,682 50,000 4,500
Vice President of Human
Resources
David J. Molny.......... 1997 160,500 4,136 59,500 9,450
Vice President, Chief
Technical Officer and
Director
Anita T. Moseley........ 1997 112,882 11,610 59,929 6,656
Vice President of Legal
Services, General
Counsel and Secretary
Steven F. Langion(3).... 1997 81,169 25,685 23,867 4,017
Former Vice President
of Development
</TABLE>
- --------
(1) Represents contributions made by the Company on behalf of the individuals
which are currently managed under the Company's 401(k) Plan.
(2) Includes commission in the amount of $47,768 earned in fiscal 1997.
(3) Mr. Langion's employment with the Company was terminated on May 19, 1997.
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<PAGE>
STOCK OPTIONS
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 by the Company to each of the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME GRANTED IN FISCAL YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- ----------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Abramson..... 202,500 18.8% $ .80 2/18/07 $ 101,250 $ 257,175
225,000 -- 9.50 9/22/07 1,343,250 3,406,500
Jeffrey J. Finn......... 25,750 10.6 .80 2/18/07 12,875 32,703
215,000 -- 9.50 9/22/97 1,283,550 3,255,100
Marilu C. Crosby........ 20,000 2.2 .80 2/18/07 10,000 25,400
20,000 -- .80 6/17/07 10,000 25,400
10,000 -- 9.50 9/22/07 59,700 151,400
David J. Molny.......... 59,500 2.6 9.50 9/22/07 355,215 900,830
Anita T. Moseley........ 22,429 2.6 .80 6/17/07 11,215 28,485
37,500 -- 9.50 9/22/07 223,875 567,750
Steven F. Langion....... 23,867 1.1 .80 8/19/97(5) 11,934 30,311
</TABLE>
- --------
(1) Each of the options was granted pursuant to the Company's Stock Option
Plan and is subject to the terms of such plan as described herein.
(2) Based on 2,268,157 options granted to employees in 1997.
(3) The exercise price per share of options granted was equal to the fair
market value of the Common Stock on the date of grant as determined by the
Company's Board of Directors.
(4) The potential realizable value is calculated based on the term of the
option at the date of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
(5) This option expired three months after the termination of Mr. Langion's
employment with the Company.
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<PAGE>
The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1997, (ii) the number of securities underlying unexercised
options held by the Named Executive Officers as of December 31, 1997 and (iii)
the value of unexercised in-the-money options (i.e., options for which the
fair market value of the Common Stock ($9.50 at December 31, 1997) exceeds the
exercise price) as of December 31, 1997:
OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
ACQUIRED END (#) FISCAL YEAR-END (#) (1)
ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Abramson..... -- -- 83,125 441,875 $723,188 $1,886,813
Jeffrey J. Finn......... -- -- 31,187 283,813 271,327 598,673
Marilu C. Crosby........ -- -- 5,000 45,000 43,500 304,500
David J. Molny.......... -- -- -- 62,500 -- 26,100
Anita T. Moseley........ -- -- 1,297 61,203 11,284 206,216
Steven F. Langion....... 11,698 -- -- (2) -- (2) -- --
</TABLE>
- --------
(1) Based on the estimated fair market value of the Common Stock as of
December 31, 1997, $9.50 per share (as determined by the Board of
Directors), minus the per share exercise price, multiplied by the number
of shares underlying the option.
(2) On August 19, 1997, Mr. Langion exercised the portions of his stock
options that had vested through the date of termination of his employment
with the Company. The remaining portions of the options expired upon such
termination.
EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED STOCK OPTION PLAN
The Company's Amended and Restated Stock Option Plan was adopted by the
Board of Directors on January 19, 1996 and most recently amended on December
16, 1997. There are currently 3,150,000 shares of Common Stock authorized for
issuance under the Option Plan. At December 31, 1997, the Company had granted
options to purchase an aggregate of approximately 3,091,429 shares of Common
Stock, of which options to purchase approximately 84,489 shares had been
exercised, options to purchase approximately 1,131,412 shares had been
canceled (due to expiration or otherwise) and options to purchase
approximately 1,875,528 shares at a weighted average exercise price of
approximately $4.91 remained outstanding. Additionally, an aggregate of
approximately 1,189,983 shares were available for future grant. The Option
Plan will terminate in January 2006 unless terminated sooner by the Board of
Directors.
The Option Plan provides for the grant of incentive stock options under the
Code to employees and nonstatutory stock options, stock appreciation rights,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Option Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability thereof.
The terms of stock options granted under the Option Plan generally may not
exceed ten years. The exercise price of options granted under the Option Plan
is determined by the Board of Directors, provided that the exercise price of
an incentive stock option cannot be less than 100% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Option Plan vest at the rate specified in the option agreement. No stock
option may be transferred by the
50
<PAGE>
optionee other than by will or the laws of descent or distribution or, in
certain limited instances, pursuant to a qualified domestic relations order,
provided that an optionee whose relationship with the Company or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the three-month period following such
cessation (unless such options terminate or expire sooner by their terms) or
in such longer period as may be determined by the Board of Directors. Options
may be exercised for up to 12 months and 18 months after an optionee's
relationship with the Company and related corporations ceases due to death or
disability, respectively.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000. Options may be
immediately exercisable, at the discretion of the Company, whether vested or
not, subject to repurchase by the Company of any unvested shares.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full become available again for the grant of
awards under the Option Plan. Shares with respect to which stock appreciation
rights have been exercised are not available for the grant of new awards or
stock options.
The Board of Directors has the authority to reprice outstanding options and
stock appreciation rights and to offer optionees and holders of stock
appreciation rights the opportunity to replace outstanding options and stock
appreciation rights with new options or stock appreciation rights for the same
or a different number of shares.
Restricted stock purchase awards granted under the Option Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a purchase payment. Rights under a
stock bonus or restricted stock bonus agreement may not be transferred other
than by will, the laws of descent and distribution or a qualified domestic
relations order while the stock awarded pursuant to such an agreement remains
subject to the agreement. Stock appreciation rights granted under the Option
Plan may be tandem rights, concurrent rights or independent rights.
Upon certain changes in control of the Company, each outstanding option
shall be assumed or an equivalent option substituted by the successor
corporation or, if the successor corporation refuses to assume or substitute
for outstanding options, such options shall become fully vested and
exercisable for a period of 15 days after notice from the Company, or
thereafter terminate.
EMPLOYEE STOCK PURCHASE PLAN
On December 16, 1997, the Company's Board of Directors adopted an Employee
Stock Purchase Plan covering an aggregate of 250,000 shares of Common Stock.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the
Purchase Plan. The Board of Directors currently plans that the offering period
for any offering will be six months.
Employees are eligible to participate in the first offering commencing
following the date they are employed by the Company or an affiliate of the
Company. Employees who participate in an offering may have up to 15% of their
earnings (provided that such amount does not exceed $25,000 in value
51
<PAGE>
per calendar year) withheld pursuant to the Purchase Plan and applied at the
end of each offering period to the purchase of shares of Common Stock. The
price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock on the commencement
date of each offering period or the purchase date. Employees may end their
participation in the offering at the end of the offering period, and
participation ends automatically upon termination of employment with the
Company.
In the event of certain changes of control, the Company and the Board of
Directors have discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor
corporation, or the Board of Directors may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The Purchase Plan will
terminate at the direction of the Board of Directors.
401(K) PLAN
The Company maintains a 401(k) profit sharing and retirement plan (the
"401(k) Plan"). All employees who have reached 21 years of age and have
completed 30 continuous days of employment are eligible to participate in the
401(k) Plan. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by 15%, up to the annual limit prescribed by statute
($9,500 in 1997), and to contribute the amount of such reduction to the 401(k)
Plan. The Company makes nonelective contributions in the amount of 4% of each
participant's annual compensation and matches 100% of each participant's
eligible contributions up to 2% of each participant's annual compensation. The
401(k) Plan also provides for discretionary contributions and qualified
nonelective contributions to the 401(k) Plan by the Company. Employee
participants may direct the trustee with respect to the investment of the
assets of the 401(k) Plan only if the trustee consents to such direction in
writing. Prior to the adoption of the 401(k) Plan, the Company maintained a
defined contribution retirement plan, which was available to all employees 21
years of age or older with one year of service to the Company. Effective
December 31, 1996, the accrual of benefits under such retirement plan ceased
and the retirement plan was merged into the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Bylaws (the "Bylaws") provide that the
Company will indemnify its directors and executive officers and may indemnify
its other officers, employees and other agents to the fullest extent permitted
by Delaware law. The Company is also empowered under its Bylaws to enter into
indemnification agreements, as the Company plans to do, with its directors and
executive officers. See "Certain Transactions". The Company's Bylaws also
allow the Company to purchase insurance on behalf of any person it is required
or permitted to indemnify.
In addition, the Company's Restated Certificate of Incorporation (the
"Certificate") provides that the Company's directors shall not be liable for
monetary damages for breach of fiduciary duty to the Company and its
stockholders as a director, except for liability (i) for breach of their duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. The Certificate further provides that no amendment or repeal
of this provision shall apply to or have any effect on the liability or
alleged liability of any director of the Company for or with respect to any
acts or omissions of such director occurring prior to such amendment or
repeal. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, the liability of directors will then be eliminated or limited to
the fullest extent permitted by Delaware law, as so amended. This provision
does not affect a director's responsibilities under any other laws, such as
the federal securities laws or state or federal environmental laws.
52
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to authority granted by the Company's Bylaws, the Company plans to
enter into indemnification agreements (the "Indemnification Agreements") with
each of its directors and executive officers upon the effectiveness of this
offering. Subject to the provisions of the Indemnification Agreements, the
Company shall indemnify and advance expenses to such directors and executive
officers in connection with their involvement in any event or occurrence which
arises in their capacity as, or as a result of, their position with the
Company. See "Management--Limitation of Liability and Indemnification of
Officers and Directors".
During 1997, the Company paid Vail Technologies, Inc. approximately $146,000
for certain consulting services provided in connection with the Company's
agreement with Lockheed. George A. Hallenbeck, Chairman of the Board and
holder of more than 5% of the Company's Common Stock, is the sole owner of
Vail Technologies, Inc. Mr. Hallenbeck is currently not providing any
consulting services to the Company.
On November 25, 1996, the Company entered into a termination agreement with
George A. Hallenbeck in connection with the termination of his services as
Chief Executive Officer of the Company, pursuant to which the Company paid Mr.
Hallenbeck a total of $120,000 in six monthly installments commencing January
1, 1997.
In September 1996, in connection with the deferral of interest due on the
Subordinated Notes (as defined below), the Company issued warrants to purchase
an aggregate of 96,962 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Morgan Stanley Venture
Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II, C.V. and Morgan
Stanley Venture Investors, L.P. (the "Morgan Stanley Funds") and warrants to
purchase an aggregate of 85,673 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Information
Associates, C.V. and Information Associates, L.P (the "Information Associates
Funds"). The warrants expire in May 2003. Robert J. Loarie, a director of the
Company, is a General Partner of Morgan Stanley Venture Partners II, L.P., the
General Partner of the Morgan Stanley Funds. He is also a Vice President of
Morgan Stanley Venture Capital II, Inc., the Managing General Partner of
Morgan Stanley Venture Partners II, L.P. Donald R. Dixon, a director of the
Company, is President of Trident Capital Management, L.L.C., the Investment
General Partner of Information Associates, C.V. and the General Partner of
Information Associates, L.P. The shares of Non-voting Common Stock issuable
upon conversion of such warrants are entitled to certain registration rights.
See "Description of Capital Stock--Registration Rights".
On May 31, 1996, the Company issued senior subordinated promissory notes
(the "Subordinated Notes") in the aggregate principal amount of $6,500,000 and
warrants to purchase an aggregate of 727,998 shares of Non-voting Common Stock
(which, upon completion of this offering, will convert into warrants to
purchase shares of Common Stock) at an exercise price of $.80 per share (the
"Warrants"), which expire in May 2003, to the Morgan Stanley Funds and
Information Associates Funds. The Subordinated Notes accrue interest at the
rate of 9% and are payable in four annual installments commencing June 1,
2000. The principal amount of the Subordinated Notes, together with interest,
are fully due and payable upon the consummation of this offering. The shares
of Common Stock issuable upon exercise of the Warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights".
On April 4, 1996, the Company entered into a consulting services agreement
with Harry B. Fair, pursuant to which the Company paid Mr. Fair a total of
$106,000. Mr. Fair is currently not providing any consulting services to the
Company.
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<PAGE>
During the fiscal years ended December 31, 1994 and December 31, 1995, the
Company was treated as an S corporation under the Code and made distributions
to its stockholders. See "Dividend Policy and S Corporation Status". The
Company deferred making distributions at the end of fiscal 1995 to its
stockholders. On January 2, 1996, the Company issued promissory notes bearing
interest at the rate of 7.25% to the following directors, executive officers
and holders of more than 5% of the Company's Common Stock in the following
principal amounts equal to the amount of each stockholder's deferred
distribution for the year ended December 31, 1995: John A. Elmgren, Harry B.
Fair, George A. Hallenbeck, David J. Molny and Wayne A. Pulick in the amounts
of $655,257, $2,293,401, $2,293,401, $65,526 and $655,257, respectively (the
"Stockholder Notes"). The Stockholder Notes contain prepayment penalties and
are due on January 2, 2006, with interest payable on each December 31. On May
24, 1996, each holder executed an Acknowledgment and Confirmation of
Subordination, agreeing to subordinate the repayment of the principal of their
Stockholder Notes to the Subordinated Notes. Further, in September 1996, each
holder agreed to forgive interest payable on the Stockholder Notes as of
September 30, 1996 in exchange for the Company's agreement to amend the
Stockholder Notes to contain prepayment penalties.
In January 1995, the Company made a loan to George A. Hallenbeck in the
principal amount of $137,400, bearing interest at the rate of 6.5% per annum
and payable in monthly installments through December 1995. Such loan was
repaid in full.
The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any
of its officers, directors, or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the independent and
disinterested members of the Board of Directors.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1997,
and as adjusted to reflect (a) the sale of the Common Stock being offered
hereby (assuming no exercise of the Underwriters' over-allotment option) and
(b) to give effect to the conversion of all outstanding shares of Non-voting
Common Stock and Preferred Stock into shares of Common Stock for (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's current stockholders who is expected to
sell shares in this offering (the "Selling Stockholders"), (iv) each of the
Named Executive Officers and (v) all directors and current executive officers
of the Company as a group. Except as otherwise noted, the persons or entities
in this table have sole voting and investing power with respect to all the
shares of Common Stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OF OFFERING(1)(2)
----------------------- SHARES -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ------------ ------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
George A. Hallenbeck.... 2,625,000 33.9% 383,600(3) 2,241,400 20.7%
c/o Evolving Systems,
Inc.
6892 South Yosemite
Englewood, CO 80112
Harry B. Fair........... 2,175,000 28.1 318,377(4) 1,856,623 17.1
c/o Evolving Systems,
Inc.
6892 South Yosemite
Englewood, CO 80112
Morgan Stanley Venture
Partners(5)............. 1,015,210 12.3 -- 1,015,210 9.0
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Trident Capital(6)...... 898,173 11.0 -- 898,173 8.0
2480 Sand Hill Road
Menlo Park, CA 94025
John A. Elmgren(7)...... 713,250 9.2 104,210(8) 609,040 5.6
1518 Cottonwood Lane
Littleton, CO 80121
Wayne A. Pulick(9)...... 600,375 7.8 87,904(10) 512,471 4.7
147 Alpine Avenue
Golden, CO 80401
J. Richard Abramson(11). 89,218 1.1 -- 89,218 *
Marilu C. Crosby(11).... 5,000 * -- 5,000 *
Donald R. Dixon(12)..... 898,173 11.0 -- 898,173 8.0
Jeffrey J. Finn(11)..... 35,827 * -- 35,827 *
Steven F. Langion....... 11,699 * -- 11,699 *
Robert J. Loarie(13).... 1,015,210 12.3 -- 1,015,210 9.0
David J. Molny(14)...... 83,250 1.1 10,000 73,250 *
Anita T. Moseley(11).... 1,780 * -- 1,780 *
All directors and
current executive
officers as a group (13
persons)(15)........... 6,928,458 78.9 711,977 6,216,481 52.4
Other Selling
Stockholders:
Timothy J. Drummond(16). 77,625 1.0 5,000 72,625 *
</TABLE>
55
<PAGE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
issuable upon exercise of stock options and warrants that are currently
exercisable or exercisable within 60 days of December 31, 1997 are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not outstanding for computing the percentage of
any other person or entity. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the
table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is based on 7,739,847 shares of Common Stock
outstanding before this offering and 10,830,756 shares of Common Stock
outstanding after this offering.
(3) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Hallenbeck will sell 500,000 shares in the offering and will beneficially
own 2,125,000 shares, or 19.6%, after the offering.
(4) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Fair will sell 500,000 shares in the offering and will beneficially own
1,675,000 shares, or 15.5%, after the offering.
(5) Includes 87,750 shares owned by Morgan Stanley Venture Capital Fund II,
C.V., 352,500 shares owned by Morgan Stanley Venture Capital Fund II, L.P.
and 91,500 shares owned by Morgan Stanley Venture Investors, L.P. Also
includes warrants to purchase an aggregate of 483,460 shares of Common
Stock, 79,838 of which are owned by Morgan Stanley Venture Capital Fund
II, C.V., 320,453 of which are owned by Morgan Stanley Venture Capital
Fund II, L.P. and 83,169 of which are owned by Morgan Stanley Venture
Investors, L.P.
(6) Includes 12,750 shares owned by Information Associates, C.V. and 458,250
shares owned by Information Associates, L.P. Also includes warrants to
purchase an aggregate of 427,173 shares of Common Stock, 11,597 of which
are owned by Information Associates, C.V. and 415,576 of which are owned
by Information Associates, L.P.
(7) Includes 750 shares subject to stock options exercisable within 60 days of
December 31, 1997.
(8) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Elmgren will sell 150,000 shares in the offering and will beneficially own
563,250 shares, or 5.2%, after the offering.
(9) Includes 375 shares subject to stock options exercisable within 60 days of
December 31, 1997.
(10) Assuming the Underwriters' over-allotment option is exercised in full,
Mr. Pulick will sell 150,000 shares in the offering and will beneficially
own 450,375 shares, or 4.2%, after the offering.
(11) Consists solely of shares subject to stock options exercisable within 60
days of December 31, 1997.
(12) Consists solely of shares owned by investment funds managed by Trident
Capital (see Note 6 above). Mr. Dixon is President of Trident Capital
Management, L.L.C., the Investment General Partner of Information
Associates, C.V. and the General Partner of Information Associates, L.P.
(13) Consists solely of shares owned by investment funds managed by Morgan
Stanley Venture Partners (see Note 5 above). Mr. Loarie is a General
Partner of Morgan Stanley Venture Partners II, L.P., the General Partner
of each of the funds. He is also a Vice President of Morgan Stanley
Venture Capital II, Inc., the Managing General Partner of Morgan Stanley
Venture Partners II, L.P. Mr. Loarie disclaims beneficial ownership of
such shares.
(14) Includes 750 shares subject to stock options exercisable within 60 days
of December 31, 1997.
(15) Includes 132,575 shares subject to stock options exercisable within 60
days of December 31, 1997. Also includes warrants to purchase an
aggregate of 910,633 shares of Common Stock. Also see Notes 12 and 13
above.
(16) Includes 375 shares subject to stock options exercisable within 60 days
of December 31, 1997.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate and Bylaws is a summary and is
qualified in its entirety by the provisions of the Certificate and Bylaws,
which have been filed as exhibits to the Company's Registration Statement, of
which this Prospectus is a part.
Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 per share. As of
December 31, 1997, there were approximately 60 record holders of the Company's
Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy". In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further vote or action by
the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including any dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. An
effect of the existence of unissued and unreserved Common Stock and Preferred
Stock may be to enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of the
Company's management. Such additional shares also could be used to dilute the
stock ownership of persons seeking to obtain control of the Company.
Additionally, the issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. No shares of
Preferred Stock will be outstanding as of the closing of this offering.
WARRANTS
As of December 31, 1997, the Company had outstanding warrants to purchase an
aggregate of 910,633 shares of Non-voting Common Stock at an exercise price of
$.80 per share (the "Common Stock Warrants"). The Common Stock Warrants
contain provisions for the adjustment of the exercise price upon the
occurrence of certain events, including a stock dividend, stock split or
recapitalization. The Common Stock Warrants terminate on May 31, 2003. The
holders of the Common Stock Warrants are entitled to certain registration
rights set forth in the Registration Rights Agreement. See "--Registration
Rights".
57
<PAGE>
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the holders (or their permitted
transferees) of approximately 6,740,909 shares of the Company's Common Stock
(the "Holders"). Additionally, holders of the Company's Common Stock Warrants
are entitled to registration rights upon the exercise of such Common Stock
Warrants. See "--Warrants". If the Company proposes to register any of its
securities under the Securities Act, the Holders are entitled to notice of
such registration and are entitled to include, at the Company's expense, their
shares therein. In addition, the Holders may require the Company at its
expense on not more than two occasions to use its best efforts to effect the
registration, subject to certain conditions and limitations. Further, subject
to certain limitations, the Holders may require the Company at its expense to
register their shares on Form S-3 when such form becomes available.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or at any time
during the prior three years has owned) 15% or more of the corporation's
voting stock.
The Company's Certificate and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may
be called only by the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer or by holders of at least two-thirds of
the shares of voting stock of the Company. The Company's Certificate also
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Individual directors may only be removed
from the Board of Directors without cause by the affirmative vote of the
holders of at least 66 2/3% of the voting power of all then-outstanding shares
of voting stock. In addition, the Company's Certificate provides for the
classification of the Board of Directors into three classes, only one of which
shall be elected at any given annual meeting. These provisions may have the
effect of delaying, deterring or preventing a change in control of the Company
or depressing the market price of Common Stock or discouraging hostile
takeover bids in which stockholders of the Company could receive a premium for
their shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, assuming no exercise of outstanding
options or warrants, the Company will have outstanding an aggregate 10,831,318
shares of Common Stock (11,025,409 shares if the Underwriters' over-allotment
is exercised in full). Of these shares, the 4,000,000 shares of Common Stock
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining 6,831,318 shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144 and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF THIS SHARES ELIGIBLE FOR
PROSPECTUS FUTURE SALE COMMENT
----------------------- ------------------- -------
<S> <C> <C>
Upon effectiveness...... 4,000,000 Freely tradable, shares sold in offering.
Upon effectiveness...... 0 Rule 144(k) (shares not subject to 180-day
lock-up).
90 days................. 24,028 Rule 144 and Rule 701 (outstanding shares
not subject to 180-day lock-up).
180 days................ 6,807,290 Lock-up released. Outstanding shares
salable under Rule 144, Rule 144(k) and
Rule 701.
</TABLE>
Upon completion of this offering, the holders of approximately 6,740,909
shares of Common Stock, or their transferees, will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Additionally, holders of the Company's outstanding warrants to purchase
910,633 shares of Common Stock are entitled to registration rights upon the
exercise of such warrants. Registration of such shares under the Securities
Act would result in such shares becoming freely tradable without restriction
under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such registration.
The Company's officers, directors and certain stockholders and optionees
have agreed that they will not, without the prior written consent of Goldman,
Sachs & Co., directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 6,807,290 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
180-day period commencing on the date of this Prospectus (the "Lock-up
Agreements"). Goldman, Sachs & Co., on behalf of the Underwriters, may, in its
sole discretion and at any time without notice, release any or all holders of
securities of the Company subject to Lock-up Agreements from any or all of
their obligations under their respective Lock-up Agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed greater of (i) one percent of
the then outstanding
59
<PAGE>
shares of the Company's Common Stock or (ii) the average weekly trading volume
of the Company's Common Stock in the Nasdaq National Market during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Option Plan and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at December 31, 1997, such
registration statement would cover approximately 3,315,511 shares. Such
registration statement is expected to be filed as soon as practicable after
the date hereof and will become effective immediately upon filing. Shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the
Company or the Lock-up Agreements described above. See "Management".
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and certain of the Selling Stockholders by its counsel,
Cooley Godward LLP, Boulder, Colorado. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Brobeck, Phleger
& Harrison LLP.
EXPERTS
The financial statements as of September 30, 1997 and for the nine-month
period ended September 30, 1997, included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996, included in this
Prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
Effective August 1997, Price Waterhouse LLP was engaged as the Company's
independent accountants and replaced Deloitte & Touche LLP who was dismissed
as the Company's independent
60
<PAGE>
accountants. The decision to change independent accountants was approved by
the Company's Board of Directors. The reports of Deloitte & Touche LLP on the
Company's financial statements for the two fiscal years ended December 31,
1996 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements with Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures during the two years ended December 31, 1996 and
through the date of their dismissal. Deloitte & Touche LLP has not audited or
reported on any financial statements subsequent to December 31, 1996. Prior to
August 1997, the Company had not consulted with Price Waterhouse LLP on items
which involved the Company's accounting principles or the form of audit
opinion to be issued on the Company's financial statements.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or document filed as an
exhibit to the Registration Statement is qualified by reference to such
exhibit as filed. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's World Wide Web site is
http://www.sec.gov.
61
<PAGE>
EVOLVING SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP............................................. F-2
Report of Deloitte & Touche LLP............................................ F-3
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-5
Statements of Changes in Stockholders' Equity.............................. F-6
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Evolving Systems, Inc.
The stock split described in Note 7 has not been consummated as of January
8, 1998. When it has been consummated, we will be in a position to furnish the
following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Evolving
Systems, Inc. at September 30, 1997, and the results of its operations and
its cash flows for the nine-month period then ended, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above."
Price Waterhouse LLP
Boulder, Colorado
January 8, 1998
F-2
<PAGE>
The accompanying financial statements reflect a one-for-two reverse split of
Non-voting Common Stock and Voting Common Stock, which is to be effected prior
to the effective date of a proposed initial public offering. The following
opinion is in the form which will be signed by Deloitte & Touche LLP upon
consummation of the above event, which is described in Note 7 of Notes to
Financial Statements, and assuming that, from March 4, 1997 to the date of
such event, no other event shall have occurred that would affect the
accompanying financial statements and notes thereto as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Evolving Systems, Inc.:
We have audited the accompanying balance sheets of Evolving Systems, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Evolving Systems, Inc. as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 4, 1997, except for Note 7,
as to which the date is ___________
F-3
<PAGE>
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------ ------------ ------------- -------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 1,269,280 $ 3,184,116 $ 3,134,055
Certificates of
deposit................ 208,041 155,181 129,493
Contract receivables,
net of allowance of
$0, $298,000 and
$476,000 at December
31, 1995 and 1996 and
September 30, 1997,
respectively........... 6,372,796 9,562,506 12,530,480
Unbilled work in-
progress............... 1,537,883 767,856 792,855
Deferred tax assets..... -- 160,733 1,253,478
Prepaid and other
current assets......... 442,290 375,447 811,981
----------- ----------- -----------
Total current assets.. 9,830,290 14,205,839 18,652,342
Property and equipment,
net.................... 9,372,856 9,840,518 9,550,910
Other assets, net of
amortization of
$28,141 and $0 at
December 31, 1996 and
September 30, 1997
respectively........... -- 309,549 225,127
----------- ----------- -----------
$19,203,146 $24,355,906 $28,428,379
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term obligations.. $ 2,685,432 $ 2,794,359 $ 2,548,003
Accounts payable........ 1,687,577 2,168,668 2,666,437
Accrued liabilities..... 1,788,265 2,187,139 1,605,352
Unearned revenue and
customer deposits...... 495,293 665,837 6,239,885
----------- ----------- -----------
Total current
liabilities.......... 6,656,567 7,816,003 13,059,677
Long-term obligations,
including related
parties................. 3,373,148 15,302,068 13,938,068
Deferred income taxes.... -- 242,082 386,871
Commitments and
contingencies (Note 3)..
Stockholders' equity:
Preferred stock, $.001
par value; 1,500,000
shares authorized; no
shares issued.......... -- -- -- $ --
Series A preferred
stock, $.001 par
value; 8,160 shares
authorized, issued and
outstanding at
December 31, 1996 and
September 30, 1997
(liquidation
preference $6,250 per
share); none
outstanding pro forma.. -- 8 8 --
Common stock, $.001 par
value; 4,930,000
nonvoting shares
authorized; 1,535,786
and 1,611,758 non-
voting issued and
outstanding as of
December 31, 1996 and
September 30 1997,
respectively;
10,070,000 voting
shares authorized, no
voting shares issued,
or outstanding as of
December 31, 1995,
1996 and September 30,
1997, respectively;
7,731,758 voting
issued outstanding at
September 30, 1997 pro
forma.................. -- 1,536 1,612 7,732
Common stock, $.01 par
value; 12,500 voting
shares authorized;
10,200 shares issued
and outstanding at
December 31, 1995...... 102 -- -- --
Additional paid-in
capital................ -- 1,007,632 2,415,877 2,409,765
Deferred compensation... -- -- (1,213,844) (1,213,844)
Retained earnings
(accumulated deficit).. 9,173,329 (13,423) (159,890) (159,890)
----------- ----------- ----------- ----------
Total stockholders'
equity............... 9,173,431 995,753 1,043,763 1,043,763
----------- ----------- ----------- ----------
$19,203,146 $24,355,906 $28,428,379
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and
related services...... $ -- $ -- $ 882,500 $ 835,000 $14,482,578
Other services......... 33,032,151 45,354,661 36,035,564 26,587,320 15,551,859
----------- ----------- ----------- ----------- -----------
Total revenue........ 33,032,151 45,354,661 36,918,064 27,422,320 30,034,437
----------- ----------- ----------- ----------- -----------
Cost of revenue:
License fees and
related services...... -- -- 450,000 450,000 5,068,835
Other services......... 18,180,886 26,588,928 24,081,340 18,342,807 14,033,067
----------- ----------- ----------- ----------- -----------
Total cost of
revenue............. 18,180,886 26,588,928 24,531,340 18,792,807 19,101,902
----------- ----------- ----------- ----------- -----------
Gross margin........... 14,851,265 18,765,733 12,386,724 8,629,513 10,932,535
Operating expenses:
Sales and marketing.... 1,898,152 3,404,638 2,912,720 1,919,616 3,435,997
General and
administrative........ 4,321,185 7,725,268 8,587,126 6,350,906 6,345,287
Research and
development........... 481,753 820,949 641,114 633,885 1,166,270
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 6,701,090 11,950,855 12,140,960 8,904,407 10,947,554
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. 8,150,175 6,814,878 245,764 (274,894) (15,019)
Other income (expense):
Interest income........ 54,378 73,477 77,778 56,352 166,417
Interest expense,
including related
party interest of
$669,440, $523,189,
$747,087 for the year
ended December 31,
1996 and the nine-
months ended
September 30, 1996
(unaudited) and 1997.. (190,235) (762,344) (1,499,534) (1,185,145) (1,245,821)
----------- ----------- ----------- ----------- -----------
Total................ (135,857) (688,867) (1,421,756) (1,128,793) (1,079,404)
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 8,014,318 6,126,011 (1,175,992) (1,403,687) (1,094,423)
Provision for (benefit
from) income taxes..... -- -- 81,349 (8,438) (947,956)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 8,014,318 $ 6,126,011 $(1,257,341) $(1,395,249) $ (146,467)
=========== =========== =========== =========== ===========
Pro forma (unaudited)
(Note 5):
Income (loss) before
income taxes.......... $ 8,014,318 $ 6,126,011 $(1,175,992) $(1,403,687)
Provision for (benefit
from) income taxes.... 3,007,084 2,300,578 (297,886) (355,563)
----------- ----------- ----------- -----------
Net income (loss).... $ 5,007,234 $ 3,825,433 $ (878,106) $(1,048,124)
=========== =========== =========== ===========
Pro forma net loss per
common and common
equivalent share
(unaudited) (Note 1)... $ (.16) $ (.02)
=========== ===========
Pro forma weighted
average common shares
outstanding (unaudited)
(Note 1)............... 7,746,819 7,934,337
=========== ===========
Supplemental pro forma
net income (loss) per
common and common
equivalent share
(unaudited) (Note 1)... $ (.07) $ .04
=========== ===========
Supplemental pro forma
weighted average number
of common and common
equivalent shares
outstanding (unaudited)
(Note 1)............... 8,859,092 9,381,356
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
$.001 PAR
SERIES A $.01 PAR VOTING NON-VOTING
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- ----------------- ---------------- PAID-IN DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) EQUITY
------- ------- -------- ------- --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1993............. -- $ -- 10,200 $ 102 -- $ -- $ -- $ -- $ 3,863,071 $ 3,863,173
Distributions to
stockholders..... (3,018,261) (3,018,261)
Net income....... 8,014,318 8,014,318
------- ------- -------- ------ --------- ------ ---------- ----------- ----------- -----------
Balance,
December 31,
1994............. -- -- 10,200 102 8,859,128 8,859,230
Distributions to
stockholders..... (5,811,810) (5,811,810)
Net income....... 6,126,011 6,126,011
------- ------- -------- ------ --------- ------ ---------- ----------- ----------- -----------
Balance,
December 31,
1995............. -- -- 10,200 102 9,173,329 9,173,431
Distributions to
stockholders..... (7,257,623) (7,257,623)
Reclassification
of undistributed
earnings upon
conversion from
non-taxable to
taxable status... 670,862 (670,862)
Recapitalization. 8,160 8 (10,200) (102) 1,530,000 1,530 (510) (926)
Other............ 5,786 6 10,693 10,699
Forgiveness of
shareholder
interest......... 326,587 326,587
Net loss......... (1,257,341) (1,257,341)
------- ------- -------- ------ --------- ------ ---------- ----------- ----------- -----------
Balance,
December 31,
1996............. 8,160 8 -- -- 1,535,786 1,536 1,007,632 (13,423) 995,753
Stock option
exercises........ 75,972 76 60,711 60,787
Deferred
compensation
related to stock
options.......... 1,347,534 (1,347,534)
Amortization of
deferred
compensation..... 133,690 133,690
Net loss......... (146,467) (146,467)
------- ------- -------- ------ --------- ------ ---------- ----------- ----------- -----------
Balance,
September 30,
1997............. 8,160 $ 8 -- $ -- 1,611,758 $1,612 $2,415,877 $(1,213,844) $ (159,890) $ 1,043,763
======= ======= ======== ====== ========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...... $ 8,014,318 $ 6,126,011 $(1,257,341) $(1,395,249) $ (146,467)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Provision for
uncollectible
contract
receivables.......... -- -- 577,000 284,361 412,500
Amortization of
deferred
compensation......... -- -- -- -- 133,690
Depreciation and
amortization......... 1,056,966 2,447,762 3,527,436 2,588,155 2,886,289
(Gain) loss on
disposal of property
and equipment........ (692) 27,810 121,166 11,168 161,504
Non-cash interest
expense.............. -- -- 668,222 523,189 --
Provision for
deferred income
taxes................ -- -- 81,349 (8,438) (947,956)
Change in operating
assets and
liabilities:
Contract receivables.. (813,853) (3,189,157) (3,832,181) (1,470,396) (3,380,474)
Unbilled work-in-
progress............. (411,822) (1,046,855) 770,027 (1,013,175) (24,999)
Prepaid and other
assets............... (232,172) (81,951) (235,609) (365,653) (352,112)
Accounts payable...... 667,500 (366,953) 481,091 797,758 497,769
Accrued liabilities... 904,124 183,699 398,874 (284,584) (581,787)
Unearned revenue and
customer deposits.... 1,324,439 (2,277,379) 170,544 (162,956) 5,574,048
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities......... 10,508,808 1,822,987 1,470,578 (495,820) 4,232,005
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (4,618,589) (2,026,253) (3,106,525) (2,857,117) (2,148,487)
Proceeds from sale of
property and
equipment............. 4,644 12,453 936,858 7,389 43,146
Change in certificates
of deposit............ (3,062) (2,976) 52,860 52,860 25,688
Change in stockholder
notes receivable...... (132,982) 79,026 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (4,749,989) (1,937,750) (2,116,807) (2,796,868) (2,079,653)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term
obligations........... 2,304,713 1,071,624 10,811,904 10,811,904 --
Repayments of long-term
obligations........... (822,998) (2,062,052) (7,686,322) (3,610,390) (2,263,200)
Distributions to
stockholders.......... (3,018,261) (5,811,810) (573,998) (573,998) --
Proceeds from exercise
of options............ -- -- 4,671 4,671 60,787
Warrants issued........ -- -- 4,853 4,853 --
Repurchase of common
stock................. -- -- (43) (43) --
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... (1,536,546) (6,802,238) 2,561,065 6,636,997 (2,202,413)
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 4,222,273 (6,917,001) 1,914,836 3,344,309 (50,061)
Cash and cash
equivalents at
beginning of period... 3,964,008 8,186,281 1,269,280 1,269,280 3,184,116
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 8,186,281 $ 1,269,280 $ 3,184,116 $ 4,613,589 $ 3,134,055
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF OTHER CASH AND NON-
CASH INVESTING AND
FINANCING TRANSACTIONS
Interest paid......... $ 190,235 $ 762,342 $ 805,707 $ 661,954 $ 812,231
Income taxes paid..... $ 65,471 $ 65,471 $ 289,867
Assets acquired under
capital lease........ $ 1,194,581 $ 4,439,482 $ 1,946,597 $ 1,809,507 $ 652,845
Distribution to
stockholders in form
of notes payable..... $ 6,683,625 $ 6,683,625
Constructive dividend
to stockholders and
related contribution
to capital........... $ 670,862 $ 670,862
Accrued interest
payable converted
into note payable.... $ 341,635 $ 341,635
Accrued interest
payable contributed
to equity............ $ 326,587 $ 326,587
Collection of
stockholder note
receivable through
reduction of
stockholder note
payable.............. $ 58,374 $ 58,374
Warrants issued as
consideration for
accrued interest
payable converted to
stockholder notes
payable.............. $ 1,218 $ 1,218
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Evolving Systems, Inc. ("Evolving Systems" or the "Company") provides
Operational Support Systems ("OSS") software solutions to telecommunications
companies. The Company's software products and professional services are
designed to address the increasingly complex operational support system
requirements of telecommunications companies in areas such as customer care,
service provisioning, network management and billing. Evolving Systems
combines pre-sales consulting with standard product software and post-sales
systems integration to create solutions to its customers' specific
requirements. This provides customers with a tailored solution, together with
the time-to-market advantages of software products.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Significant estimates have been made by management with
respect to the collectibility of accounts receivable and the estimates to
complete long-term contracts. Actual results could differ from these
estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed
price and time and materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's LNP software products and
related services. Other services revenue consists of custom programming,
systems integration of third-party products, maintenance and training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services and is generally
recognized using the percentage-of-completion method of accounting. The
percentage-of-completion for each contract is determined based on the ratio of
direct labor hours incurred to total estimated direct labor hours. Amounts
billed in advance of services being performed are recorded as unearned
revenue. Unbilled work in progress represents revenue earned but not yet
billable under the terms of the fixed price contracts and all such amounts are
expected to be billed and collected during the succeeding 12 months.
Services revenue provided under fixed price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.
Maintenance revenue is recorded as deferred revenue and is recognized
ratably over the service period, which is generally 12 months. Revenue from
training services is recognized as the training services are performed. When
maintenance or training services are bundled with the original license fee
arrangement, their fair value is deferred and recognized during the period
such services are provided.
F-8
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company may encounter cost overruns on fixed-price contracts caused by
increased material, labor, or overhead costs. Adjustments to cost estimates
are made in the periods in which the facts requiring such revisions become
known. Estimated losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract cost indicate a loss. The
Company does not anticipate a change in the timing of revenue recognition upon
adoption of Statement of Position 97-2, "Software Revenue Recognition".
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
Expenditures for software research and development are expensed as incurred.
Such costs are required to be expensed until the point that technological
feasibility of the product is established after which time such costs are
capitalized until general availability of the product. The period between
achieving technological feasibility and the general availability of such
software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility is achieved are expensed because
they are insignificant.
CASH AND CASH EQUIVALENTS
All highly liquid investments and investments with a maturity of three
months or less when purchased are considered to be cash equivalents. All cash
equivalents are carried at cost, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company has cash
investment policies that limit investments to repurchase agreements and
certificates of deposit. The Company performs ongoing evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. During the years ended December 31, 1994, 1995, and 1996 and the
nine-month period ended September 30, 1997, the Company recognized
approximately 70%, 78%, 73%, and 89% of total revenue from two, two, five, and
six customers, respectively all in the telecommunications industry. As of
December 31, 1995, 1996, and September 30, 1997, these customers accounted for
65%, 75%, and 87% of contract receivables, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, certificates of deposit, contract receivables, accounts payable
and accrued expenses, management believes that the carrying amounts
approximate fair value due to their short maturities. Additionally, based upon
the borrowing rates currently available to the Company for debt agreements
with similar terms and average maturities, management believes the carrying
amount of the notes payable to the bank approximates fair market value. For
the notes payable to stockholders and the senior subordinated promissory
notes, the Company estimated the fair value below using rates offered for
similar instruments with similar maturities.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Carrying amount......................... $11,962,058 $11,934,493
Estimated fair value.................... $11,424,840 $11,438,517
</TABLE>
F-9
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally four to seven years or the lease term if
shorter, using the straight-line method.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value
based method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25, and
accordingly, it has included the pro forma disclosures required under SFAS No.
123 in Note 4.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying balance sheets, as well
as operating loss and tax credit carryforwards. Deferred tax assets may be
reduced by a valuation allowance if based on the weight of available evidence
it is more likely than not that these benefits will not be realized.
EARNINGS PER COMMON SHARE
Pro Forma Net Loss per Common Share
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of
the Company's anticipated initial public offering. Accordingly, historical net
income (loss) per common share is not considered meaningful and has not been
presented herein.
Pro forma net income (loss) per share is computed based on the weighted
average number of common shares outstanding and gives effect to certain
adjustments described below. Common equivalent shares are not included in the
per share calculation where the effect of their inclusion would be
antidilutive, except that, in conformity with Securities and Exchange
Commission ("SEC") requirements, common and common equivalent shares issued
during the twelve-month period prior to the filing of the registration
statement related to the Company's proposed initial public offering have been
included in the calculation as if they were outstanding for all periods, using
the treasury stock method and the assumed initial public offering price.
Additionally, all outstanding shares of convertible preferred stock are
assumed to have been converted to common stock at the time of their issuance.
Supplemental Pro Forma Net Income (Loss) Per Common Share
Supplemental pro forma net income (loss) per common share is based on the
weighted average number of shares of common stock and common stock equivalents
used in the calculation of pro forma net loss per common share plus the number
of shares that would be required to be sold, on a net proceeds basis, to repay
borrowings outstanding and related accrued interest on the Company's notes
F-10
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
payable ($12,420,250) as contemplated in connection with the Company's initial
public offering ("IPO"). For purposes of this calculation, net loss has been
adjusted by approximately $493,000 and $603,000, for the nine-month period
ended September 30, 1997 and for the year ended December 31, 1996,
respectively, to reflect elimination of interest expense on such notes
payable, net of taxes.
SFAS No. 128, "Earnings per Share"
The FASB issued SFAS No. 128 in February of 1997. The Company will be
required to apply this statement in its financial statements for fiscal 1998.
This pronouncement establishes new standards for computing and presenting
earnings per share ("EPS") on a basis that is more comparable to international
standards and provides for the presentation of basic and diluted EPS,
replacing the currently required primary and fully-diluted EPS. Basic EPS will
be computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS will be computed in a manner
similar to the current method for calculating fully-diluted EPS. Prior period
EPS will be restated to conform with the new statement. Because the Company
was in a net loss position for the year ended December 31, 1996 and the nine
months ended September 30, 1997, there was no difference between the SFAS No.
128 EPS as compared to the pro forma and supplemental pro forma EPS reflected
in the Statements of Operations.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Board of Directors has authorized management of the Company to file a
registration statement with the SEC permitting the Company to sell shares of
its common stock to the public. If the
Company's IPO is consummated under the terms presently anticipated, all of the
convertible preferred stock outstanding will automatically convert into
6,120,000 shares of common stock. Unaudited pro forma stockholders' equity as
of September 30, 1997, as set forth on the accompanying balance sheets, is
adjusted for the anticipated conversion of such preferred stock based on an
assumed public offering price.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements for the nine-months ended
September 30, 1996 are unaudited. In the opinion of the Company, the unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements and reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the results of the
Company's operations and its cash flows for the nine months ended September
30, 1996.
RECLASSIFICATIONS
Certain amounts in the 1994, 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
F-11
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT:
Computer equipment and purchased
software......................... $11,696,945 $13,650,128 $ 16,095,661
Furniture, fixtures and leasehold
improvements..................... 2,098,049 3,825,438 3,767,321
----------- ----------- ------------
13,794,994 17,475,566 19,862,982
Less accumulated depreciation..... (4,422,138) (7,635,048) (10,312,072)
----------- ----------- ------------
$ 9,372,856 $ 9,840,518 $ 9,550,910
=========== =========== ============
</TABLE>
Included in property and equipment at December 31, 1995, 1996 and September
30, 1997 are assets under capital lease of $7,852,510, $9,799,108 and
$9,636,919, respectively. Related accumulated depreciation is $1,043,159,
$3,979,232 and $5,674,461, as of December 31, 1995, 1996 and September 30,
1997, respectively.
<TABLE>
<S> <C> <C> <C>
ACCRUED LIABILITIES:
Accrued compensation and related
expenses................................ $ 439,894 $ 581,427 $ 747,264
Benefit plan contributions payable (Note
6)...................................... 1,348,371 1,020,712 198,655
Sublessee deposits....................... -- 585,000 173,677
Other.................................... -- -- 485,756
---------- ---------- ----------
$1,788,265 $2,187,139 $1,605,352
========== ========== ==========
</TABLE>
3. LONG-TERM OBLIGATIONS, INCLUDING RELATED PARTY OBLIGATIONS AND COMMITMENTS
Long-term obligations, including capitalized lease obligations, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Notes payable to a bank under term
debt facility..................... $ 708,333 $ 916,667 $ 666,666
Note payable to bank, variable
interest at the financial
institution's prime rate plus 1.5%
(10% at December 31, 1996)........ 153,630 64,643 --
Notes payable to stockholders...... -- 5,120,423 5,092,859
Senior subordinated promissory
notes payable to stockholders..... -- 6,841,635 6,841,635
Capital lease obligations.......... 5,196,617 5,153,059 3,884,911
----------- ----------- -----------
Total............................ 6,058,580 18,096,427 16,486,071
Less current portion............... (2,685,432) (2,794,359) (2,548,003)
----------- ----------- -----------
Long-term portion.................. $ 3,373,148 $15,302,068 $13,938,068
=========== =========== ===========
</TABLE>
F-12
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Line of Credit and Notes Payable to Bank
Under a borrowing arrangement with a bank, the Company has a revolving line
of credit with $7,000,000 of maximum available credit at September 30, 1997
(limited to 80% of the balance of certain qualifying assets) which bears
interest at prime plus .75%, unless the Company has been profitable for two
quarters, at which time the interest rate will be prime plus .25%. The
arrangement is collateralized by substantially all assets of the Company.
There were no borrowings outstanding under the line of credit at December 31,
1996 and September 30, 1997. Letters of credit under the agreement totaling
$746,323 and $664,216 were outstanding at December 31, 1996 and September 30,
1997, respectively. In December 1997, the maximum available credit under the
line of credit increased to $10,000,000.
The Company also has a term debt facility under the borrowing arrangement.
Under the term debt facility, which expires September 16, 1998, the Company
can draw up to a maximum of $1,500,000, subject to certain terms and
conditions. Each borrowing under the term debt facility is repayable in 36
monthly installments. The term debt facility bears interest at a rate equal to
prime plus 1.25%, unless the Company has been profitable for two quarters, at
which time the interest rate will be prime plus .75%. The term debt facility
is collateralized by accounts receivable and property and equipment.
Under the borrowing arrangement, the Company is limited in its ability to
pay dividends, make investments, incur other indebtedness, or enter into a
business merger. Additionally, the Company must maintain certain financial
covenants, in addition to other restrictive covenants, with which it is in
compliance as of September 30, 1997.
Notes Payable to Stockholders
On January 2, 1996, the Company distributed substantially all previously
undistributed earnings on which stockholders had been taxed in the form of
stockholder notes payable (the Notes), aggregating $6,683,625. These Notes are
unsecured and are due January 2, 2006, with interest payable annually on
December 31 at 7.25% per annum, and contain prepayment penalties. The payment
of principal under the Notes is subordinated to all financial institution debt
arising from agreements currently in existence, as amended, and all other
indebtedness of the Company to third party commercial lenders and banks.
Interest payable as of September 30, 1996, in the amount of $326,587, was
forgiven by the Note holders and has been accounted for as a capital
contribution.
Senior Subordinated Promissory Notes Payable to Stockholders
In May 1996, the Company issued Senior Subordinated Promissory Notes to
certain stockholders (the Promissory Notes) for a total of $6,500,000. The
Promissory Notes are unsecured, and the principal is due in four equal annual
payments beginning on June 1, 2000. Interest is payable semiannually on
December 1 and June 1 at 9% per annum. The payment of principal under the
Promissory Notes is subordinated to all financial institution debt arising
from agreements currently in existence, as amended, and all other indebtedness
of the Company to third party commercial lenders and banks, except the Notes
Payable to Stockholders. The Promissory Notes limit the Company's ability to
incur other indebtedness, pay dividends, make investments or sell its assets.
In connection with the issuance of the Promissory Notes, warrants to purchase
727,998 of the Company's Non-Voting Common stock at $.80 per share were issued
to the Promissory Noteholders. The warrants expire May 31, 2003.
F-13
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In September 1996, the Company and the Promissory Note holders entered into
an agreement to defer all interest incurred to date and to be incurred through
November 30, 1996, aggregating $341,635, by adding such amount to the
principal of the Promissory Notes. The deferred interest is payable on or
before December 1, 1998 and accrues interest at 12% per annum. In connection
with the deferral of interest, the Company issued to the Promissory Note
holders additional warrants to purchase 182,635 shares of the Company's Non-
Voting Common stock at $.80 per share which expire May 31, 2003.
Costs associated with the origination of the Promissory Note aggregating
$337,690 ($273,368 remaining at September 30, 1997), included within other
assets, are being amortized over the life of the Promissory Notes.
Scheduled maturities of debt obligations for the periods ending December 31
are as follows:
<TABLE>
<CAPTION>
NOTES SHAREHOLDER NOTES CAPITAL LEASE
PAYABLE PAYABLE OBLIGATIONS TOTAL
--------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
1997.................... $ 83,333 $ -- $ 788,757 $ 872,090
1998.................... 333,333 -- 2,019,170 2,352,503
1999.................... 250,000 -- 842,065 1,092,065
2000.................... -- 3,420,817 492,525 3,913,342
2001.................... -- 3,420,818 115,818 3,536,636
Thereafter.............. -- 5,092,859 -- 5,092,859
--------- ----------- ----------- -----------
666,666 11,934,494 4,258,335 16,859,495
Less amounts
representing interest.. -- -- (373,424) (373,424)
--------- ----------- ----------- -----------
666,666 11,934,494 3,884,911 16,486,071
Less current maturities. (333,333) -- (2,214,670) (2,548,003)
--------- ----------- ----------- -----------
$ 333,333 $11,934,494 $ 1,670,241 $13,938,068
========= =========== =========== ===========
</TABLE>
Operating Lease Commitments
The Company leases its office and operating facilities and various equipment
under non-cancelable operating leases. Rent expense was $1,315,704,
$2,789,032, $4,156,863, and $2,748,306 for the years ended December 31, 1994,
1995 and 1996, and the nine-months ended September 30, 1997, respectively.
Rent expense for the year ended December 31, 1996 and the nine-months ended
September 30, 1997 is net of $341,862 and $994,960, respectively in sublease
rental income. As of December 31, 1996 and September 30, 1997 certificates of
deposit totalling $155,181 and $129,493, respectively, are pledged as
collateral on an office space lease.
During 1996, the Company entered into a lease obligation on a new corporate
campus of approximately 120,281 square feet located in Englewood, Colorado.
The Company has subleased a portion of this campus. In connection with its
obligations under certain of its office facility leases, the Company has
letters of credit totaling $746,323 and $664,216 outstanding at December 31,
1996 and September 30, 1997, respectively.
F-14
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum non-cancelable commitments under these leases as of September
30, 1997, are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 1,028,566
1998............................................................. 3,479,933
1999............................................................. 2,536,276
2000............................................................. 2,272,003
2001............................................................. 1,290,936
Thereafter....................................................... 12,801,782
-----------
23,409,496
Less: sublease income............................................ 228,232
-----------
$23,181,264
===========
</TABLE>
4. RECAPITALIZATION, CAPITAL STOCK AND STOCK OPTIONS
Recapitalization
Effective January 1996, Evolving Systems, Inc. ("Old ESI") merged into ESI
Merger Corporation (the "Merger"), a Delaware corporation, which previously
had no operations. Simultaneously, ESI Merger Corporation changed its name to
Evolving Systems, Inc. Pursuant to the Merger agreement, each share of the Old
ESI common stock outstanding as of January 10, 1996 was converted into .8
shares of the Company's Series A Preferred Stock and 100 shares of the
Company's non-voting common stock. As part of the recapitalization, the
Company became a taxable entity and as of that date had $670,862 of earnings
which had not been distributed to its shareholders. Consequently, for
financial statement purposes, these undistributed earnings have been
reclassified to additional paid-in capital under the assumption of a
constructive dividend to the shareholders followed by a contribution to the
Company's capital (see Note 5).
Series A Preferred Stock
Each share of Series A Preferred Stock is convertible at the option of the
holder into 750 shares of non-voting common stock, subject to antidilution
provisions, has voting rights on an as-converted to voting common stock basis
and has preference in liquidation equal to $6,250 (aggregate liquidation
preference as of September 30, 1997 is equal to $51 million). If the Company
enters into a transaction whereby it sells substantially all of its assets or
agrees to merge into or with another entity, a liquidation is considered to
have occurred. Additionally, if the Company completes an Initial Public
Offering (IPO) of its common stock in which the price is at least $5 per share
and gross proceeds exceed $10,000,000, the Series A preferred shares shall
automatically convert into shares of common stock.
Common Stock
Each share of non-voting common stock outstanding shall automatically
convert into one share of voting common stock immediately prior to the closing
of an IPO.
Stock Options
On January 19, 1996, the Company's board of directors approved a stock
option plan. Under the stock option plan, 2,150,000 shares of the Company's
non-voting common stock are reserved for issuance, of which 1,323,053 and
291,520 shares are available for grant as of December 31, 1996 and September
30, 1997. The Company has also reserved 910,633 shares of non-voting common
stock
F-15
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for the issuance of warrants. Options issued under the stock option plan shall
be at the discretion of the Board of Directors, including the provisions of
each stock option granted, which need not be identical. Options generally vest
over four years and expire no more than ten years from the date of grant.
Certain options will automatically vest upon the effectiveness of the IPO.
Subsequent to September 30, 1997 the Board of Directors approved the repricing
of all options granted with an exercise price of $12.60 to $9.50.
Generally, stock options are granted with an exercise price not less than
the fair value of non-voting common stock as determined by the Board of
Directors at the date of grant, and accordingly no compensation cost was
recognized during 1994, 1995 or 1996. During the nine months ended September
30, 1997, the Company recorded $1,347,534 as deferred compensation,
representing the excess of the estimated fair value of the Company's common
stock as determined by the Board of Directors over the exercise price of
options granted. Such deferred compensation cost is being amortized over the
vesting period of the options. Of the total amount, $133,690 was recognized as
expense during the nine months ended September 30, 1997.
Based on calculations using the minimum value option-pricing model, the
weighted average grant date fair value of options and warrants was $0 and
$1.66 in 1996 and the nine months ended September 30, 1997, respectively. The
fair value has been estimated using the minimum value option-pricing model
with the following assumptions used for grants in 1996 and the nine months
ended September 30, 1997, respectively: no dividend yield for both periods; an
expected life of 3 years for both periods; no volatility; and a weighted
average risk free interest rate of 6.5% for both periods.
The pro forma impact on the Company's net income (loss) and net income
(loss) per share had compensation cost been recorded at the date of grant
based on the minimum value method prescribed by SFAS No. 123 is shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Net income (loss):
As reported............................................. (146,467)
SFAS No. 123 Pro forma.................................. (216,467)
Pro forma net loss per share:
As reported............................................. (.02)
SFAS No. 123 Pro forma.................................. (.03)
Supplemental pro forma net income per share:
As reported............................................. .04
SFAS No. 123 Pro forma.................................. .03
</TABLE>
The status of total stock options and warrants outstanding and exercisable
under the Plan as of September 30, 1997 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS AND
STOCK OPTIONS AND WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------------- ------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES LIFE (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options................. $ 0.80 1,000,469 9.17 $ 0.80 147,499 $ 0.80
$12.60 775,011 9.98 $12.60 -- $12.60
--------- ---- ------ ------- ------
1,775,480 9.52 $ 5.95 147,499 $ 0.80
========= ==== ====== ======= ======
Warrants................ $ 0.80 910,633 5.73 $ 0.80 910,633 $ 0.80
========= ==== ====== ======= ======
</TABLE>
F-16
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF SHARES AVERAGE OPTIONS AND AVERAGE
------------------- EXERCISE WARRANTS EXERCISE
OPTIONS WARRANTS PRICE EXERCISABLE PRICE
--------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Options and warrants
outstanding, January 1,
1996..................... -- -- $ -- -- $
Options and warrants
granted................ 897,226 910,633 0.80
Less options forfeited.. (70,279) -- 0.80
Less options exercised.. (2,015) -- 0.80
--------- --------
Options and warrants
outstanding, December 31,
1996..................... 824,932 910,633 0.80 1,016,482 0.80
Options granted......... 1,307,219 -- 7.80
Less options forfeited.. (280,699) -- 0.80
Less options exercised.. (75,972) -- 0.80
--------- --------
Options and warrants
outstanding, September
30, 1997................. 1,775,480 910,633 4.20 1,058,132 0.80
========= ========
</TABLE>
Included in total options and warrants exercisable at December 31, 1996 and
September 30, 1997 are 910,633 warrants issued in connection with debt
financings (see Note 3).
5. INCOME TAXES
Prior to January 6, 1996, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly,
the shareholders were responsible for payment of taxes on income earned by the
Company and the Company distributed to shareholders annually an amount equal
to the estimated tax liability arising from operations. On January 6, 1996,
the Company revoked its election to be taxed under Subchapter S of the Code
and elected to be taxed under Subchapter C of the Code. In connection with the
change in status, the Company recorded a deferred tax liability and tax
expense of $379,235. For comparative purposes, a pro forma tax provision
(benefit) has been calculated and presented in the statements of operations as
if the Company had been a taxable entity since its inception.
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Current:
Federal..................................... $ -- $ --
State....................................... -- --
Deferred:
Federal..................................... 74,152 (917,171)
State....................................... 7,197 (30,785)
------- ---------
Total..................................... $81,349 $(947,956)
======= =========
</TABLE>
F-17
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue................................ $ -- $ 129,179
Research and development credit carryforwards... -- 600,000
Allowance for doubtful accounts................. -- 178,000
Net operating loss carryforwards................ 328,028 362,443
Reserves against contract receivables........... 111,324 --
Other........................................... 15,698 67,573
--------- ---------
Total deferred tax assets..................... 455,050 1,337,195
--------- ---------
Deferred tax liabilities:
Accumulated depreciation........................ (532,810) (470,588)
Miscellaneous accruals and reserves............. (3,589) --
--------- ---------
Total deferred tax liabilities.................... (536,399) (470,588)
--------- ---------
Net deferred tax asset (liability)................ $ (81,349) $ 866,607
========= =========
</TABLE>
The provision for (benefit from) income taxes are different from the amounts
computed by applying the federal statutory rate to income before income taxes.
The amounts are reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Federal income taxes (benefit) at statutory
rate....................................... $(395,458) $(372,104)
State income tax, net of federal benefit.... (26,036) (30,785)
Effect of conversion to C Corporation....... 379,235 --
Cancellation of indebtedness................ 109,914 --
Research and development tax credits........ -- (600,000)
Amortization of deferred compensation....... 45,455
Other....................................... 13,694 9,478
--------- ---------
Provision for (benefit from) income taxes... $ 81,349 $(947,956)
========= =========
</TABLE>
As of September 30, 1997 the Company has net operating loss carryforwards
for federal income tax purposes of approximately $970,000, which will begin to
expire in 2011. Additionally, the Company has research and development tax
credit carryforwards for federal income tax purposes of $600,000, which will
begin to expire in 2011.
6. BENEFIT PLANS
The Company has established a 401(k) Plan which is available to all
employees 21 years of age or older with one year of service to the Company.
Employees may contribute up to 15% of gross compensation not to exceed the
maximum statutory contribution amount. The Company may make discretionary
matching contributions. All employee contributions are fully vested
immediately and employer contributions vest 100% after completion of three
years of service. During 1994, 1995 and 1996, and the nine-months ended
September 30, 1997, the Company contributed $461,058, $586,257, $0 and
$748,194, respectively, under the 401(k) Plan.
F-18
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also had a defined contribution retirement plan, which was
available to all employees 21 years of age or older with one year of service
to the Company. Company contributions to the defined contribution retirement
plan were made annually at 7.4% of the eligible employees' salary and vest
after completion of three years of service. During 1994, 1995 and 1996, the
Company contributed $567,164, $703,983, and $965,198, respectively, under the
defined contribution retirement plan. Effective December 31, 1996 the accrual
of benefits under the retirement plan ceased and the retirement plan was
merged into the 401(k) Plan.
7. SUBSEQUENT EVENTS
In connection with its proposed initial public offering, a one-for-two
reverse stock split of the Company's stock has been approved and is to be
consummated prior to such offering. All common stock share and per share
information and all preferred stock conversion rates presented in these
financial statements have been restated for all periods presented to reflect
the reverse stock split.
Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 par value per share.
F-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Hambrecht & Quist LLC and UBS Securities LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the following respective numbers of shares of Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
Hambrecht & Quist LLC...........................................
UBS Securities LLC..............................................
---------
Total......................................................... 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, this offering price and other selling terms may from time
to time be varied by the representatives.
The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 600,000 additional shares of Common Stock to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
4,000,000 shares of Common Stock offered.
The Company and its officers, directors and certain stockholders have agreed
that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of the
Prospectus, they will not, subject to certain exceptions, offer, sell,
contract to sell, grant an option to sell, transfer or otherwise dispose of
any securities of the Company without the prior written consent of the
representatives of the Underwriters.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the
Company and the representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance,
U-1
<PAGE>
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL".
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in this offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in this offering for their account may be reclaimed by the
syndicate if such securities are repurchased by the syndicate in stabilizing
or covering transactions. These activities may stabilize, maintain or
otherwise affect the market price of the securities, which may be higher than
the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq Stock Market, in the over-the-counter market or
otherwise.
U-2
<PAGE>
GLOSSARY OF TERMS
"API"--Application Programming Interface. Application programs invoke APIs
to request lower-level services that are performed by the platform software,
computer, or operating system. An API incorporates a set of standard software
interrupts, calls and data formats that application programs use to initiate
contact with network services, communications programs, or other systems.
"cellular"--Term used for Cellular Mobile Telephone System (or CMTS). A
wireless telephone system based on a grid of cell sites. Each cell site serves
a limited geographic area and contains transmitters, receivers and antennae.
Each cell site is connected to centrally-located switching gear and control
equipment. Each cellular telephone has a unique identification number which
allows the central switch to track and coordinate all mobile phones in the
service area, including the hand-offs from one cell site to another.
"CDPD"--Cellular Digital Packet Data. A method of sending and receiving data
over the existing analog cellular network. The data are structured in
"packets" which are transmitted over cellular frequencies that are not being
used in phone conversations, thereby avoiding the need to develop an overlay
cellular network exclusively for data communications. Targeted at telemetry
applications and highly mobile users, packets are sent and received via CDPD
modems, which can be connected to cellular telephones, personal computers or
specialized devices.
"client"--Clients are devices and software which request information from
other sources and provide the end user interface. Typically, the client is a
PC or workstation attached to a local area network.
"client/server"--A computer system architecture in which the "client" is a
desktop computing device which is "served" by another networked computer.
Computers are integrated over the network by an application, which provides a
single system image. The server may be a mainframe, minicomputer, or
workstation with attached storage devices.
"database"--A collection of information organized in such a way that a
computer program can quickly insert, retrieve and update application data.
"digital"--A method of storing, processing and transmitting information by
representing information with combinations of the binary digits 0 and 1.
"HP/UX"--Brand name of Hewlett Packard's UNIX operating system product line.
"ILECs"--Incumbent Local Exchange Carriers. ILECs are local exchange
carriers who were formerly part of the Bell System. Through divestiture and
recent consolidation, these companies now include Ameritech, Bell Atlantic,
BellSouth, GTE, Southwestern Bell and U.S. West.
"Java"--A high-level object-oriented programming language developed by Sun
Microsystems, Inc. which facilitates the creation of platform-independent
applications and software components. It was designed primarily for writing
software for World Wide Web sites, although the use of Java is expanding for
other commercial purposes.
"LNP"--Local Number Portability. LNP, which enables customers to retain
their local phone number when changing service providers, was mandated by the
Telecommunications Act of 1996 and regulations promulgated thereunder in order
to facilitate a level playing field for local telephone service competition.
The implementation of LNP utilizes a new ten-digit telephone number, known as
the Location Routing Number, or LRN. The LRN is used by the originating
carrier to determine the identity and location of the terminating carrier's
switch.
G-1
<PAGE>
"LSR"--Local Service Request. LSRs are 22-page forms which are used by
competing carriers to place wholesale orders with ILECs. The competing
carriers utilize the LSRs to place orders for unbundled facilities and
services provided by ILECs, and support retail orders associated with new
customers captured by the competing carriers. LSRs today are primarily
processed in a costly manual fashion due to the relative lack of inter-carrier
transactions. However, with the introduction of LNP, the volume of LSRs is
expected to increase dramatically, creating the need to exchange LSRs by
facsimile, e-mail, the Internet and through electronic document interchange
(EDI) interfaces.
"NPACs"--Number Portability Administration Centers. These are the regional
third-party clearinghouses established by state and federal regulators in
order to oversee, mediate, track and resolve all customer LNP-related issues
among U.S. carriers. In the U.S., there are seven NPACs, which are
administered by Lockheed Martin IMS and Perot Systems.
"OSS"--Operational Support Systems. OSS are the systems and procedures which
directly support the daily operation of the telecommunications infrastructure.
The average local exchange carrier has hundreds of OSS, which are typically
categorized into ordering, provisioning, service assurance and billing.
"PCS"--Personal Communication Services. PCS is a new, lower-powered, higher
frequency technology that is competitive to cellular. Operating at frequencies
between 1800 MHz and 2000 MHz, PCS provides certain cost advantages over
cellular, offers digital communications and improved security.
"RBOCs"--Regional Bell Operating Companies. The local exchange carriers
formerly part of the Bell System. See ILECs.
"server"--The server component of a client/server system. The server
operates on the local area network and may be a mainframe, minicomputer, or
workstation with attached storage devices.
"switch"--A central facility capable of establishing, routing and releasing
connections on a per call basis between two or more circuits, services or
systems. Switches are used for both wireline and wireless communications
networks.
"UNIX"--A powerful multi-user, multi-tasking computer operating system
widely adopted in the telecommunications industry. UNIX is available on a wide
range of computers, from personal computers to minicomputers to mainframes.
G-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy and S Corporation Status.................................. 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 32
Management................................................................ 44
Certain Transactions...................................................... 52
Principal and Selling Stockholders........................................ 54
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 58
Legal Matters............................................................. 59
Experts................................................................... 59
Change in Accountants..................................................... 59
Additional Information.................................................... 60
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
Glossary of Terms......................................................... G-1
</TABLE>
----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 SHARES
EVOLVING SYSTEMS, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
[LOGO OF EVOLVING SYSTEMS, INC. APPEARS HERE]
----------------
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST
UBS SECURITIES
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 16,284
NASD filing fee................................................. 6,020
Nasdaq Stock Market Listing Application fee..................... 44,578
Blue sky qualification fees and expenses........................ 7,500
Printing and engraving expenses................................. 150,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 270,000
Transfer agent and registrar fees............................... 7,500
Custodian fees.................................................. 2,500
Miscellaneous................................................... 120,618
--------
Total....................................................... $875,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by the General Corporation Law of Delaware and
(ii) require the Registrant to indemnify its directors and executive officers
to the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they
are or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from
which the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or
its stockholders when the director was aware or should have been aware of a
risk of serious injury to the Registrant or its stockholders, for acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Registrant or its stockholders,
for improper transactions between the director and the Registrant and for
improper distributions to stockholders and loans to directors and officers.
The provision also does not affect a director's responsibilities under any
other law, such as the federal securities law or state or federal
environmental laws. See "Management--Limitation of Liability and
Indemnification of Officers and Directors" and "Certain Transactions".
II-1
<PAGE>
The Registrant plans to enter into indemnification agreements with each of
its directors and executive officers that require the Registrant to indemnify
such persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made
a party by reason of the fact that such person is or was a director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The indemnification agreements also
set forth certain procedures that will apply in the event of a claim for
indemnification thereunder. See "Certain Transactions".
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Registrant has issued and/or sold the following
unregistered securities:
(1) On January 2, 1996, the Registrant issued an aggregate principal amount
of $5,092,859 of promissory notes to its stockholders in connection
with the stockholders' deferred receipt of their 1995 S Corporation
distributions.
(2) On January 10, 1996, in connection with the Registrant's
reincorporation from Colorado to Delaware, the Registrant issued an
aggregate of 510,000 shares of its Non-voting Common Stock and an
aggregate of 8,160 shares of its Series A Preferred Stock in exchange
for cancellation of the issued and outstanding shares of capital stock
of its Colorado predecessor.
(3) From January 19, 1996 to January 2, 1998, options granted to employees,
directors and consultants of the Registrant to purchase an aggregate of
85,051 shares of the Registrant's Non-voting Common Stock under its
Stock Option Plan at a weighted average exercise price of $.80 per
share have been exercised.
(4) On June 7, 1996, Thomas Konchan, a former employee of the Registrant,
exercised a nonstatutory stock option to purchase 3,825 shares of the
Registrant's Non-voting Common Stock at an exercise price of $.80 per
share.
(5) On May 31, 1996, the Registrant issued and sold an aggregate principal
amount of $6,500,000 of its Senior Subordinated Promissory Notes, along
with warrants to purchase an aggregate of 727,998 shares of its Non-
voting Common Stock at an exercise price of $.80 per share, to five
accredited investors. The aggregate purchase price of the warrants was
$4,853.33. On September 30, 1996, in connection with amendment of the
terms of the Senior Subordinated Promissory Notes, the Registrant
issued and sold additional warrants to purchase an aggregate of 182,635
shares of its Non-voting Common Stock at an exercise price of $.80 per
share to such investors at an aggregate purchase price of $1,217.58.
The issuance of the promissory notes described in paragraph (1) above did
not involve any public offering and therefore was exempt from registration
under the Securities Act by virtue of Section 4(2) thereof.
The issuance of the securities described in paragraph (2) above was exempt
from registration under the Securities Act by virtue of Section 3(a)(9)
thereof in that the securities were issued in an exchange transaction with the
Registrant's existing stockholders solely for the purpose of changing the
Registrant's domicile within the United States.
The stock option exercises described in paragraphs (3) and (4) above were
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were
II-2
<PAGE>
issued and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation.
The issuance and sale of the securities described in paragraph (5) above
were exempt from registration under the Securities Act by virtue of Section
4(2) thereof. The purchasers of the securities were either accredited
investors, as defined in Section 2(15)(ii) of the Securities Act, or
experienced venture capital investors. Each purchaser represented to the
Registrant its intention to acquire the securities for investment and not for
distribution, and appropriate restrictive legends are affixed to the
certificates representing the securities. In addition, each purchaser received
adequate information about the Registrant in connection with making its
investment decision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3(i).1 Amended and Restated Certificate of Incorporation, as amended.
3(i).2* Form of Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, as amended, to be filed prior to the
closing of the offering to which this Registration Statement
relates.
3(i).3 Form of Restated Certificate of Incorporation to be effective upon
the closing of the offering to which this Registration Statement
relates.
3(ii).1 Amended and Restated By-laws of the Registrant.
3(ii).2 Form of Amended and Restated By-laws to be effective upon the
closing of the offering to which this Registration Statement
relates.
4.1 Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2* Specimen stock certificate representing shares of Common Stock.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnification Agreement to be entered into by the
Registrant and its directors and executive officers.
10.2* Amended and Restated Stock Option Plan.
10.3 Employee Stock Purchase Plan to be effective upon the closing of
this offering.
10.4 Note and Warrant Purchase Agreement, between the Registrant and the
parties named therein, dated as of May 31, 1996.
10.5 Form of Senior Subordinated Promissory Note, as amended.
10.6 Form of Warrant to Purchase Shares of Common Stock.
10.7 Registration Rights Agreement, dated as of May 31, 1996.
11.1 Statement regarding computation of earnings per share.
16.1 Letter regarding change in certifying accountant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors, and Report
on Schedule.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 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 Securities 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 being 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated
by reference in the registration statement 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.
(2) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado on the 9th day of January, 1998.
EVOLVING SYSTEMS, INC.
/s/ J. RICHARD ABRAMSON
By: __________________________________________
J. Richard Abramson
President, Chief Executive Officer and
Director
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints J.
Richard Abramson and Anita T. Moseley as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any of all amendments to the Registration Statement of
Form S-1 (including post-effective amendments or any abbreviated registration
statement, and any amendments thereto, filed pursuant to Rule 462(b)
increasing the amount of securities for which registration is being sought),
and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE A. HALLENBECK Chairman of the Board of Directors January 9, 1998
- ------------------------
George A. Hallenbeck
/s/ J. RICHARD ABRAMSON President, Chief Executive Officer January 9, 1998
- ------------------------ and Director
J. Richard Abramson (Principal Executive Officer)
/s/ ROGER A. BARNES Senior Vice President of Finance, January 9, 1998
- ------------------------ Chief Financial Officer, Treasurer
Roger A. Barnes and Assistant Secretary
(Principal Financial and Accounting
Officer)
/s/ DAVID J. MOLNY Vice-President, Chief Technical January 9, 1998
- ------------------------ Oficer and Director
David J. Molny
/s/ HARRY B. FAIR Vice Chairman of the Board of January 9, 1998
- ------------------------ Directors
Harry B. Fair
/s/ DONALD R. DIXON Director January 9, 1998
- ------------------------
Donald R. Dixon
/s/ ROBERT J. LOARIE Director January 9, 1998
- ------------------------
Robert J. Loarie
</TABLE>
II-5
<PAGE>
SCHEDULE II
EVOLVING SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO WRITE- END
OF PERIOD OPERATIONS OFFS OF PERIOD
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
December 31, 1994............... $ -- $ -- $ -- $ --
-------- -------- -------- --------
December 31, 1995............... $ -- $ -- $ -- $ --
-------- -------- -------- --------
December 31, 1996............... $ -- $577,000 $279,000 $298,000
-------- -------- -------- --------
Nine Months Ended:
September 30, 1997.............. $298,000 $412,500 $234,500 $476,000
-------- -------- -------- --------
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3(i).1 Amended and Restated Certificate of Incorporation, as amended.
3(i).2* Form of Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, as amended, to be filed prior to the
closing of the offering to which this Registration Statement relates.
3(i).3 Form of Restated Certificate of Incorporation to be effective upon
the closing of the offering to which this Registration Statement
relates.
3(ii).1 Amended and Restated By-laws of the Registrant.
3(ii).2 Form of Amended and Restated By-laws to be effective upon the closing
of the offering to which this Registration Statement relates.
4.1 Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2* Specimen stock certificate representing shares of Common Stock.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnification Agreement to be entered into by the
Registrant and its directors and executive officers.
10.2* Amended and Restated Stock Option Plan.
10.3 Employee Stock Purchase Plan to be effective upon the closing of this
offering.
10.4 Note and Warrant Purchase Agreement, between the Registrant and the
parties named therein, dated as of May 31, 1996.
10.5 Form of Senior Subordinated Promissory Note, as amended.
10.6 Form of Warrant to Purchase Shares of Common Stock.
10.7 Registration Rights Agreement, dated as of May 31, 1996.
11.1 Statement regarding computation of earnings per share.
16.1 Letter regarding change in certifying accountant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors, and Report on
Schedule.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3(i).1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EVOLVING SYSTEMS, INC.
Evolving Systems, Inc., a Delaware corporation (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is Evolving Systems, Inc.
2. The date of filing of the original Certificate of Incorporation of the
Corporation with the Secretary of State of Delaware was January 10, 1996.
3. The Amended and Restated Certificate of Incorporation attached hereto
as Exhibit A was duly adopted in accordance with the provisions of Sections 141,
228, 242 and 245 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has executed this certificate on the
29th day of May, 1996.
EVOLVING SYSTEMS, INC.
/s/ Larry S. Schwartz
By:---------------------------------
Larry S. Schwartz
Vice President, Legal Services and
Secretary
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
EVOLVING SYSTEMS, INC.
I.
The name of this corporation is Evolving Systems, Inc.
II.
The address of the registered office of the Corporation in the State
of Delaware is:
The Corporation Trust Company
1209 Orange Street
Wilmington, DE 19801
County of New Castle
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares the corporation is authorized to issue is Eleven Million Five
Hundred Eight Thousand One Hundred Sixty (11,508,160) shares, (i) Ten Million
(10,000,000) shares of which shall be Common Stock (the "Common Stock") and (ii)
One Million Five Hundred Eight Thousand One Hundred Sixty (1,508,160) shares of
which shall be Preferred Stock (the "Preferred Stock"). The Common Stock and
the Preferred Stock shall have a par value of one-tenth of one cent ($.001) per
share.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares of such stock then outstanding) by
the affirmative vote of the holders of a majority of the voting stock of the
Corporation.
PREFERRED STOCK. The Preferred Stock may be issued from time to time
in one or more series.
A. DESIGNATION OF SERIES A PREFERRED. Eight Thousand One Hundred Sixty
(8,160) of the shares of Preferred Stock are designated as Series A Preferred
Stock (the "Series A Preferred") with the rights preferences, privileges and
restrictions specified herein.
1.
<PAGE>
1. DIVIDEND RIGHTS. Holders of Series A Preferred shall be
entitled to receive cash dividends when, as and if declared by the Board of
Directors, but only out of funds that are legally available therefor.
2. VOTING RIGHTS. The holder of each share of Series A
Preferred shall have the right to vote one vote for each share of Common Stock
into which such share of Series A Preferred could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the Bylaws, and shall be entitled to vote, together
with holders of Common Stock, upon such matters and in such manner as may be
provided by law.
3. LIQUIDATION RIGHTS. Upon any liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary, before any
distribution or payment shall be made to the holders of any other stock of the
Corporation, the holders of Series A Preferred shall be entitled to be paid out
of the assets of the Corporation an amount per share equal to Six Thousand Two
Hundred Fifty ($6,250). If the assets and funds thus distributed to the holders
of the Series A Preferred shall be insufficient to permit payment to such
holders of the full aforesaid preferential amounts, then the entire assets of
the Corporation legally available for distribution shall be distributed pro rata
to the holders of the Series A Preferred based on the relative preferential
amounts of the shares of the Series A Preferred then held by them.
After the payment of the full liquidation preference of the Preferred
Stock as set forth in Section A(3) above, the remaining assets of the
Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Preferred Stock and Common Stock (on an as-
converted basis).
An Acquisition or an Asset Transfer, as defined below, shall be
considered a liquidation for purposes of this section.
4. CONVERSION TO COMMON STOCK. The holders of the Series A
Preferred shall have the following rights with respect to the conversion of the
Series A Preferred into shares of Common Stock:
A. OPTIONAL CONVERSION. Subject to and in compliance with
the provisions of this Section A(4), any shares of Series A Preferred may, at
the option of the holder, be converted at any time into fully-paid and
nonassessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series A Preferred shall be entitled upon conversion shall be
the product obtained by multiplying the "Series A Conversion Rate" then in
effect (determined as provided in Section A(4)(b)) by the number of shares of
Series A Preferred being converted.
B. SERIES A PREFERRED CONVERSION RATE. The conversion
rate in effect at any time for conversion of the Series A Preferred (the "Series
A Conversion Rate") shall be the quotient obtained by dividing the "Original
Issue Price" of the Series A Preferred plus any
2.
<PAGE>
declared and unpaid dividends thereon, by the "Series A Conversion Price,"
calculated as provided in Section A(4)(c)). The Original Issue Price of the
Series A Preferred shall be Six Thousand Two Hundred Fifty Dollars ($6,250) (as
adjusted for any stock combinations or splits with respect to the Series A
Preferred shares).
C. CONVERSION PRICE. The conversion price for the Series A
Preferred initially shall be Twelve Dollars Fifty Cents ($12.50) (the "Series A
Conversion Price"). Such initial Series A Conversion Price shall be adjusted
from time to time in accordance with this Section A(4). All references to the
Series A Conversion Price herein shall mean the Series A Conversion Price as so
adjusted.
D. MECHANICS OF CONVERSION. Each holder of Series A Preferred
who desires to convert the same into shares of Common Stock pursuant to this
Section A(4) shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
A Preferred, and shall give written notice to the Corporation at such office
that such holder elects to convert the same. Such notice shall state the number
of shares of Series A Preferred being converted. Thereupon, the Corporation
promptly shall issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder is
entitled and promptly shall pay in cash or, to the extent sufficient funds are
not then legally available therefor, in Common Stock (at the fair market value
of the Common Stock determined by the Board of Directors as of the date of such
conversion), any declared and unpaid dividends on the shares of Series A
Preferred being converted. Such conversion shall be deemed to have been made at
the close of business on the date of such surrender of the certificates
representing the shares of Series A Preferred to be converted, and the person
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of Common
Stock on such date.
E. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Corporation shall at any time or from time to time after the date the first
share of Series A Preferred is issued (the "Series A Original Issue Date")
effect a subdivision of the outstanding Common Stock, the Series A Conversion
Price in effect immediately before such subdivision shall be decreased
proportionately. Conversely, if the Corporation shall at any time or from time
to time after the Series A Original Issue Date combine the outstanding shares of
Common Stock into a smaller number of shares, the Series A Conversion Price in
effect immediately before such combination shall be increased proportionately.
Any adjustment under this Section A(4)(e) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
F. ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If
the Corporation at any time or from time to time after the Series A Original
Issue Date makes or fixes a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock, in each such event the Series A Conversion
Price then in effect shall be decreased as of the time of such issuance or, in
the event such record date is fixed, as of the close of business on such record
date, by
3.
<PAGE>
multiplying the Series A Conversion Price then in effect by a fraction (1) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (2) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Series A Conversion Price shall be recomputed accordingly as
of the close of business on such record date and thereafter the Series A
Conversion Price shall be adjusted pursuant to this Section A(4)(f) to reflect
the actual payment of such dividend or distribution.
G. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time after the Series A Original Issue
Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, in each such
event provision shall be made so that the holders of the Series A Preferred
shall receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of other securities of the
Corporation they would have received had their Series A Preferred been converted
into Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section A(4) with respect to the rights of the holders of the Series A Preferred
or with respect to such other securities by their terms.
H. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If at any time or from time to time after the Series A Original Issue Date, the
Common Stock issuable upon the conversion of the Series A Preferred is changed
into the same or a different number of shares of any class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than an
Acquisition or Asset Transfer or a subdivision or combination of shares or stock
dividend or a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Section A(4)), in any such event each holder of Series A
Preferred shall have the right thereafter to convert such stock into the kind
and amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the maximum
number of shares of Common Stock into which such shares of Series A Preferred
could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided herein
or with respect to such other securities or property by the terms thereof.
I. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time after the Series A Original Issue Date,
there is a capital reorganization of the Common Stock (other than an Acquisition
or Asset Transfer or a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares provided for elsewhere in
this Section A(4)), as a part of such capital reorganization, provision
4.
<PAGE>
shall be made so that the holders of the Series A Preferred thereafter shall be
entitled to receive upon conversion of the Series A Preferred the number of
shares of stock or other securities or property of the Corporation to which a
holder of the number of shares of Common Stock deliverable upon conversion would
have been entitled on such capital reorganization, subject to adjustment in
respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section A(4) with respect to the rights of the holders of Series A
Preferred after the capital reorganization to the end that the provisions of
this Section A(4) (including adjustment of the Series A Conversion Price, as
applicable, then in effect and the number of shares issuable upon conversion of
the Series A Preferred) shall be applicable after that event and be as nearly
equivalent as practicable.
"Acquisition" shall mean any consolidation or merger of the
Corporation with or into any other corporation or other
entity or person, or any other corporate reorganization, in
which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less
than fifty percent (50%) of the voting power of the
surviving corporation or other entity or person immediately
after such consolidation, merger or reorganization, or any
transaction or series of related transactions in which in
excess of fifty percent (50%) of the Corporation's voting
power is transferred; or
"Asset Transfer" shall mean a sale, lease or other
disposition of all or substantially all of the assets of the
Corporation.
J. NOTICES OF RECORD DATE. Upon (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any Acquisition or other capital
reorganization of the Corporation, any reclassification or recapitalization of
the capital stock of the Corporation, any merger or consolidation of the
Corporation with or into any other corporation, or any Asset Transfer, or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, the Corporation shall mail to each holder of Series A Preferred at
least twenty (20) days prior to the record date specified therein a notice
specifying (1) the date on which any such record is to be taken for the purpose
of such dividend or distribution and a description of such dividend or
distribution, (2) the date on which any such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up is expected to become effective, and (3) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up.
K. AUTOMATIC CONVERSION.
5.
<PAGE>
(1) Each share of Series A Preferred automatically shall be
converted into shares of Common Stock, based on the then-effective Series A
Conversion Rate, immediately prior to the closing of a firmly underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation in which the per share price to the public is
at least Fifteen Dollars ($15.00) (as adjusted for stock splits,
recapitalizations and the like), and the gross cash proceeds to the Corporation
(before underwriting discounts, commissions and fees) are at least Ten Million
Dollars ($10,000,000). Upon any such conversion, any declared and unpaid
dividends shall be paid in accordance with the provisions of Section A(1).
(2) Upon the occurrence of an event specified in paragraph
(a) above, the outstanding shares of Series A Preferred, as applicable, shall be
converted without any further action by the holders of such shares and whether
or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series A Preferred, as applicable, either are delivered to the Corporation or
its transfer agent as provided below, or the holder notifies the Corporation or
its transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
Upon the occurrence of such conversion of the Series A Preferred, the holders of
Series A Preferred shall surrender the certificates representing such shares at
the office of the Corporation or any transfer agent for the Series Preferred.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series A Preferred surrendered were convertible on the date
on which such conversion occurred, and the Corporation promptly shall pay in
cash or, at the option of the Corporation, Common Stock (at the fair market
value of the Common Stock determined by the Board as of the date of such
conversion), or both, together with all declared and unpaid dividends on the
shares of such Series A Preferred being converted, to and including the date of
such conversion.
L. FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of Series A Preferred by a holder thereof shall be aggregated for purposes
of determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of any fractional share, the Corporation shall, in lieu
of issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common Stock's fair market value (as determined by the Board)
on the date of conversion.
M. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Preferred. If at any time the
6.
<PAGE>
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
N. NOTICES. Any notice required by the provisions of this
Section A shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient; if not, then
on the next business day, (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or (iv)
one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
O. PAYMENT OF TAXES. The Corporation will pay all taxes
(other than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series A Preferred, excluding any tax or other charge
imposed in connection with any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of Series A
Preferred so converted were registered.
P. NO DILUTION OR IMPAIRMENT. The Corporation shall not
amend its Certificate of Incorporation or participate in any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, for the purpose of avoiding or seeking
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but shall at all times in good faith
assist in carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred against dilution or other impairment.
5. NO REISSUANCE OF PREFERRED STOCK. No share or shares of
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued.
A. COMMON STOCK. Except as provided otherwise herein or
in the Bylaws, the holder of each share of Common Stock shall have the right to
one vote, and shall be entitled to notice of any shareholder's meeting in
accordance with the Bylaws.
B. DESIGNATION OF NON-VOTING COMMON STOCK; AUTOMATIC
CONVERSION. Two Million Four Hundred Twenty Thousand (2,420,000) shares of the
Common Stock are designated as Non-Voting Common Stock (the "Non-Voting Common")
which, except as may be otherwise required by law, shall be non-voting stock.
Each share of Non-Voting Common shall be converted into one share of Common
Stock of the Corporation upon the occurrence of the following events: (i)
immediately prior to the closing of a firmly underwritten public offering
pursuant to an effective registration statement under the Securities Exchange
Act
7.
<PAGE>
of 1934, as amended, covering the offer and sale of Common Stock for the account
of the Corporation, (ii) upon a merger of the Corporation, unless the
Corporation's stockholders of record as constituted immediately prior to such
merger will, immediately after such merger hold at least 50% of the voting power
of the surviving entity, and (iii) upon the sale of all or substantially all the
assets of the Corporation.
V.
A. A Director of the corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended.
B. Any repeal or modification of this Article VI or Section 42 of the
Bylaws shall be prospective and shall not affect the rights under this Article
VI or Section 42 of the Bylaws in effect at the time of the alleged occurrence
of any act or omission to act giving rise to liability or indemnification.
VI.
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its Directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by the Board
of Directors in the manner provided in the Bylaws.
B. The Board of Directors may from time to time make, amend, supplement
or repeal the Bylaws; provided, however, that the stockholders may change or
repeal any Bylaw adopted by the Board of Directors by the affirmative vote of
the holders of a majority of the voting power of all of the then outstanding
shares of the Common Stock, excluding the outstanding shares of the Non-Voting
Common, if any, and Series A Preferred voting together as a single class on an
as converted basis; and, provided further, that no amendment or supplement to
the Bylaws adopted by the Board of Directors shall vary or conflict with any
amendment or supplement thus adopted by the stockholders.
C. The Directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
8.
<PAGE>
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.
9.
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
EVOLVING SYSTEMS, INC.
Evolving Systems, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the Corporation is Evolving Systems, Inc.
SECOND: The first paragraph of Article IV of the Amended and Restated
Certificate of Incorporation of the Corporation is hereby amended in its
entirety to read as follows:
This Corporation is authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares the Corporation is authorized
to issue is thirty-one million five hundred eight thousand one
hundred sixty (31,508,160) shares, (i) thirty million
(30,000,000) shares of which shall be Common Stock (the "Common
Stock") and (ii) one million five hundred eight thousand one
hundred sixty (1,508,160) shares of which shall be Preferred
Stock (the "Preferred Stock"). The Common Stock and the Preferred
Stock shall have a par value of one-tenth of one cent ($.001) per
share.
THIRD: The first sentence of Section 5(b) of Article IV of the Amended and
Restated Certificate of Incorporation of the Corporation is hereby amended in
its entirety to read as follows:
Seven million two hundred sixty thousand (7,260,000) shares of the
Common Stock are designated as Non-Voting Common Stock (the "Non-Voting
Common"), which, except as may be otherwise required by law, shall be non-
voting stock.
FOURTH: The foregoing amendments to the Amended and Restated Certificate
of Incorporation of the Corporation have been duly adopted by the directors and
stockholders of the Corporation in accordance with the provisions of Sections
141, 228 and 242 of the General Corporation Law of the State of Delaware, and
notice of such adoption has been provided in accordance with said Section 228.
1.
<PAGE>
IN WITNESS WHEREOF, the Corporation has executed this Certificate of
Amendment on the 7th day of November, 1996.
EVOLVING SYSTEMS, INC.
By: /s/ Larry Schwartz
-------------------------------
Name: Larry Schwartz
Title: Vice President of Legal Services, Secretary
2.
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
EVOLVING SYSTEMS, INC.
Evolving Systems, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the Corporation is Evolving Systems, Inc.
SECOND: The first sentence of Section 5(b) of Article IV of the Amended and
Restated Certificate of Incorporation of the Corporation is hereby amended to
read in its entirety as follows:
Nine million eight hundred and sixty thousand (9,860,000)
shares of the Common Stock are designated as Non-Voting Common
Stock (the "Non-Voting Common"), which, except as may be
otherwise required by law, shall be non-voting stock.
THIRD: The foregoing amendments to the Amended and Restated Certificate of
Incorporation of the Corporation have been duly adopted by the directors and
stockholders of the Corporation in accordance with the provisions of Sections
141, 228 and 242 of the General Corporation Law of the State of Delaware, and
notice of such adoption has been provided in accordance with said Section 228.
IN WITNESS WHEREOF, the Corporation has executed this Certificate of
Amendment on the 30th day of January, 1997.
EVOLVING SYSTEMS, INC.
By: /s/ Larry Schwartz
-------------------------------
Name: Larry Schwartz
Title: V.P. of Legal Services
<PAGE>
EXHIBIT 3(i).3
RESTATED CERTIFICATE OF INCORPORATION
OF
EVOLVING SYSTEMS, INC.
A DELAWARE CORPORATION
I.
The undersigned, J. Richard Abramson, hereby certifies that:
ONE: He is the duly elected and acting President and Chief Executive
Officer of Evolving Systems, Inc.
TWO: The corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on January 10, 1996.
THREE: This Restated Certificate of Incorporation restates, integrates and
amends the corporation's Certificate of Incorporation filed on January 10, 1996,
as amended by the Amended and Restated Certificate of Incorporation filed May
29, 1996, the Amended and Restated Certificate of Incorporation filed on
November 8, 1996 and the Certificate of Amendment filed February 18, 1997 and
has been duly adopted in accordance with Sections 242 and 245 of the Delaware
General Corporation Law.
FOUR: The text of the Amended and Restated Certificate of Incorporation of
this corporation is hereby amended and restated to read in its entirety as
follows:
II.
The name of this corporation is EVOLVING SYSTEMS, INC.
III.
The address of the registered office of the corporation in the State of
Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
IV.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is
twenty-seven million (27,000,000), of which twenty-five million (25,000,000)
shares shall be Common Stock and two million
<PAGE>
(2,000,000) shares shall be Preferred Stock. The Common Stock shall have a
par value of $.001 per share and the Preferred Stock shall have a par value of
$.001 per share.
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Following the closing of the initial public offering pursuant to
an effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class II directors
shall expire and Class II directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
<PAGE>
Notwithstanding the foregoing provisions of this Article, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
3. Subject to any limitations imposed by law, the Board of Directors
or any individual director may be removed from office at any time (i) with cause
by the affirmative vote of the holders of a majority of the voting power of all
the then-outstanding shares of voting stock of the corporation, entitled to vote
at an election of directors (the "Voting Stock"), or (ii) without cause by the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the voting power of all the then-outstanding shares of the Voting
Stock.
4. Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B.
1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws. No action shall be taken by the stockholders by written consent.
C.
1. Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
<PAGE>
Directors for adoption) or (iv) by the holders of the shares entitled to cast
not less than ten percent (10%) of the votes at the meeting, and shall be held
at such place, on such date, and at such time as they or he shall fix; provided,
however, that following the registration of any classes of equity securities of
the corporation pursuant to the provisions of the Securities Exchange Act of
1934, as amended, special meetings of the stockholders may only be called by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized Directors.
2. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
corporation, its stockholders, and others.
B. No director of the corporation shall be personally liable to the
corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the Delaware General Corporation Law or any
amendment thereto or shall be liable by reason that, in addition to any and all
other requirements for such liability, such director (1) shall have breached the
director's duty of loyalty to the corporation or its stockholders, (2) shall not
have acted in good faith, or, in failing to act, shall not have acted in good
faith, (3) shall have acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law, or (4) shall
have derived an improper personal benefit. If the Delaware General Corporation
Law is hereafter amended to authorize the further elimination or limitation of
the liability of a director, the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
C. Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation or of a
direct or indirect subsidiary of the corporation, or is or was serving at the
request of the corporation as a director or officer of another entity or
enterprise, or was a director or officer of a foreign or domestic corporation
which was predecessor corporation of the corporation or of another
<PAGE>
entity or enterprise at the request of such predecessor corporation, shall be
indemnified and held harmless by the corporation, and the corporation shall
advance all expenses incurred by any such person in defense of any such
proceeding prior to its final determination, to the fullest extent authorized by
the Delaware General Corporation Law. In any proceeding against the corporation
to enforce these rights, such person shall be presumed to be entitled to
indemnification and the corporation shall have the burden of proving that such
person has not met the standards of conduct for permissible indemnification set
forth in the Delaware General Corporation Law. The rights to indemnification and
advancement of expenses conferred by this Article VI shall be presumed to have
been relied upon by the directors and officers of the corporation in serving or
continuing to serve the corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The corporation may, upon written
demand presented by a director or officer of the corporation or of a direct or
indirect subsidiary of the corporation, or by a person serving at the request of
the corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the Delaware General Corporation Law, as amended and in effect from
time to time.
1. If a claim under this Article VI is not paid in full by the
corporation within sixty (60) days after a written claim has been received by
the corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed, but the claimant shall be presumed to be entitled to
indemnification and the corporation shall have the burden of proving that the
claimant has not met the standards of conduct for permissible indemnification
set forth in the Delaware General Corporation Law.
2. If the Delaware General Corporation Law is hereafter amended to
permit the corporation to provide broader indemnification rights than the
Delaware General Corporation Law permitted the corporation to provide prior to
such amendment, the indemnification rights conferred by this Article VI shall be
broadened to the fullest extent permitted by the Delaware General Corporation
Law, as so amended.
D. Any repeal or modification of any of the foregoing provisions of this
Article VI, including without limitation, any contractual rights arising under
or authorized by it, shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
<PAGE>
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
_________________ , 1997.
--------------------------------------
J. Richard Abramson
President and Chief Executive Officer
<PAGE>
EXHIBIT 3(ii).1
AMENDED AND RESTATED BY-LAWS
OF
EVOLVING SYSTEMS, INC.
(A DELAWARE CORPORATION)
AS AMENDED BY THE BOARD OF DIRECTORS ON AUGUST 7, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I OFFICES........................................................................... 1
Section 1. Registered Office................................................................. 1
Section 2. Other Offices..................................................................... 1
ARTICLE II CORPORATE SEAL.................................................................... 1
Section 3. Corporate Seal.................................................................... 1
ARTICLE III STOCKHOLDERS' MEETINGS............................................................ 1
Section 4. Place Of Meetings................................................................. 1
Section 5. Annual Meeting.................................................................... 2
Section 6. Special Meetings.................................................................. 3
Section 7. Notice Of Meetings................................................................ 4
Section 8. Quorum............................................................................ 4
Section 9. Adjournment And Notice Of Adjourned Meetings...................................... 5
Section 10. Voting Rights..................................................................... 5
Section 11. Beneficial Owners Of Stock........................................................ 5
Section 12. List Of Stockholders.............................................................. 6
Section 13. Action Without Meeting............................................................ 6
Section 14. Organization...................................................................... 7
ARTICLE IV DIRECTORS.............................................................................. 8
Section 15. Number And Term Of Office......................................................... 8
Section 16. Powers............................................................................ 8
Section 17. Vacancies......................................................................... 8
Section 18. Removal........................................................................... 9
Section 19. Meetings.......................................................................... 9
Section 20. Quorum and Voting................................................................. 10
Section 21. Action Without Meeting............................................................ 10
Section 22. Fees and Compensation............................................................. 10
Section 23. Committees........................................................................ 11
Section 24. Organization...................................................................... 12
ARTICLE V OFFICERS.......................................................................... 12
Section 25. Officers Designated............................................................... 12
Section 26. Tenure and Duties of Officers..................................................... 13
Section 27. Delegation of Authority........................................................... 14
Section 28. Resignations...................................................................... 14
Section 29. Removal........................................................................... 14
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF
SECURITIES OWNED BY THE CORPORATION............................................... 14
Section 30. Execution of Corporate Instruments................................................ 14
Section 31. Voting of Securities Owned by the Corporation..................................... 15
ARTICLE VII SHARES OF STOCK................................................................... 15
Section 32. Form And Execution Of Certificates................................................ 15
Section 33. Lost Certificates................................................................. 16
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Section 34. Transfers......................................................................... 16
Section 35. Fixing Record Dates............................................................... 16
Section 36. Registered Stockholders........................................................... 17
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION............................................... 18
Section 37. Execution Of Other Securities..................................................... 18
ARTICLE IX DIVIDENDS......................................................................... 18
Section 38. Declaration Of Dividends.......................................................... 18
Section 39. Dividend Reserve.................................................................. 18
ARTICLE X FISCAL YEAR....................................................................... 19
Section 40. Fiscal Year....................................................................... 19
ARTICLE XI INDEMNIFICATION................................................................... 19
Section 41. Indemnification of Directors, Officers, Employees and Other Agents................ 19
ARTICLE XII NOTICES........................................................................... 23
Section 42. Notices........................................................................... 23
ARTICLE XIII AMENDMENTS........................................................................ 24
Section 43. Amendments........................................................................ 24
ARTICLE XIV LOANS TO OFFICERS................................................................. 25
Section 44. Loans To Officers................................................................. 25
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AMENDED AND RESTATED BY-LAWS
OF
EVOLVING SYSTEMS, INC.
(a Delaware corporation)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business in Englewood, Colorado, at such place as
may be fixed by the Board of Directors, and may also have offices at such other
places, both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
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Section 5. ANNUAL MEETING.
a) The annual meeting of the stockholders of the corporation, for
the purpose of election of Directors and for such other business as may lawfully
come before it, shall be held on a day designated by the Board of Directors
during the month of May in each year or on such date and at such time as may be
designated from time to time by the Board of Directors.
b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) if the
business includes formal action by the stockholders, specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, if the business includes formal action by the
stockholders, the stockholder must have given timely notice thereof in writing
to the Secretary of the corporation. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal executive offices of the
corporation not less than thirty (30) calendar days in advance of the date of
the annual meeting of the stockholders.
c) Nominations of persons for election to the Board of Directors
of the corporation may be made at a meeting of the stockholders by or at the
direction of the Board of Directors or by any stockholder of the corporation
entitled to vote in the election of Directors at the meeting.
SECTION 6. SPECIAL MEETINGS.
a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board or Vice
Chairman of the Board, (ii) the Chief Executive Officer, (iii) the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption) or (iv) by the holders of shares entitled to cast not less
than one-fifth of the votes at the meeting, and shall be held at such place, on
such date, and at such time as they or he shall fix.
b) If a special meeting is called by any person or persons other
than the Board of Directors, the Chairman of the Board, Vice Chairman of the
Board, or Chief Executive Officer, the request shall be in writing, specifying
the time, date and location of such meeting, any formal action proposed to be
taken at the meeting, and the general nature of other business proposed to be
discussed, and shall be delivered personally or sent by registered mail,
overnight delivery by a nationally recognized courier, or by telegraphic or
other facsimile transmission to the Chairman of the Board, the Vice
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Chairman of the Board, the Chief Executive Officer, the President, any Vice
President, or the Secretary of the corporation. No formal action of the
stockholders may be taken at such special meeting otherwise than specified in
such notice. The officer receiving the request for a meeting shall cause notice
to be promptly given to the stockholders entitled to vote, in accordance with
the provisions of Section 7 of these By-Laws. The time and date specified in a
request for a meeting submitted under this Section 6(b) may be modified by the
Board of Directors; provided that the date for the meeting established by the
Board of Directors shall not be earlier than that specified in the request and
shall not be later than ten (10) business days after the date specified in the
request. Nothing contained in this paragraph (b) shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these By-Laws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. Any shares, the voting of
which at said meeting has been enjoined, or which for any reason cannot be
lawfully voted at such meeting, shall not be counted to determine a quorum at
such meeting. In the absence of a quorum any meeting of stockholders may be
adjourned, from time to time, either by the chairman of the meeting or by vote
of the holders of a majority of the shares represented thereat, but no other
business shall be transacted at such meeting. The stockholders present at a
duly called or convened meeting, at which a quorum is present, may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. Except as otherwise provided by law,
the Certificate of Incorporation or these By-Laws, all action taken by the
holders of a majority of the voting power represented at any meeting at which a
quorum is present shall be valid and binding upon the corporation; provided,
however, that Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of Directors. Where a separate vote by a class or classes
is required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled to
take action with respect to that
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vote on that matter and the affirmative vote of the majority (plurality, in the
case of the election of Directors) of shares of such class or classes present in
person or represented by proxy at the meeting shall be the act of such class.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
represented thereat. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those stock
holders entitled to vote at any meeting of the stockholder, except as otherwise
provided by law, only persons in whose names shares stand on the stock records
of the corporation on the records date, as provided in Section 12 of these By-
Laws, shall be entitled to vote at any meeting of stockholders. Except as may
be otherwise provided in the Certificate of Incorporation or these By-Laws, each
stockholder shall be entitled to one vote for each share of capital stock held
by such stockholder. Every person entitled to vote or execute consents shall
have the right to do so either in person or by an agent or agents authorized by
a written proxy executed by such person or his duly authorized agent, which
proxy shall be filed with the Secretary at or before the meeting at which it is
to be used. An agent so appointed need not be a stockholder. No proxy shall be
voted after three (3) years from its date of creation unless the proxy provides
for a longer period. All elections of Directors shall be by written ballot,
unless otherwise provided in the Certificate of Incorporation.
SECTION 11. BENEFICIAL OWNERS OF STOCK.
a) If shares or other securities having voting power stand of
record in the names of two (2) or more persons, whether fiduciaries, members of
a partnership, joint tenants, tenants in common, tenants by the entirety, or
otherwise, or if two (2) or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their acts with respect
to voting shall have the following effect: (a) if only one (1) votes, his act
binds all; (b) if more than one (1) votes, the act of the majority so voting
binds all; (c) if more than one (1) votes, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionally, or may apply to the Delaware Court of Chancery for relief as
provided in the General Corporation Law of Delaware, Section 217(b). If the
instrument filed with the Secretary shows that any such tenancy is
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held in unequal interests, a majority or even split for the purpose of this
subsection (a) shall be a majority or even split in interest.
b) Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
a) Any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, are signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the Corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested or
by overnight delivery deposited with a nationally recognized courier. Unless
otherwise specified in the written consent, all written consents may be executed
in counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same written consent.
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c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the General Corporation Law of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
SECTION 14. ORGANIZATION.
a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the Vice
Chairman of the Board, or if the Vice Chairman is absent, the Chief Executive
Officer, or if the Chief Executive Officer is absent, the President, or, if the
President is absent, the most senior Vice President present, or in the absence
of any such officer, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the Chief Executive Officer, shall act as secretary of the meeting.
b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies, and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless, and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The Board of Directors shall
consist of a number no less than five, nor greater than seven members. The
number of authorized Directors may be modified from time to time by amendment of
this Section 15 in accordance with the provisions of Section 43 hereof. Except
as provided in Section
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17, the Directors shall be elected by the stockholders at their annual meeting
in each year and shall hold office until the next annual meeting and until their
successors shall be duly elected and qualified. Directors need not be
stockholders unless so required by the Certificate of Incorporation. If for any
cause, the Directors shall not have been elected at an annual meeting, they may
be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these By-Laws. No
reduction of the authorized number of Directors shall have the effect of
removing any Director before the Director's term of office expires, unless such
removal is made pursuant to the provisions of Section 18 hereof.
The Directors shall elect one Director to serve as Chairman of the Board of
Directors and one Director to serve as Vice Chairman of the Board of Directors.
The positions of Chairman and Vice Chairman of the Board shall not have the
authority of officers of the corporation.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, vacancies and newly created directorships resulting from any
increase in the authorized number of Directors may be filled by a majority of
the Directors then in office, although less than a quorum, or by a sole
remaining Director, and each Director so elected shall hold office for the
unexpired portion of the term of the Director whose place shall be vacant and
until his successor shall have been duly elected and qualified. A vacancy in
the Board of Directors shall be deemed to exist under this Section 17 in the
case of the death, removal or resignation of any Director, or if the
stockholders fail at any meeting of stockholders at which Directors are to be
elected (including any meeting referred to in Section 19 below) to elect the
number of Directors then constituting the whole Board of Directors. Any
Director may resign at any time by delivering his written resignation to the
Secretary, such resignation to specify whether it will be effective at a
particular time, upon receipt by the Secretary or at the pleasure of the Board
of Directors. If no such specification is made, it shall be deemed effective at
the pleasure of the Board of Directors. When one or more Directors shall resign
from the Board of Directors, effective at a future date, a majority of the
Directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each Director so chosen
shall hold office for the unexpired portion of the term of the Director whose
place shall be vacated and until his successor shall have been duly elected and
qualified.
SECTION 18. REMOVAL. At a special meeting of stockholders called for the
purpose in the manner hereinabove provided, subject to any limitations imposed
by law or the Certificate of Incorporation, the Board of Directors, or any
individual Director, may be removed from office, with or without cause, and a
new Director or Directors elected
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by a vote of stockholders holding a majority of the outstanding shares entitled
to vote at an election of Directors.
Section 19. MEETINGS.
A) ANNUAL MEETINGS. The annual meeting of the Board of
Directors may be held immediately after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
B) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors, when held, shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place within
or without the State of Delaware which has been determined by the Board of
Directors.
C) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, Vice Chairman of the Board, the Chief
Executive Officer or any Director.
D) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
E) NOTICE OF MEETINGS. Written notice of the time and place of
all special meetings of the Board of Directors shall be given at least one (1)
day before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
Director by attendance thereat, except when the Director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
F) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed or wherever held, shall be as valid as though had at a meeting duly held
after regular call and notice, if a quorum be present and if, either before or
after the meeting, each of the directors not present shall sign a written waiver
of notice, or a consent to holding such meeting, or an approval of the minutes
thereof. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in any
written waiver of notice or consent unless so required by the Certificate
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of Incorporation or these By-Laws. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
SECTION 20. QUORUM AND VOTING.
A) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 41 hereof, for which a quorum shall be one third of the exact number of
Directors fixed from time to time in accordance with Section 15 hereof, but not
less than one (1), a quorum of the Board of Directors shall consist of a
majority of the exact number of Directors fixed from time to time in accordance
with Section 15 of these By-Laws, but not less than one (1); provided, however,
at any meeting whether a quorum be present or otherwise, a majority of the
Directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
B) At each meeting of the Board of Directors at which a quorum
is present all questions and business shall be determined by a vote of a
majority of the Directors present, unless a different vote be required by law,
the Certificate of Incorporation or these By-Laws.
SECTION 21. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of the Board of Directors or committee.
SECTION 22. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
Director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 23. COMMITTEES.
A) EXECUTIVE COMMITTEE. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors, appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and
specifically granted by the Board of Directors, shall have and may exercise when
the Board of Directors is not in session all powers of the Board of Directors in
the management of the business and affairs of the corporation, including,
without limitation, the power and authority to declare a dividend
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or to authorize the issuance of stock, except such committee shall not have the
power or authority to amend the Certificate of Incorporation, to adopt an
agreement of merger or consolidation, to recommend to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, to recommend to the stockholders of the corporation a dissolution of the
corporation or a revocation of a dissolution or to amend these By-Laws.
B) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors, and shall have such powers and perform such duties as
may be prescribed by the resolution or resolutions creating such committees, but
in no event shall such committee have the powers denied to the Executive
Committee in these By-Laws.
C) TERM. The members of all committees of the Board of
Directors shall serve a term coexistent with that of the Board of Directors
which shall have appointed such committee. The Board of Directors, subject to
the provisions of subsections (a) or (b) of this Section 23, may at any time
increase or decrease the number of members of a committee or terminate the
existence of a committee. The membership of a committee member shall terminate
on the date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason remove
any individual committee member and the Board of Directors may fill any
committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
D) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 23 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any Director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any Director by attendance thereat, except when the Director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to
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the transaction of any business because the meeting is not lawfully called or
convened. A majority of the authorized number of members of any such committee
shall constitute a quorum for the transaction of business, and the act of a
majority of those present at any meeting at which a quorum is present shall be
the act of such committee.
SECTION 24. ORGANIZATION. At every meeting of the Directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the Vice Chairman of the Board of Directors, or if the Vice Chairman
is absent, the Chief Executive Officer, or if the Chief Executive Officer is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the Directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the Chief Executive Officer, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 25. OFFICERS DESIGNATED. The officers of the corporation shall
be the Chief Executive Officer, the President, one or more Vice Presidents, the
Secretary and the Chief Financial Officer or Treasurer, all of whom shall be
elected at the annual organizational meeting of the Board of Directors. The
Board of Directors may also appoint such other officers and agents with such
powers and duties as it shall deem necessary. The Board of Directors may assign
such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation at
any one time unless specifically prohibited therefrom by law. The salaries and
other compensation of the officers of the corporation shall be fixed by or in
the manner designated by the Board of Directors. The Chief Executive Officer may
appoint one or more Assistant Secretaries and Assistant Treasurers with such
powers and duties as he or she deems necessary.
SECTION 26. TENURE AND DUTIES OF OFFICERS.
A) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
B) DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer of the Corporation shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business and
officers of the corporation. The Chief Executive Officer shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors shall designate from time
to time.
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C) INTENTIONALLY DELETED.
D) DUTIES OF PRESIDENT. The President shall perform the duties
of and have all of the powers of and be subject to all of the restrictions upon
the Chief Executive Officer in the event of the Chief Executive Officer's
absence, refusal or inability to act or during a vacancy in the office of the
Chief Executive Officer. The President shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time.
E) DUTIES OF VICE PRESIDENTS. The Vice Presidents, in the
order of their seniority, may assume and perform the duties of the President in
the absence or disability of the President or whenever the office of President
is vacant. The Vice Presidents shall perform other duties commonly incident to
their office and shall also perform such other duties and have such other powers
as the Board of Directors or the Chief Executive Officer shall designate from
time to time.
F) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors, and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these By-Laws of all meetings of
the stockholders, and of all meetings of the Board of Directors and any
committee thereof requiring notice. The Secretary shall perform all other duties
given him in these By-Laws and other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time The Chief Executive Officer may
direct any Assistant Secretary to assume and perform the duties of the Secretary
in the absence or disability of the Secretary and each Assistant Secretary shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors or the Chief
Executive Officer shall designate from time to time.
G) DUTIES OF CHIEF FINANCIAL OFFICER OR TREASURER. The Chief
Financial Officer or Treasurer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner, and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors or the Chief Executive Officer. The Chief
Financial Officer or Treasurer, subject to the order of the Board of Directors,
shall have the custody of all funds and securities of the corporation. The
Chief Financial Officer or Treasurer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the Chief Executive Officer shall
designate from time to time. The Chief Executive Officer may direct any
Assistant Treasurer to assume and perform the duties of the Chief Financial
Officer or Treasurer in the absence or disability of the Chief Financial Officer
or Treasurer, and each Assistant Treasurer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the Chief Executive Officer shall
designate from time to time.
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SECTION 27. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 28. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the Chief Executive Officer or to
the Secretary. Any such resignation shall be effective when received by the
person or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 29. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, subject to the terms of any employment agreement
between the corporation and such officer, by the vote or written consent of a
majority of the Directors in office at the time, or by any committee or superior
officers upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 30. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these By-Laws, and
such execution or signature shall be binding upon the corporation. If not
otherwise designated by the Board of Directors, the Chief Executive Officer, the
President or any Vice President is authorized to execute contracts or other
documents on behalf of the corporation, but no others.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chief
Executive Officer or the President or any Vice President, and by the Secretary
or Chief Financial Officer or Treasurer or any Assistant Secretary or Assistant
Treasurer. All other instruments and documents requiring the corporate
signature, but not requiring the corporate seal, may be executed as aforesaid or
in such other manner as may be expressly directed in writing by the Board of
Directors.
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All checks and drafts drawn on banks or other depositories on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 31. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chief Executive Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 32. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chief Executive Officer, or the President or any Vice
President and by the Treasurer or Assistant Treasurer or the Secretary or
Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be by
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the designations,
preferences, limitations, restrictions on transfer and relative rights of the
shares authorized to be issued.
SECTION 33. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
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SECTION 34. TRANSFERS.
a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware.
SECTION 35. FIXING RECORD DATES.
A) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
B) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix, in advance, a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. If no record date has been fixed by the Board of
Directors, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested or
by overnight delivery deposited with a nationally recognized courier. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by law, the record date for determining
stockholders entitled to
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consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action.
C) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 36. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 37. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 32), may be signed by the Chief Executive Officer, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature of a
trustee under an indenture pursuant to which such bond, debenture or other
corporate security shall be issued, the signatures of the persons signing and
attesting the corporate seal on such bond, debenture or other corporate security
may be the imprinted facsimile of the signatures of such persons. Interest
coupons appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 38. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
SECTION 39. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
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ARTICLE X
FISCAL YEAR
SECTION 40. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 41. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS.
A) INDEMNIFIED PERSONS. The corporation shall indemnify its
Directors, executive officers, including the Chief Executive Officer, the
President, the Chief Financial Officer, the Treasurer, the Secretary and all
Vice Presidents, and other officers or employees named by the Board of Directors
from time-to-time (the "Indemnified Persons") to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
corporation may limit the extent of such indemnification by written individual
contracts with such Indemnified Persons; and, provided, further, that the
corporation shall not be required to indemnify any Indemnified Persons in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the corporation or its Directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the Board of Directors
of the corporation or (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the Delaware General Corporation Law.
B) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
c) GOOD FAITH.
I) For purposes of any determination under this Bylaw, an
Indemnified Person shall be deemed to have acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe that his conduct was unlawful, if his action is
based on information, opinions, reports and statements, including financial
statements and other financial data, in each case prepared or presented by:
A) one or more officers or employees of the
corporation whom the Indemnified Person believed to be reliable and competent in
the matters presented;
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B) counsel, independent accountants or other persons
(such as an outside consultant) as to matters which the Indemnified Person
believed to be within such person's professional competence;
C) with respect to a Director, a committee of the
Board upon which such Director does not serve, as to matters within such
Committee's designated authority, which committee the Director believes to merit
confidence; so long as, in each case, the Director acts without knowledge that
would cause such reliance to be unwarranted; and (iv) any other resource, if
such source and the information provided by such source were believed to be
reliable and competent by such Indemnified Person.
II) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, that
he had reasonable cause to believe that his conduct was unlawful.
III) The provisions of this paragraph (c) shall not be
deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth by
the Delaware General Corporation Law.
D) EXPENSES. The corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Indemnified Person in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it should be determined ultimately that such person is not entitled to be
indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (e) of this Bylaw, no advance shall be made by the
corporation if a determination is reasonably and promptly made (1) by the Board
of Directors by a majority vote of a quorum consisting of Directors who were not
parties to the proceeding, or (2) if such quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, that the facts known to the decision making party
at the time such determination is made demonstrate clearly and convincingly that
such person acted in bad faith or in a manner that such person did not believe
to be in or not opposed to the best interests of the corporation.
E) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to Indemnified
Persons under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the Indemnified Person. Any right to indemnification or advances
granted by this Bylaw to an Indemnified Person shall be enforceable by or on
behalf of the person holding such right in any court of competent jurisdiction
if (i) the claim for indemnification or advances is denied, in whole or in part,
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or (ii) no disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole or in
part, shall be entitled to be paid also the expense of prosecuting his claim.
The corporation shall be entitled to raise as a defense to any such action that
the claimant has not met the standards of conduct that make it permissible under
the Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
F) NON EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by the Bylaw shall not be exclusive of any other right which such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its Directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
G) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
H) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
I) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
J) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each Indemnified Person to the full
extent not prohibited by any applicable portion of this Bylaw that shall not
have been invalidated, or by any other applicable law.
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K) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
I) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
II) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding.
III) The term "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
IV) References to a "director," "officer," "employee," or
"agent" of the corporation shall include, without limitation, situations where
such person is serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
V) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner not opposed to the best interests of the
corporation as referred to in this Bylaw.
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ARTICLE XII
NOTICES
SECTION 42. NOTICES.
A) NOTICE OF STOCKHOLDERS. Whenever, under any provisions of
these By-Laws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent, or by overnight delivery
to such address, deposited with a nationally recognized courier.
B) NOTICE OF DIRECTORS. Any notice required to be given to any
Director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such Director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such Director.
C) ADDRESS UNKNOWN. If no address of a stockholder or Director
be known, notice may be sent to the office of the corporation required to be
maintained pursuant to Section 2 hereof.
D) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
E) TIME NOTICES DEEMED GIVEN. All notices given by mail or
overnight delivery, as above provided, shall be deemed to have been given as at
the time of mailing or deposit with a nationally recognized courier and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
F) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all Directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
G) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such Director to receive such
notice.
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H) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or By-Laws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
I) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or By-Laws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 43. AMENDMENTS. Except as otherwise set forth in paragraph (i)
of Section 41 of these By-Laws, these By-Laws may be amended or repealed and new
By-Laws adopted by a majority of the stockholders entitled to vote. The Board of
Directors shall also have the power, if such power is conferred upon the Board
of Directors by the Certificate of Incorporation, to adopt, amend or repeal By-
Laws (including, without limitation, the amendment of any Bylaw setting forth
the number of Directors who shall constitute the whole Board of Directors).
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ARTICLE XIV
LOANS TO OFFICERS
SECTION 44. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in this Section 44 shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute.
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EXHIBIT 3(ii).2
AMENDED
AND
RESTATED
BYLAWS
OF
EVOLVING SYSTEMS, INC.
(A DELAWARE CORPORATION)
<PAGE>
RESTATED BYLAWS
OF
EVOLVING SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought
<PAGE>
before an annual meeting, business must be: (A) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 5. Such
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stockholder's notice shall set forth (i) as to each person, if any, whom the
stockholder proposes to nominate for election or re-election as a director: (A)
the name, age, business address and residence address of such person, (B) the
principal occupation or employment of such person, (C) the class and number of
shares of the corporation which are beneficially owned by such person, (D) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the stockholder, and (E) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected); and (ii) as to
such stockholder giving notice, the information required to be provided pursuant
to paragraph (b) of this Section 5. At the request of the Board of Directors,
any person nominated by a stockholder for election as a director shall furnish
to the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The chairman
of the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he should so determine, he shall so declare at the meeting,
and the defective nomination shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), or (iv) by the holders of shares entitled to cast not
less than two-thirds (2/3) of the votes at the meeting, and shall be held at
such place, on such date, and at such time as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon
3
<PAGE>
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons requesting the meeting may set the time and place of the meeting and
give the notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by
action of the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided, however, that directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where a
separate vote by a class or classes or series is required, except where
otherwise provided by statute or by the Certificate of Incorporation or these
Bylaws, a majority of the outstanding shares of such class or classes or series,
present in person or represented by proxy, shall constitute a quorum entitled to
take action with respect to that vote on that matter and, except where otherwise
provided by statute or by the Certificate of Incorporation or these Bylaws, the
affirmative vote of the majority (plurality, in the case of the election of
directors) of the votes cast, including abstentions, by the holders of shares of
such class or classes or series shall be the act of such class or classes or
series.
4
<PAGE>
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
5
<PAGE>
SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the Chief
Executive Officer or, if the Chief Executive Officer is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
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<PAGE>
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND QUALIFICATIONS. The authorized number of directors
of the corporation shall be fixed by resolution of the Board of Directors.
Directors need not be stockholders. If for any cause, the directors shall not
have been elected at an annual meeting, they may be elected as soon thereafter
as convenient at a special meeting of the stockholders called for that purpose
in the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS AND TERMS OF OFFICE. Subject to the
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, following the closing of the initial
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale
of Common Stock to the public (the "Initial Public Offering"), the directors
shall be divided into three classes designated as Class I, Class II and Class
III, respectively. Directors shall be assigned to each class in accordance with
a resolution or resolutions adopted by the Board of Directors. At the first
annual meeting of stockholders following the closing of the Initial Public
Offering, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class II directors shall expire and Class II directors
shall be elected for a full term of three years. At the third annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class III directors shall expire and Class III directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing, each director shall serve until his successor is
duly elected and qualified or until his death, resignation or removal. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in
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the Board of Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the Chief Executive Officer, the President
or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear
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each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall given in writing, by facsimile,
telegraph or telex, during normal business hours, at least twenty-four (24)
hours before the date and time of the meeting, or sent in writing to each
director by (i) overnight courier with a nationally recognized courier service
at least two (2) days before the date of the meeting or (ii) first class mail,
charges prepaid, at least three (3) days before the date of the meeting. Notice
of any meeting may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
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SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES AND CHAIRMAN OF THE BOARD.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, including without limitation the power or authority
to declare a dividend, to authorize the issuance of stock and to adopt a
certificate of ownership and merger, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors
shall by resolution passed by a majority of the whole Board of Directors appoint
a Chairman of the Board. The Chairman of the Board of Directors, when present,
shall preside at all meetings of the stockholders and the Board of Directors.
The Chairman of the Board of Directors shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time.
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(d) TERM. The Chairman of the Board and each member of a committee
of the Board of Directors shall serve a term on the committee coexistent with
such member's term on the Board of Directors. The Board of Directors, subject to
the provisions of subsections (a) or (b) of this Bylaw may at any time increase
or decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his death or voluntary resignation from the committee or from the Board of
Directors. The Board of Directors may at any time for any reason remove the
Chairman of the Board and any individual committee member and the Board of
Directors may fill any Chairman position and committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(e) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the Chief Executive Officer or, if the Chief Executive Officer is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
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ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chief Executive
Officer, the President, one or more Vice Presidents, the Secretary and the Chief
Financial Officer all of whom shall be elected at the annual organizational
meeting of the Board of Directors. The Board of Directors may also appoint one
or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and
such other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) DUTIES OF CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors, unless the Chairman of the Board of Directors has been
appointed and is present. The Chief Executive Officer shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. The Chief Executive
Officer shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(c) DUTIES OF PRESIDENT. The President may assume and perform the
duties of the Chief Executive Officer in the absence or disability of the Chief
Executive Officer or whenever the office of Chief Executive Officer is vacant.
The President, subject to the control of the Board of Directors and the Chief
Exectuvive Officer, shall have general supervision, direction and control of the
business and officers of the corporation. The President shall perfom other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors shall designate from time
to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the Chief Executive Officer or the President in the
absence or disability of both of the Chief Executive Officer and the President
or whenever the office of Chief Executive Officer and President is vacant. The
Vice Presidents shall perform other duties commonly incident to
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their office and shall also perform such other duties and have such other powers
as the Board of Directors or the Chief Executive Officer or President shall
designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings
of the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Controller or any Assistant
Controller to assume and perform the duties of the Chief Financial Officer in
the absence or disability of the Chief Financial Officer, and each Controller
and Assistant Controller shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors or the President shall designate from time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or
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superior officers upon whom such power of removal may have been conferred by the
Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chief
Executive Officer or the President or any Vice President, and by the Secretary
or Chief Financial Officer. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as
aforesaid or in such other manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chief Executive Officer, the President, the Secretary or the Chief
Financial Officer.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and
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applicable law. Every holder of stock in the corporation shall be entitled to
have a certificate signed by or in the name of the corporation by the Chief
Executive Officer, or the President or any Vice President and by the Chief
Financial Officer, or the Secretary or Assistant Secretary, certifying the
number of shares owned by him in the corporation. Any or all of the signatures
on the certificate may be facsimiles. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in summary,
all of the powers, designations, preferences, and rights, and the limitations or
restrictions of the shares authorized to be issued or shall, except as otherwise
required by law, set forth on the face or back a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional, or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated stock, the
corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
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SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chief Executive Officer, the
President, the Secretary or the Chief Financial Officer, or such other person as
may be authorized by the Board of Directors, and the corporate seal impressed
thereon or a facsimile of such seal imprinted thereon and attested by the
signature of the Secretary or an Assistant Secretary, or the Chief Financial
Officer or Assistant Financial Officer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond,
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debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Chief Financial Officer or the Controller or Assistant
Controller of the corporation or such other person as may be authorized by the
Board of Directors, or bear imprinted thereon the facsimile signature of such
person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
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(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, prior to the final disposition of the
proceeding, promptly following request therefor, all expenses incurred by any
director or executive officer in connection with such proceeding upon receipt of
an undertaking by or on behalf of such person to repay said amounts if it should
be determined ultimately that such person is not entitled to be indemnified
under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance shall be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such officer is or
was a director of the corporation in which event this paragraph shall not apply)
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to the proceeding, or (ii) if such quorum is not obtainable,
or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, that the facts known to the
decision-making party at the time such determination is made demonstrate clearly
and convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
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enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct. In any suit
brought by a director or executive officer to enforce a right to indemnification
or to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise shall be on the
corporation.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Bylaw shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
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(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) Certain Definitions. For the purposes of this Bylaw, the
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed
and shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving
of testimony in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.
(ii) The term "expenses" shall be broadly construed
and shall include, without limitation, court costs, attorneys' fees,
witness fees, fines, amounts paid in settlement or judgment and any other
costs and expenses of any nature or kind incurred in connection with any
proceeding.
(iii) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, and employees or
agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request
of such constituent corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence
had continued.
(iv) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
(v) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the
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corporation" shall include any service as a director, officer, employee or
agent of the corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and a person who acted in
good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
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ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
courier, facsimile, telex or telegram, except that such notice other than one
which is delivered personally shall be sent to such address as such director
shall have filed in writing with the Secretary, or, in the absence of such
filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail or
overnight courier, as above provided, shall be deemed to have been given as at
the time of mailing, and all notices given by facsimile, telex or telegram shall
be deemed to have been given as of the sending time recorded at time of
transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any
22
<PAGE>
action or meeting which shall be taken or held without notice to any such person
with whom communication is unlawful shall have the same force and effect as if
such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal the Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of
23
<PAGE>
the corporation. Nothing in these Bylaws shall be deemed to deny, limit or
restrict the powers of guaranty or warranty of the corporation at common law or
under any statute.
24
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I. OFFICES...........................................1
Section 1. Registered Office...............................1
Section 2. Other Offices...................................1
ARTICLE II. CORPORATE SEAL....................................1
Section 3. Corporate Seal..................................1
ARTICLE III. STOCKHOLDERS' MEETINGS............................1
Section 4. Place of Meetings...............................1
Section 5. Annual Meeting..................................1
Section 6. Special Meetings................................3
Section 7. Notice of Meetings..............................4
Section 8. Quorum..........................................4
Section 9. Adjournment and Notice of Adjourned Meetings....5
Section 10. Voting Rights...................................5
Section 11. Joint Owners of Stock...........................5
Section 12. List of Stockholders............................5
Section 13. Action Without Meeting..........................6
Section 14. Organization....................................6
ARTICLE IV. DIRECTORS.........................................7
Section 15. Number and Term of Office.......................7
Section 16. Powers..........................................7
Section 17. Classes of Directors............................7
Section 18. Vacancies.......................................7
Section 19. Resignation.....................................8
Section 20. Removal.........................................8
Section 21. Meetings........................................8
(a) Annual Meetings.................................8
(b) Regular Meetings................................8
(c) Special Meetings................................8
(d) Telephone Meetings..............................8
(e) Notice of Meetings..............................9
(f) Waiver of Notice................................9
Section 22. Quorum and Voting...............................9
Section 23. Action Without Meeting..........................9
</TABLE>
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 24. Fees and Compensation.......................... 9
Section 25. Committees.....................................10
(a) Executive Committee............................10
(b) Other Committees...............................10
(c) Term...........................................10
(d) Meetings.......................................11
Section 26. Organization...................................11
ARTICLE V. OFFICERS.........................................11
Section 27. Officers Designated............................11
Section 28. Tenure and Duties of Officers..................12
(a) General........................................12
(b) Duties of Chairman of the Board of Directors...12
(c) Duties of Chief Executive Officer..............12
(d) Duties of President............... ............12
(e) Duties of Vice Presidents......................12
(f) Duties of Secretary............................12
(g) Duties of Chief Financial Officer..............13
Section 29. Delegation of Authority........................13
Section 30. Resignations...................................13
Section 31. Removal........................................13
ARTICLE VI. EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION...........13
Section 32. Execution of Corporate Instruments.............13
Section 33. Voting of Securities Owned by the Corporation..14
ARTICLE VII. SHARES OF STOCK..................................14
ARTICLE VIII. OTHER SECURITIES OF THE CORPORATION..............16
ARTICLE IX. DIVIDENDS........................................17
ARTICLE X. FISCAL YEAR......................................17
ARTICLE XI. INDEMNIFICATION..................................17
ARTICLE XII. NOTICES...................................... ...20
ARTICLE XIII. AMENDMENTS.......................................22
ARTICLE XIV. LOANS TO OFFICERS................................22
</TABLE>
ii
<PAGE>
EXHIBIT 10.1
EVOLVING SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is effective as of the ___ day
of _____________, 199__, by and between EVOLVING SYSTEMS, INC., a Delaware
corporation (the "Company"), and _______________________ ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein.
NOW, THEREFORE, in consideration of Indemnitee's continued service to the
Company after the date hereof, the parties hereby agree as set forth below:
1. CERTAIN DEFINITIONS.
(a) "Change in Control" shall mean, and shall be deemed to have occurred
if, on or after the date of this Agreement, (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities (as
defined below), (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of related
transactions) all or substantially all of the Company's assets.
1.
<PAGE>
(b) "Claim" shall mean with respect to a Covered Event (as defined
below): any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other.
(c) References to the "Company" shall include, in addition to Evolving
Systems, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Evolving Systems,
Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including upon
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld), actually and reasonably incurred,
of any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgment in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
2.
<PAGE>
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company' s Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. INDEMNIFICATION.
(a) Indemnification of Expenses. Subject to the provisions of Section
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the foregoing,
in the event any Reviewing Party shall have determined (in a written opinion, in
any case in which Independent Legal Counsel is the Reviewing Party) that
Indemnitee is not entitled to be indemnified hereunder under applicable law, (i)
the Company shall have no further obligation under Section 2(a) to make any
payments to Indemnitee not made prior to such determination by such Reviewing
Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee
(who hereby agrees to reimburse the Company) for all Expenses theretofore paid
in indemnifying Indemnitee; provided, however, that if Indemnitee has commenced
or thereafter commences legal proceedings in a court of competent jurisdiction
to secure a determination that Indemnitee is entitled to be indemnified
hereunder under applicable law, any determination made by any Reviewing Party
that Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If
any Reviewing Party determines that Indemnitee substantively is not entitled to
be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's certificate of incorporation or bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the
3.
<PAGE>
Company (which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent Indemnitee would be entitled to be indemnified
hereunder under applicable law and the Company agrees to abide by such opinion.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
referred to above and to indemnify fully such counsel against any and all
expenses (including attorneys' fees), claims, liabilities and damages arising
out of or relating to this Agreement or its engagement pursuant hereto.
Notwithstanding any other provision of this Agreement, the Company shall not be
required to pay Expenses of more than one Independent Legal Counsel in
connection with all matters concerning a single Indemnitee, and such Independent
Legal Counsel shall be the Independent Legal Counsel for any or all other
Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee
shall provide a written statement setting forth in detail a reasonable objection
to such Independent Legal Counsel representing other Indemnitees.
(e) Mandatory Payment of Expenses. Notwithstanding any other provision of
this Agreement other than Section 10 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any Claim, Indemnitee
shall be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
3. EXPENSE ADVANCES.
(a) Obligation to Make Expense Advances. The Company shall make Expense
Advances to Indemnitee upon receipt of a written undertaking by or on behalf of
the Indemnitee to repay such amounts if it shall ultimately be determined that
the Indemnitee is not entitled to be indemnified therefor by the Company.
(b) Form of Undertaking. Any written undertaking by the Indemnitee to
repay any Expense Advances hereunder shall be unsecured and no interest shall be
charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree that
for the purposes of any Expense Advance for which Indemnitee has made written
demand to the Company in accordance with this Agreement, all Expenses included
in such Expense Advance that are certified by affidavit of Indemnitee's counsel
as being reasonable shall be presumed conclusively to be reasonable.
4. PROCEDURES FOR INDEMNIFICATION AND EXPENSE ADVANCES.
(a) Timing of Payments. All payments of Expenses (including without
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than twenty (20) business days
after such written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing within twenty-five (25) business days after receipt by Indemnitee of
notice of any Claim made against Indemnitee for which indemnification will or
could be sought under this Agreement. Notice to the Company shall be directed to
the Chief Executive Officer of the Company at the address shown on the signature
page of this Agreement (or such other address as the Company shall designate in
writing to Indemnitee). In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
4.
<PAGE>
(c) No Presumptions; Burden of Proof. For purposes of this Agreement, the
termination of any Claim by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company of
a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such Claim in accordance
with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently employed by
or on behalf of Indemnitee with respect to the same Claim; provided, however,
that (i) Indemnitee shall have the right to employ Indemnitee's separate counsel
in any such Claim at Indemnitee's expense and (ii) if (A) the employment of
separate counsel by Indemnitee has been previously authorized by the Company,
(B) Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.
5. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's certificate of incorporation, the Company's bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the
5.
<PAGE>
Company's certificate of incorporation, its bylaws, any other agreement, any
vote of stockholders or disinterested directors, the General Corporation Law of
the State of Delaware, or otherwise. The indemnification and the payment of
Expense Advances provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though subsequent thereto Indemnitee may have ceased to serve in such capacity.
6. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's certificate of
incorporation, bylaws or otherwise) of the amounts otherwise payable hereunder.
7. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of
this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in
certain instances, federal law or applicable public policy may prohibit the
Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. LIABILITY INSURANCE. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. EXCEPTIONS. Notwithstanding any other provision of this Agreement, the
Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses
resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law; provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense Advances
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's certificate of incorporation or bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law (relating to indemnification of officers, directors, employees
and agents; and insurance), regardless of
6.
<PAGE>
whether Indemnitee ultimately is determined to be entitled to such
indemnification or insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred
by the Indemnitee with respect to any action instituted (i) by Indemnitee to
enforce or interpret this Agreement, if a court having jurisdiction over such
action determines as provided in Section 13 that each of the material assertions
made by the Indemnitee as a basis for such action was not made in good faith or
was frivolous, or (ii) by or in the name of the Company to enforce or interpret
this Agreement, if a court having jurisdiction over such action determines as
provided in Section 13 that each of the material defenses asserted by Indemnitee
in such action was made in bad faith or was frivolous.
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute; provided, however, that
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligation to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having jurisdiction over the Claim shall have
made a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that Indemnitee has violated said statute.
(e) Payment under Insurance Policy. To indemnify Indemnitee for payment
which actually is made to Indemnitee under a valid and collectible insurance
policy, except in respect of any excess beyond payment under such insurance.
11. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall constitute an original.
12. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors, assigns (including any direct or indirect successor
by purchase, merger, consolidation or otherwise to all or substantially all of
the business or assets of the Company), spouses, heirs and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect, and whether by purchase, merger, consolidation or otherwise)
to all, substantially all, or a substantial part, of the business or assets of
the Company, by written agreement in form and substance satisfactory to
Indemnitee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary (as applicable) of the Company or of any other
enterprise at the Company's request.
13. EXPENSES INCURRED IN ACTION RELATING TO ENFORCEMENT OR INTERPRETATION. In
the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action),
7.
<PAGE>
unless as a part of such action a court having jurisdiction over such action
makes a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that each of the material defenses asserted by
Indemnitee in such action was made in bad faith or was frivolous; provided,
however, that until such final judicial determination is made, Indemnitee shall
be entitled under Section 3 to receive payment of Expense Advances hereunder
with respect to such action.
14. NOTICE. All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered by
hand and signed for by the party addressed, on the date of such delivery, or
(ii) if mailed by domestic certified or registered mail with postage prepaid, on
the third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement or as subsequently
modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. SEVERABILITY. The provisions of this Agreement shall be severable in the
event that any of the provisions hereof (including any provision within a single
section, paragraph or sentence) are held by a court of competent jurisdiction to
be invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including without
limitation each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
17. CHOICE OF LAW. This Agreement, and all rights, remedies, liabilities,
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.
18. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this
Agreement shall not be exclusive of any other right Indemnitee might have or
hereafter acquire under any statute, provision of the
8.
<PAGE>
Company's certificate of incorporation or bylaws, agreement, vote of
stockholders or directors, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding office.
23. HEADINGS. The headings of the Sections are inserted for convenience only
and shall not be deemed to constitute part of this Agreement or to affect the
construction hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
9.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
EVOLVING SYSTEMS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address: Evolving Systems, Inc.
6892 South Yosemite
Englewood, CO 80155
AGREED TO AND ACCEPTED
Indemnitee
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
10.
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Indemnitee Title
================================================================================
<S> <C>
George A. Hallenbeck Chairman of the Board of Directors
- --------------------------------------------------------------------------------
J. Richard Abramson President, Chief Executive Officer and Director
- --------------------------------------------------------------------------------
Jeffrey J. Finn Senior Vice President and General Manager of Product
Development and Distribution
- --------------------------------------------------------------------------------
James M. Ross Senior Vice President and General Manager of Services
- --------------------------------------------------------------------------------
David J. Molny Vice President, Chief Technical Officer and Director
- --------------------------------------------------------------------------------
Roger A. Barnes Senior Vice President of Finance, Chief Financial
Officer, and Assistant Secretary
- --------------------------------------------------------------------------------
Terry Porter Vice President of Sales and Sales Support
- --------------------------------------------------------------------------------
Anita T. Moseley Vice President of Legal Services, General Counsel and
Secretary
- --------------------------------------------------------------------------------
Marilu C. Crosby Vice President of Human Resources
- --------------------------------------------------------------------------------
Robert M. Gahan Vice President of Corporate Development
- --------------------------------------------------------------------------------
Donald R. Dixon Director
- --------------------------------------------------------------------------------
Harry B. Fair Director
- --------------------------------------------------------------------------------
Robert J. Loarie Director
================================================================================
</TABLE>
Board Minutes, December 16, 1997 11 Confidential
<PAGE>
Exhibit 10.3
EVOLVING SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED DECEMBER 16, 1997
1. GRANT; OFFERING DATE.
(A) The Board of Directors of EVOLVING SYSTEMS, INC. (the "Company"),
pursuant to the Company's Employee Stock Purchase Plan (the "Plan"), hereby
authorizes the grant of rights to purchase shares of the common stock of the
Company ("Common Stock") to all Eligible Employees (an "Offering"). Subject to
earlier termination in accordance with subsection 1(b) below, THE FIRST OFFERING
SHALL COMMENCE ON THE EFFECTIVE DATE OF THE INITIAL PUBLIC OFFERING OF THE
COMPANY'S COMMON STOCK AND END ON JUNE 30, 1998 (the "Initial Offering").
Thereafter, an Offering shall begin on every July 1 and January 1 until revised
or terminated by the Board, beginning with July 1, 1998, and each such Offering
shall end on the day prior to the next Offering Date. The first day of an
Offering is that Offering's "Offering Date." If an Offering Date does not fall
on a day during which the Common Stock is actively traded, then the Offering
Date shall be the next succeeding day during which the Common Stock is actively
traded.
(B) Notwithstanding anything to the contrary, in the event that the fair
market value of a share of Common Stock on any Purchase Date (as defined herein)
during an Offering is less than the fair market value on the Offering Date of
the Offering, then following the purchase of Common Stock on such Purchase Date
(i) the Offering shall terminate, (ii) a new Offering shall commence on the day
following the Purchase Date that shall extend for two (2) years, and (iii)
participants shall automatically be enrolled in the new Offering.
(C) Prior to the commencement of any Offering, the Board of Directors (or
the Committee described in subparagraph 2(c) of the Plan, if any) may change any
or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
2. ELIGIBLE EMPLOYEES.
(D) All employees of the Company and each of its Affiliates (as defined in
the Plan) incorporated in the United States, shall be granted rights to purchase
Common Stock under each Offering on the Offering Date of such Offering, provided
that each such employee otherwise meets the employment requirements of
subparagraph 5(a) of the Plan (an "Eligible Employee"). Notwithstanding the
foregoing, the following employees shall not be Eligible Employees or be granted
rights under an Offering: (i) part-time or seasonal employees whose customary
employment is less than 20 hours per week or 5 months per calendar year or (ii)
5% stockholders (including ownership through unexercised options) described in
subparagraph 5(c) of the Plan.
(E) Each person who first becomes an Eligible Employee during any Offering,
receive a right under such Offering, which right shall thereafter be deemed to
be a part of the Offering. Such right shall have the same characteristics as
any rights originally granted under the Offering except that:
(I) the date on which such right is granted (i.e., the date an
employee first becomes eligible to commence participation in the Plan) shall be
the "Offering Date" of such right for all purposes, including determination of
the exercise price of such right; and
1.
<PAGE>
(II) the Offering for such right shall begin on its Offering Date and
end coincident with the end of the ongoing Offering.
3. RIGHTS.
(F) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Eligible Employee's Earnings paid during such Offering after the Eligible
Employee first commences participation; provided, however, that no employee may
purchase Common Stock on a particular Purchase Date that would result in more
than fifteen percent (15%) of such employee's Earnings in the period from the
Offering Date to such Purchase Date having been applied to purchase shares under
all ongoing Offerings under the Plan and all other Company plans intended to
qualify as "employee stock purchase plans" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). For this Offering, "Earnings"
means the total compensation paid to an employee, including all salary, wages
(including amounts elected to be deferred by the employee, that would otherwise
have been paid, under any cash or deferred arrangement established by the
Company), variable pay, overtime pay, commissions, bonuses, and other
remuneration paid directly to the employee, but excluding profit sharing, the
cost of employee benefits paid for by the Company, education or tuition
reimbursements, imputed income arising under any Company group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company under any employee benefit plan, and similar items of compensation.
(G) Notwithstanding the foregoing, the maximum number of shares of Common
Stock an Eligible Employee may purchase on any Purchase Date in an Offering
shall be such number of shares as has a fair market value (determined as of the
Offering Date for such Offering) equal to (x) $25,000 multiplied by the number
of calendar years in which the right under such Offering has been outstanding at
any time, minus (y) the fair market value of any other shares of Common Stock
(determined as of the relevant Offering Date with respect to such shares) which,
for purposes of the limitation of Section 423(b)(8) of the Code, are attributed
to any of such calendar years in which the right is outstanding. The amount in
clause (y) of the previous sentence shall be determined in accordance with
regulations applicable under Section 423(b)(8) of the Code based on (i) the
number of shares previously purchased with respect to such calendar years
pursuant to such Offering or any other Offering under the Plan, or pursuant to
any other Company plans intended to qualify as "employee stock purchase plans"
under Section 423 of the Code, and (ii) the number of shares subject to other
rights outstanding on the Offering Date for such Offering pursuant to the Plan
or any other such Company plan.
(H) The maximum aggregate number of shares available to be purchased by all
Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date (or eighty-five percent (85%) of the fair market value of
the Common Stock on the first day on which the Company's Common Stock is
actively traded that immediately follows the Offering Date if an Offering Date
does not fall on a day during which the Company's Common Stock is actively
traded) or eighty-five percent (85%) of the fair market value of the Common
Stock on the Purchase Date (or eighty-five percent (85%) of the fair market
value of the Common Stock on the first day on which the Company's Common Stock
is actively traded that immediately precedes the Purchase Date if a Purchase
Date does not fall on a day during which the Company's Common Stock is actively
traded), in each case rounded up to the nearest whole cent per share.
2.
<PAGE>
5. PARTICIPATION.
(I) An Eligible Employee may elect to participate in an Offering at the
beginning of any Offering. An Eligible Employee shall become a participant in
an Offering by delivering an agreement authorizing payroll deductions. Such
deductions may be in whole dollars or whole percentages not to exceed fifteen
percent (15%) of Earnings. A participant may not make additional payments into
his or her account. The agreement shall be made on such enrollment form as the
Company provides, and must be delivered to the Company before the date of
participation to be effective for such Offering, as determined by the Company
and communicated to Eligible Employees.
(J) A participant may increase or reduce (including to zero) his or her
participation level effective as of the beginning of any Offering. Any such
change in participation shall be made by delivering a notice to the Company or a
designated Affiliate in such form and at such time as the Company provides. In
addition, a participant may change his or her deductions prior to the beginning
of a new Offering to be effective at the beginning of such new Offering. A
participant may withdraw from an Offering and receive his or her accumulated
payroll deductions from the Offering (reduced to the extent, if any, such
deductions have been used to acquire Common Stock for the participant on any
prior Purchase Dates), without interest, at any time prior to the end of the
Offering, excluding only each ten (10) day period immediately preceding a
Purchase Date (or such shorter period of time determined by the Company and
communicated to participants), by delivering a withdrawal notice to the Company
in such form as the Company provides. A participant who has withdrawn from an
Offering shall not be entitled to again participate in such Offering, but may
participate in other Offerings under the Plan by submitting a new participation
agreement in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as each June 30 and December 31 (except that December 31,
1997 shall not constitute a Purchase Date). If a Purchase Date does not fall on
a day during which the Common Stock is actively traded then the Purchase Date
shall be the nearest prior day on which the Common Stock is actively traded.
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a tax-
qualified employee stock purchase plan under Section 423 of the Code.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and
3.
<PAGE>
regulations which may from time to time be promulgated and adopted pursuant to
the Plan), the provisions of the Plan shall control.
4.
<PAGE>
EVOLVING SYSTEMS, INC.
----------------------
EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 16, 1997
APPROVED BY THE STOCKHOLDERS ON ________________, 1997
1. PURPOSE.
(A) The purpose of this Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of EVOLVING SYSTEMS, INC., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(B) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(C) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(D) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(E) The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors (the "Board") of the Company. The
Committee shall have, in connection with the administration of the Plan, all
powers possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. Notwithstanding anything to the foregoing, the Board shall
have full power and authority to take any action that may be taken by the
Committee hereunder.
(F) The Board or the Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(I) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(II) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(III) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board or the Committee, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(IV) To amend the Plan as provided in paragraph 13.
1.
<PAGE>
(V) Generally, to exercise such powers and to perform such acts as the
Board or the Committee deems necessary or expedient to promote the best
interests of the Company and its Affiliates and to carry out the intent that the
Plan be treated as an "employee stock purchase plan" within the meaning of
Section 423 of the Code.
3. SHARES SUBJECT TO THE PLAN.
(G) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate FIVE HUNDRED THOUSAND (500,000)
shares of the Company's common stock (the "Common Stock"). If any right granted
under the Plan shall for any reason terminate without having been exercised, the
Common Stock not purchased under such right shall again become available for the
Plan.
(H) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 5 through 8, inclusive.
5. ELIGIBILITY.
(I) Rights may be granted only to employees of the Company or, as the Board
or the Committee may designate as provided in subparagraph 2(b), to employees of
any Affiliate of the Company. Except as provided in subparagraph 5(b), an
employee of the Company or any Affiliate shall not be eligible to be granted
rights under the Plan unless, on the Offering Date, such employee has been in
the employ of the Company or any Affiliate for such continuous period preceding
such grant as the Board or the Committee may require, but in no event shall the
required period of continuous employment be equal to or greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(J) The Board or the Committee may provide that each person who, during the
course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(VI) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
2.
<PAGE>
(VII) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(VIII) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.
(K) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of
this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
(L) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
(M) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board or
the Committee may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(N) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding fifteen percent (15%) of such
employee's Earnings (as defined in subparagraph 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. The Board
or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(O) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(P) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(IX) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
3.
<PAGE>
(X) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(Q) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as an employee's regular salary or wages
(including amounts thereof elected to be deferred by the employee, that would
otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), and may include, if determined by the Board or the Committee and set
forth in the terms of the Offering, all of the following items of compensation:
bonuses, commissions, overtime pay, incentive pay, profit sharing, or other
remuneration (excluding fringe benefits) paid directly to the employee.
Notwithstanding the foregoing, Earnings shall not include the cost of employee
benefits paid for by the Company or an Affiliate, education or tuition
reimbursements, imputed income arising under any group insurance or benefit
program, traveling expenses, business and moving expense reimbursements, income
received in connection with stock options, contributions made by the Company or
an Affiliate under any employee benefit plan, and similar items of compensation,
as determined by the Board or the Committee. The payroll deductions made for
each participant shall be credited to an account for such participant under the
Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(R) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board or the Committee in the Offering. Upon such
withdrawal from the Offering by a participant, the Company shall distribute to
such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's right
to acquire Common Stock under that Offering shall be automatically terminated.
A participant's withdrawal from an Offering will have no effect upon such
participant's eligibility to participate in any other Offerings under the Plan
but such participant will be required to deliver a new participation agreement
in order to participate in subsequent Offerings under the Plan.
(S) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of a participant's employment with the Company and
any designated Affiliate, for any reason, and the Company shall distribute to
such terminated employee all of his or her accumulated payroll deductions
(reduced to the extent, if any, such deductions have been used to acquire stock
for the terminated employee), under the Offering, without interest.
(T) Rights granted under the Plan shall not be transferable by a
participant other than by will or the laws of descent and distribution, or by a
beneficiary designation as provided in paragraph 14, and during a participant's
lifetime, shall be exercisable only by such participant.
4.
<PAGE>
8. EXERCISE.
(U) On each Purchase Date specified in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. Unless
otherwise provided for in the applicable Offering, no fractional shares shall be
issued upon the exercise of rights granted under the Plan. The amount, if any,
of accumulated payroll deductions remaining in each participant's account after
the purchase of shares which is less than the amount required to purchase one
share of stock on the final Purchase Date of an Offering shall be held in each
such participant's account for the purchase of shares under the next Offering
under the Plan, unless such participant withdraws from such next Offering, as
provided in subparagraph 7(b), or is no longer eligible to be granted rights
under the Plan, as provided in paragraph 5, in which case such amount shall be
distributed to the participant after such final Purchase Date, without interest.
The amount, if any, of accumulated payroll deductions remaining in any
participant's account on the final Purchase Date of an Offering after the
purchase of shares which is equal to or in excess of the value of one whole
share of common stock shall be distributed in full to the participant after such
Purchase Date, without interest.
(V) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(W) During the terms of the rights granted under the Plan, the Company
shall at all times keep available as authorized but unissued shares that number
of shares of stock required to satisfy such rights.
(X) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock to participants pursuant to rights granted
under the Plan shall constitute general funds of the Company.
5.
<PAGE>
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shares acquired upon exercise
of rights hereunder are recorded in the books of the Company (or its transfer
agent).
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(Y) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(Z) In the event of: (1) a dissolution or liquidation of the Company; (2)
a merger or consolidation in which the Company is not the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise; or (4) the acquisition by any person,
entity or group within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, as determined by the Board in its
sole discretion (i) any surviving or acquiring corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(AA) The Board or the Committee at any time, and from time to time, may
amend the Plan. However, except as provided in paragraph 12 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company within twelve (12) months before or
after the adoption of the amendment if such amendment requires stockholder
approval in order for the Plan to obtain employee stock purchase plan treatment
under Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act.
(BB) The Board or the Committee may amend the Plan in any respect the Board
or the Committee deems necessary or advisable to provide eligible employees with
the maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder relating to employee stock purchase
plans and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(CC) Rights and obligations under any rights granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or
6.
<PAGE>
except as necessary to ensure that the Plan and/or rights granted under the Plan
comply with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(DD) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(EE) Such designation of beneficiary may be changed by the participant at
any time by written notice in the form prescribed by the Company. In the event
of the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its sole discretion, may deliver such shares and/or cash to the spouse or to
any one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(FF) The Board or the Committee in its discretion, may suspend or terminate
the Plan at any time. No rights may be granted under the Plan while the Plan is
suspended or after it is terminated.
(GG) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon adoption by the Board (the "Effective
Date"), but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the Board, which date may
be prior to the Effective Date.
7.
<PAGE>
EXHIBIT 10.4
EVOLVING SYSTEMS, INC.
Note And Warrant Purchase Agreement
MAY 31, 1996
<PAGE>
<TABLE>
<S> <C>
1 AMOUNT AND TERMS OF THE LOAN; PURCHASE AND SALE OF WARRANTS......... 1
1.1 The Loan.................................................... 1
1.2 Purchase and Sale of Warrants............................... 1
2 CLOSING............................................................. 1
2.1 Closing Date................................................ 1
2.2 Delivery.................................................... 1
3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................... 2
3.1 Organization and Standing; Articles and Bylaws.............. 2
3.2 Corporate Power............................................. 2
3.3 Subsidiaries................................................ 2
3.4 Capitalization.............................................. 2
3.5 Authorization............................................... 3
3.6 Financial Statements........................................ 3
3.7 Title to Properties and Assets; Liens....................... 3
3.8 No Changes.................................................. 4
3.9 Compliance with Other Instruments........................... 4
3.10 Litigation.................................................. 4
3.11 Governmental Consents....................................... 4
3.12 Disclosure.................................................. 5
3.13 Material Contracts and Commitments.......................... 5
3.14 Tax Returns and Payments.................................... 5
3.15 Registration Rights......................................... 5
3.16 Contracts................................................... 5
3.17 Broker's Fees............................................... 5
3.18 Enforceability.............................................. 5
3.19 Approvals................................................... 6
3.20 No Violation or Default..................................... 6
3.21 Intellectual Property....................................... 6
3.22 Governmental Permits........................................ 7
3.23 No Agreements to Sell Assets or Merge....................... 7
3.24 Employee Benefit Plans...................................... 7
3.25 Other Regulations........................................... 8
3.26 Solvency, etc............................................... 8
3.27 Catastrophic Events; Labor Disputes......................... 9
3.28 Certain Agreements of Officers, Employees and Consultants... 9
3.29 Contracts or Commitments; Indebtedness...................... 9
3.30 Transactions with Affiliates; Investments................... 9
4 REPRESENTATIONS AND WARRANTIES OF THE LENDERS....................... 10
4.1 Purchase for Own Account.................................... 10
4.2 Information and Sophistication.............................. 10
4.3 Ability to Bear Economic Risk............................... 10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.4 Restricted Securities; Limitation on Disposition............ 10
4.5 Brokerage................................................... 11
4.6 Reliance.................................................... 11
5 CONDITIONS TO CLOSING............................................... 11
5.1 Representations and Warranties True......................... 11
5.2 Authorization; Reservation of Shares........................ 11
5.3 Registration Rights Agreement............................... 12
5.4 Minimum Investment.......................................... 12
5.5 Stock Transfer.............................................. 12
5.6 Opinion..................................................... 12
5.7 Amendment to Certificate.................................... 12
5.8 Amendment to Bylaws......................................... 12
5.9 Merrill Lynch............................................... 12
5.10 Audit and Compensation Committee............................ 12
6 MISCELLANEOUS....................................................... 12
6.1 Binding Agreement........................................... 12
6.2 Governing Law............................................... 13
6.3 Counterparts................................................ 13
6.4 Titles and Subtitles........................................ 13
6.5 Notices..................................................... 13
6.6 Expenses.................................................... 13
6.7 Modification; Waiver........................................ 13
</TABLE>
SCHEDULE OF LENDERS
EXHIBIT A
Form of Senior Subordinated Promissory Note
EXHIBIT B
Form of Warrant to Purchase Non-Voting Common Stock
EXHIBIT C
Amended and Restated Certificate of Incorporation
EXHIBIT D
Amended and Restated Bylaws
EXHIBIT E
Registration Rights Agreement
EXHIBIT F
Proprietary Information Agreement
EXHIBIT G
ii
<PAGE>
Opinion of Cooley Godward Castro Huddleson & Tatum
iii
<PAGE>
EVOLVING SYSTEMS, INC.
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT (the "AGREEMENT") is made as of
the 31st day of May, 1996, by and among EVOLVING SYSTEMS, INC., a Delaware
corporation (the "COMPANY"), and the entities named on the Schedule of Lenders
attached hereto (individually, a "LENDER" and collectively, the "Lenders").
The parties hereby agree as follows:
1 AMOUNT AND TERMS OF THE LOAN; PURCHASE AND SALE OF WARRANTS
1.1 THE LOAN. Subject to the terms of this Agreement the Company shall
borrow from each Lender and each Lender shall lend to the Company the amount set
forth opposite such Lender's name on the Schedule of Lenders (the "LOAN AMOUNT")
pursuant to a senior subordinated promissory note in the form attached hereto as
Exhibit A (the "NOTE" or collectively, the "Notes"). The Loan Amounts are
hereinafter referred to collectively as the "LOAN."
1.2 PURCHASE AND SALE OF WARRANTS. Subject to the terms of this
Agreement, the Company will issue and sell to each Lender and each Lender will
purchase, at a price of one cent ($.01) per warrant, warrants to purchase the
number of shares of Non-Voting Common Stock of the Company, set forth opposite
such Lender's name on the Schedule of Lenders (the "WARRANT AMOUNT") for an
aggregate of four hundred eighty-five thousand three hundred thirty-three
(485,333) shares of Non-Voting Common Stock. Such warrants shall be in the form
of Exhibit B hereto (individually, a "WARRANT" and collectively, the "WARRANTS")
and shall be exercisable at an exercise price (subject to adjustment as set
forth in the Warrant) of one dollar twenty cents ($1.20).
2 CLOSING
2.1 CLOSING DATE. The closing (the "CLOSING") hereunder shall be held at
10:00 a.m. at the offices of Cooley Godward Castro Huddleson & Tatum, 2595
Canyon Blvd., Suite 250, Boulder, Colorado 80302 on May 29, 1996 (the "CLOSING
DATE") or such other date and time as the Company and the Lenders shall agree;
provided, however, that the Closing Date shall be no later than May 31, 1996.
2.2 DELIVERY. At the Closing (i) each Lender will deliver to the Company
wire transfer funds in the amount of its Loan Amount; and (ii) the Company shall
deliver to each Lender a Note representing such Lender's Loan Amount and a
Warrant representing such Lender's Warrant Amount.
1.
<PAGE>
3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Schedule of Exceptions attached hereto, the
Company hereby represents and warrants to each Lender in consideration of the
Lender's purchase from the Company of the Warrants and Notes and Lender's
purchase from the Transferors under the Stock Transfer Agreement of even date
herewith of 1,337 shares of Series A Preferred Stock at a price of $5,000 per
share as follows:
3.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. The Company is a
corporation duly organized and existing under, and by virtue of, the laws of the
State of Delaware and is in good standing under such laws. The Company has the
requisite corporate power to own and operate its properties and assets and to
carry on its business as presently conducted and as proposed to be conducted.
The Company is qualified to do business as a foreign corporation in Colorado,
and no other qualification is presently required. The Company has furnished the
Lenders with copies of its Amended and Restated Certificate of Incorporation and
its Bylaws, as amended, attached hereto as Exhibits C and D. Said copies are
true, correct, and complete and contain all amendments through the Closing Date.
3.2 CORPORATE POWER. The Company will have at the Closing Date all
requisite corporate power to execute and deliver this Agreement and the
Registration Rights Agreement and to carry out and perform its obligations under
the terms of this Agreement and the Registration Rights Agreement.
3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies
and does not otherwise own or control, directly or indirectly, any other
corporation, association or business entity.
3.4 CAPITALIZATION. The authorized capital stock of the Company consists
of 10,000,000 shares of Common Stock, of which 2,420,000 shares are designated
as Non-Voting Common Stock, of which 1,020,000 shares are issued and
outstanding, and 1,508,160 shares of Preferred Stock, of which 8,160 shares have
been designated as Series A Preferred Stock (the "SERIES A PREFERRED") and 8,160
of which are issued and outstanding. All such issued and outstanding shares
have been duly authorized, have been validly issued, and are fully paid and
nonassessable. The Company has reserved 485,333 shares of Non-Voting Common
Stock for issuance upon exercise of the Warrants (the "WARRANT SHARES") and
500,000 shares of Non-Voting Common Stock for issuance to employees, consultants
and directors of the Company pursuant to the Company's 1996 Stock Option Plan
(the "PLAN") as may be determined by the Company's Board of Directors from time
to time (the "OPTION SHARES"), of which 272,417 shares are available for future
option grants. The Company has reserved 4,080,000 shares of voting Common Stock
for issuance upon conversion of the Series A Preferred, 1,020,000 shares of
voting Common Stock for issuance upon conversion of the Non-Voting Common Stock,
485,333 shares of voting Common Stock for conversion of the Warrant Shares and
500,000 shares of voting Common Stock for conversion of the Option Shares. The
Series A Preferred will have at the Closing the rights, preferences, privileges
and restrictions set forth in the Company's Amended and Restated Certificate of
Incorporation. There are no options, warrants,
2.
<PAGE>
conversion privileges or other rights presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of capital stock or other
securities of the Company except for (i) the Warrants, (ii) rights created under
this Agreement and the Registration Rights Agreement, (iii) conversion
privileges with respect to the Series A Preferred, Non-Voting Common Stock, the
Warrant Shares and Option Shares, (v) the rights of first refusal contained in
the Registration Rights Agreement, and (vi) rights under the Plan. All
outstanding shares of Common Stock and Series A Preferred were issued in
compliance with all federal and state securities laws.
3.5 AUTHORIZATION. All corporate action on the part of the Company, its
directors and its stockholders necessary for the authorization, execution,
delivery and performance of this Agreement and the Registration Rights Agreement
by the Company and the performance of the Company's obligations hereunder and
thereunder, including the issuance and delivery of the Notes and Warrants and
the reservation of the Non-Voting Common Stock issuable upon exercise of the
Warrants has been taken or will be taken prior to the Closing. This Agreement,
the Registration Rights Agreement, the Notes and the Warrants, when executed and
delivered by the Company, shall constitute valid and binding obligations of the
Company enforceable in accordance with their terms, subject to laws of general
application relating to bankruptcy, insolvency, the relief of debtors and, with
respect to rights to indemnity, subject to federal and state securities laws.
The Non-Voting Common Stock, when issued in compliance with the provisions of
this Agreement, the Registration Rights Agreement and the Warrants, will be
validly issued, fully paid and nonassessable and free of any liens or
encumbrances; provided, however, that the Non-Voting Common Stock may be subject
to restrictions on transfer under state and/or federal securities laws.
3.6 FINANCIAL STATEMENTS. The Company has previously furnished to the
Lenders (i) its audited balance sheet at December 31, 1995, and an audited
statement of operations, statement of stockholders' equity, and statement of
changes in financial position for the fiscal year ended December 31, 1995, (the
"YEAR-END FINANCIAL STATEMENTS"), and (ii) its unaudited balance sheets at
January 31, 1996, February 29, 1996, March 31, 1996 and April 30, 1996 and
unaudited statement of operations for the months ending January 31, 1996,
February 29, 1996, March 31, 1996 and April 30, 1996 (the "INTERIM FINANCIAL
STATEMENTS"). The Year-End Financial Statements and Interim Financial
Statements (collectively, the "FINANCIAL STATEMENTS") were prepared in
accordance with generally accepted accounting principles applied on consistent
basis, are complete and correct in all material respects and fairly present the
financial condition and the results of operations of the Company, except that
the Interim Financial Statements do not contain footnotes and are subject to
year-end audit adjustments, which are not expected to be material.
3.7 TITLE TO PROPERTIES AND ASSETS; LIENS. The Company has good and
marketable title to its properties and assets that are material to its business
as currently operated and all its leasehold interests are in full force and
effect, in each case subject to no mortgage, pledge, lien, lease, encumbrance or
charge, other than (i) the lien of current taxes not yet due and payable, (ii)
possible minor liens on real property and encumbrances that do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the
3.
<PAGE>
Company, and that have not arisen other than in the ordinary course of business,
and (iii) except as set forth on the Schedule of Exceptions.
3.8 NO CHANGES. Since April 30, 1996, there has not been any event or
condition of any type that could have been known to the Company after due
investigation that has, or could reasonably be expected to have, materially and
adversely affected the Company's business, prospects, condition, affairs,
operations, properties or assets, except as disclosed to the Lenders.
3.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not, and will not
be by virtue of entering into and performing this Agreement and the Registration
Rights Agreement and the transactions contemplated hereunder and thereunder, in
violation of any term of its Amended and Restated Certificate of Incorporation
or its Bylaws or in any material respect of any term or provision of any
material mortgage, indenture, contract, agreement, instrument, judgment or
decree. The Company is not, and will not be by virtue of entering into and
performing this Agreement or the Registration Rights Agreement and the
transactions contemplated hereunder, in violation of any order, statute, rule or
regulation applicable to the Company. The execution, delivery and performance of
and compliance with this Agreement and the Registration Rights Agreement and the
transactions contemplated hereunder and thereunder, including the issuance of
the Notes, the Warrants and the Non-Voting Common Stock issuable upon exercise
of the Warrants, have not resulted and will not result in any violation of or
conflict with or constitute a material default under any material agreement to
which the Company is a party, and have not resulted and will not result in the
creation of any material mortgage, pledge, lien, encumbrance or charge upon any
of the properties or assets of the Company; and there is no such violation or
default that materially and adversely affects the business of the Company or any
of its properties or assets.
3.10 LITIGATION. There are no actions, suits, proceedings or
investigations that are pending against the Company or its properties before any
court or governmental agency (nor, to the best of the Company's knowledge, is
there any basis therefor or threat thereof) that either in any case or in the
aggregate, (i) might result in any material adverse change in the business or
financial condition of the Company or any of its properties or assets, (ii)
might result in any material impairment of the right or ability of the Company
to carry on its business as now conducted or as proposed to be conducted, (iii)
might result in any material liability on the part of the Company, or (iv)
questions the validity of this Agreement or the Registration Rights Agreement or
any action taken or to be taken in connection herewith or therewith. There are
no actions, suits, proceedings or investigations of which the Company is aware,
after reasonable inquiry, against any employee of the Company brought by a
former employer (nor, to the best of the Company's knowledge, is there any basis
therefor of threat thereof).
3.11 GOVERNMENTAL CONSENTS. Based in part on the representations of the
Lenders in Section 4, the offer, sale and issuance of the Notes and Warrants in
conformity with the terms of this Agreement are exempt from the registration
requirements of the Securities Act of 1933, as amended (the "ACT") and will be
in compliance with applicable state securities laws.
4.
<PAGE>
3.12 DISCLOSURE. No representation or warranty of the Company contained in
this Agreement or in any written statement or certificate furnished or to be
furnished to the Lenders pursuant hereto or in connection with the transactions
contemplated hereby (when read together) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances under which they
were made.
3.13 MATERIAL CONTRACTS AND COMMITMENTS. All the material contracts,
agreements and instruments to which the Company is a party are valid, binding
and in full force and effect in all material respects.
3.14 TAX RETURNS AND PAYMENTS. The Company has filed all tax returns and
reports as required by law or obtained extensions to such filing requirements.
These returns and reports are true and correct in all material respects. The
Company has paid all taxes and other assessments due. The provision for taxes
of the Company as shown in the Financial Statements is adequate for taxes due or
accrued as of the date thereof.
3.15 REGISTRATION RIGHTS. Except as provided in the Registration Rights
Agreement, the form of which is attached hereto as Exhibit E (the "REGISTRATION
RIGHTS AGREEMENT"), to be entered into at the Closing, the Company is not under
any obligation to register under the Act any of its presently outstanding
securities or any of its securities which may hereafter be issued.
3.16 CONTRACTS. The Company has no fixed price contracts in excess of
$250,000 on which the revenues are expected to be less than the costs.
3.17 BROKER'S FEES. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company except for the amounts owed to The Wallach Company, the cost of
which will be borne by the Company.
3.18 ENFORCEABILITY.
(A) The Agreement, the Registration Rights Agreement and the Notes
have been, or will be, duly executed and delivered by the Company and
constitute, or will constitute, a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution may be limited by applicable laws and
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to general equity principles and to limitations
on availability of equitable relief, including specific performance.
(B) The Warrants have been, or will be, duly executed and delivered
by the Company and constitute, or will constitute, a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as rights to indemnity and contribution may be limited by
applicable laws and except as enforceability may be subject to or limited by:
(a) applicable bankruptcy, insolvency, reorganization, arrangement, moratorium
or
5.
<PAGE>
other similar laws affecting creditors' rights; (b) general equity principles
and to limitations on availability of equitable relief, including specific
performance; (c) limitations on the Company's ability to waive rights or
benefits given by statute or otherwise; and (d) any other limitations, which in
the event of a default by the Company in its obligations under the Agreement and
the Notes would act as a limitation on the rights of the Lenders, each in
accordance with Colorado law.
3.19 APPROVALS. No consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority or other
Person (including, without limitation, the stockholders of any Person) is
required in connection with the execution and delivery of the Agreement, the
Registration Rights Agreement, Notes and Warrants and the performance and
consummation of the transactions contemplated thereby.
3.20 NO VIOLATION OR DEFAULT. The Company is not in violation of or in
default with respect to (i) its Certificate of Incorporation or Bylaws or any
material judgment, order, writ, decree, statute, rule or regulation applicable
to such Person; (ii) any material mortgage, indenture, agreement, instrument or
contract to which such Person is a party or by which it is bound (nor is there
any waiver in effect which, if not in effect, would result in such a violation
or default), where, in each case, such violation or default, individually, or
together with all such violations or defaults, could reasonably be expected to
have a material adverse effect on the business, assets, operations, prospects or
financial or other condition of the company. Without limiting the generality of
the foregoing, the Company (A) has not violated any Environmental Laws (as
defined below), (B) has no liability under any Environmental Laws or (C) has not
received notice or other communication of an investigation or is under
investigation by any Governmental Authority having authority to enforce
Environmental Laws, where such violation, liability or investigation could
reasonably be expected to have a material adverse effect on the business,
assets, operations, prospects or financial or other condition of the Company.
For purposes of this Section 3.20, "ENVIRONMENTAL LAWS" means all judgments,
orders, writs, decrees, statutes, rules or regulations relating to the
protection of the environment, including, without limitation, all judgments,
orders, writs, decrees, statutes, rules or regulations, pertaining to reporting,
licensing, permitting, investigation and remediation of emissions, discharges,
releases or threatened releases of hazardous materials, chemical substances,
pollutants, contaminants or hazardous or toxic substances, materials or wastes
whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of chemical
substances, pollutants, contaminants or hazardous or toxic substances,
materials, or wastes, whether solid, liquid, or gaseous in nature, which after
the giving of notice or the lapse of time or both would constitute an Event of
Default, has occurred and is continuing.
3.21 INTELLECTUAL PROPERTY. The Company has sufficient and valid right,
title and ownership of all patents, trademarks, service marks, trade names,
copyrights, licenses, trade secrets, inventions and proprietary rights
(collectively, "INTELLECTUAL PROPERTIES"), or licenses, rights or purchase
options with respect to the foregoing, necessary for its business as now
conducted and as currently proposed to be conducted, or will be able to obtain
on terms which will not materially and adversely affect its business all such
necessary permits, licenses and other
6.
<PAGE>
authority with respect thereto without any conflict with or infringement of the
known or asserted rights of others. Item 3.21 of The Schedule of Exceptions,
contains a complete list of Intellectual Properties owned or used by the
Company. Neither the Company nor, to the Company's knowledge, any officer or
management, technical or professional employee of the Company is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would conflict with the Company's business as
conducted (or as proposed to be conducted) or, in the case of any such employee,
such employee's right to be employed by the Company. The Company does not
believe it is utilizing any inventions or proprietary ideas of any of its
employees (or persons it currently intends to hire) made prior to their
employment by the Company and which are known by the Company to be inventions of
such employees or persons. All of the officers and management, technical or
professional employees of the Company have executed an agreement containing
assignment of invention and confidentiality covenants substantially in the form
contained in the agreements attached hereto as Exhibit F; such agreements remain
in full force and effect; and, to the Company's knowledge, none of such officers
or management, technical or professional employees is in violation thereof.
3.22 GOVERNMENTAL PERMITS. The Company has obtained all governmental
permits, authorizations, approvals and licenses known by the Company to be
necessary for its business as now conducted and as currently proposed to be
conducted and the absence of which would have a material adverse effect on the
business, assets, operations, prospects or financial or other condition of the
Company.
3.23 NO AGREEMENTS TO SELL ASSETS OR MERGE. The Company does not have any
legal obligation, absolute or contingent, to any Person to sell the assets of
the Company (other than sales in the ordinary course of business), or to effect
any merger, consolidation or other reorganization of the Company or to enter
into any agreement with respect thereto.
3.24 EMPLOYEE BENEFIT PLANS.
(A) The Company maintains two defined contribution employee pension
plans as defined by Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended (as the same may be amended or supplemented, and including
any rules or regulations intended in connection therewith, "ERISA"). The Company
has no "ERISA Affiliate" which is treated as a single employer with the Company
under section 414 of the Internal Revenue Code of 1986, as amended (the "CODE").
Neither the Company nor any ERISA Affiliate has any liability with respect to
any post-retirement benefit under any Employee Benefit Plan which is a welfare
plan (as defined in section 3(I) of ERISA), other than liability for health plan
continuation coverage described in Part 6 of Title I(B) of ERISA, which
liability for health plan continuation coverage cannot reasonably be expected to
have a material adverse effect on the business, assets, operations, prospects or
financial or other condition of the company.
(B) To the best of the Company's knowledge, each Employee Benefit
Plan complies, in both form and operation, in all material respects, with its
terms, ERISA and the Code, and no condition exists or event has occurred with
respect to any such Employee Benefit
7.
<PAGE>
Plan which would result in the incurrence by either Company or any ERISA
Affiliate of any material liability, fine or penalty. Each Employee Benefit
Plan, related trust agreement, arrangement and commitment of Company or any
ERISA Affiliate is legally valid and binding and in full force and effect. No
Employee Benefit Plan is being audited or investigated by any governmental
authority or is subject to any pending or threatened claim or suit. Neither
Company nor any ERISA Affiliate nor any fiduciary of any Employee Benefit Plan
has engaged in a prohibited transaction under sections 406 or 407 of ERISA or
section 4975 of the Code (other than transactions which are otherwise exempt
under either Section 408 of ERISA or 4975(d) of the Code). The Company restated
its Money Purchase Pension Plan and 401(k) Plan effective March 1, 1996. On May
9, 1996, the Company submitted requests for determination letters respecting
both the Money Purchase Pension Plan and the 401(k) Plan to the Internal Revenue
Service, pursuant to Rev. Proc. 93-39. Such requests are currently pending. The
Company does not anticipate any material difficulties in securing appropriate
determination letters from the Internal Revenue Service regarding the Money
Purchase Pension Plan and the 401(k) Plan.
(C) Neither the Company nor any ERISA Affiliate (i) has incurred or
expects to incur any liability under Title IV of ERISA or Section 412 of the
Code, or (ii) contributes to any multiemployer plan within the meaning of ERISA
(a "MULTIEMPLOYER PLAN"). Neither the Company nor any ERISA Affiliate has
incurred any material liability (including secondary liability) to any
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan under section 4201 of ERISA or as a result of a sale of
assets described in section 4204 of ERISA. Neither Company nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in reorganization or
insolvent under and within the meaning of section 4241 or section 4245 of ERISA
or that any Multiemployer Plan intends to terminate or has been terminated under
section 4041A of ERISA.
3.25 OTHER REGULATIONS. The Company is not subject to regulation under the
Investment Company Act of 1940, the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Interstate Commerce Act, any state public utilities
code or to any federal or state statute or regulation limiting its ability to
incur Indebtedness.
3.26 SOLVENCY, ETC. The Company is Solvent (as defined below) and, after
the execution and delivery of the Agreement, Note and Warrants and the
consummation of the transactions contemplated thereby, Company will be Solvent.
"SOLVENT" shall mean that on such date (a) the fair value of the property of
such Person is greater than the fair value of the liabilities (including,
without limitation, contingent liabilities) of such Person, (b) the present fair
saleable value of the assets of such Person is not less than the amount that
will be required to pay the probable liability of such Person on its debts as
they become absolute and matured, (c) such Person does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature and (d) such Person is not
engaged in business or a transaction, and is not about in business or a
transaction, for which such Person's property would constitute an unreasonably
small capital.
8.
<PAGE>
3.27 CATASTROPHIC EVENTS; LABOR DISPUTES. Neither the Company nor any of
its properties is or has been affected by any fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or other casualty that could reasonably be expected to have a material
adverse effect on the business, assets, operations, prospects or financial or
other condition of the company. There are no disputes presently subject to
grievance procedure, arbitration or litigation under any of the collective
bargaining agreements, employment contracts or employee welfare or incentive
plans to which the Company is a party, and there are not strikes, lockouts, work
stoppages or slowdowns, or, to the best knowledge of the Company, jurisdictional
disputes or organizing activity occurring or threatened which could reasonably
be expected to have a material adverse effect on the business, assets,
operations, prospects or financial or other condition of the company.
3.28 CERTAIN AGREEMENTS OF OFFICERS, EMPLOYEES AND CONSULTANTS.
(A) No officer, employee or consultant of the Company is, or is now
expected to be, in violation of any term of any employment contract, proprietary
information agreement, nondisclosure agreement, noncompetition agreement, or any
other contract or agreement with the Company or, to the best of the Company's
knowledge, any restrictive covenant relating to the right of any such officer,
employee or consultant to be employed by the Company because of the nature of
the business conducted or to be conducted by Company or relating to the use of
trade secrets or proprietary information of others, and to the best of Company's
knowledge, after due inquiry, the continued employment of Company's officers,
employees and consultants do not subject the Company to any liability for any
claim or claims arising out of or in connection with any such contract,
agreement or covenant.
(B) To the knowledge of the Company, no officers of the Company,
and no employee or consultant of the Company whose termination, either
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the business, assets, operations, prospects or
financial or other condition of the Company, has any present intention of
terminating his or her employment or consulting relationship with the Company.
3.29 CONTRACTS OR COMMITMENTS; INDEBTEDNESS. Neither the Company nor
any of its properties is subject to any material judgment, order, writ, decree,
statute, rule or regulation, or any material mortgage, indenture, agreement,
instrument or contract which could reasonably be expected to have a material
adverse effect on the business, assets, operations, prospects or financial or
other condition of the company. Except for this Agreement, the Registration
Rights Agreement, the Notes and the Warrants, and except as set forth in Item
3.29 of the Schedule of Exceptions, the Company is not a party to any contracts
or commitments (or group of related contracts or commitments) involving an
obligation of the Company for more than Two Hundred Fifty Thousand Dollars
($250,000). Except as set forth in the Schedule of Exceptions and the Existing
Indebtedness set forth in Schedule 1 of the Note, the Company has no
indebtedness for borrowed money or lease obligations or guarantees.
3.30 TRANSACTIONS WITH AFFILIATES; INVESTMENTS. There are no loans,
leases, royalty agreements or other continuing transactions between the Company
and any affiliate of the
9.
<PAGE>
Company, except transactions in the ordinary course of business and on terms at
least as favorable to the Company as would be the case in an arms-length
transaction with an unaffiliated person. Except as set forth in the Schedule of
Exceptions, the Company has no investments in other entities and has made no
extensions of credit to other entities.
4 REPRESENTATIONS AND WARRANTIES OF THE LENDERS
4.1 PURCHASE FOR OWN ACCOUNT. Each Lender represents that it is
acquiring the Notes, the Preferred Stock issuable upon conversion of the Notes,
the Warrants and the Common Stock issuable upon exercise of the Warrants
(collectively, the "SECURITIES") for investment and not for sale or with a view
to distribution of the Securities or any part thereof, has no present intention
of selling (in connection with a distribution or otherwise), granting any
participation in, or otherwise distributing the same. Each Lender also
represents that the entire legal and beneficial interest of the Notes and
Warrants it is acquiring is being acquired for the account of the Lender only
and neither in whole nor in part for any other person, and that any transfer of
the Securities will be made in compliance with the Act, the California Corporate
Securities Law of 1968 and all other applicable securities laws.
4.2 INFORMATION AND SOPHISTICATION. Each Lender acknowledges that it has
received all the information it has requested from the Company and considers
necessary or appropriate for deciding whether to acquire the Notes and Warrants.
Each Lender represents that it has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Notes and Warrants and to obtain any additional information
necessary to verify the accuracy of the information given the Lender. Each
Lender further represents that it has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risk of
this investment.
4.3 ABILITY TO BEAR ECONOMIC RISK. Each Lender acknowledges that
investment in the Notes and Warrants involves a high degree of risk, and
represents that it is able, without materially impairing its financial
condition, to hold the Securities for an indefinite period of time and to suffer
a complete loss of its investment. Each Lender acknowledges that it is either an
"accredited investor" as that term is defined in Section 2(15) of the Act and
the rules promulgated thereunder and, in particular, Regulation 230.501(a), or
an experienced venture capital investor.
4.4 RESTRICTED SECURITIES; LIMITATION ON DISPOSITION.
(A) Each Lender understands that the Securities it is purchasing are
characterized as "Restricted Securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering, and that under such laws and applicable regulations
such securities may be resold without registration under the Act only in certain
limited sets of circumstances. In this connection, each Lender represents that
it is familiar with Securities and Exchange Commission Rule 144 ("RULE 144"), as
presently in effect.
(B) Without limiting the foregoing, each Lender agrees that it will in no
event make any disposition of any of the Securities unless:
10.
<PAGE>
(I) There is then in effect a registration statement under
the Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or
(II) Such disposition is made in accordance with Rule 144;
or
(III) The Lender shall have notified the Company of the
pertinent details of the proposed disposition and, if the Company so reasonably
requests, shall have provided the Company with an opinion of counsel for the
Lender to the effect that such disposition will not require registration of the
Securities under the Act, and such opinion of counsel shall be reasonably
acceptable to the Company's counsel.
(C) Each Lender understands that the Company's stock transfer records
will be noted to reflect the restrictions on transferability of the Securities
contained herein and that certificates evidencing the Securities may bear one or
more of the following legends:
(I) "The securities represented hereby have not been
registered under the Act". Any transfer of such securities will be invalid
unless (1) a Registration Statement under the Act is in effect as to such
transfer, (2) such transfer is made in compliance with Rule 144 under the Act,
or (3) in the opinion of counsel satisfactory to the Company registration under
the Act is unnecessary in order for such transfer to comply with the Act."
(II) Any legend imposed or required pursuant to applicable
state securities law.
4.5 BROKERAGE. There are no claims for brokerage commissions, finders'
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement binding upon the Company
except for the amounts owed to The Wallach Company, the cost of which will be
borne by the Company.
4.6 RELIANCE. The Company may rely on the representations made by the
Lenders under the Stock Transfer Agreement of even date herewith.
5 CONDITIONS TO CLOSING
The Company's obligation to sell and issue and the Lenders' obligation
to purchase the Notes and Warrants at the Closing is the subject to the
following conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company set forth in Section 3 and of the Lenders set forth in
Section 4 shall be true at and as of the Closing with the same force and effect
as though such representations and warranties had been made at and as of the
Closing.
5.2 AUTHORIZATION; RESERVATION OF SHARES. All corporate action on the part
of the Company and its officers, directors, and stockholders that is necessary
for the authorization, execution, and delivery of this Agreement and the
Registration Rights Agreement by the
11.
<PAGE>
Company, for the performance of the Company's obligations hereunder and
thereunder and for the authorization, issuance and delivery of the Notes and
Warrants and the Common Stock issuable upon exercise of the Warrants shall have
been taken. The four hundred eighty-five thousand three hundred thirty-three
(485,333) shares of Non-Voting Common Stock issuable upon exercise of the
Warrants and Common Stock issuable upon conversion of the Warrant Shares shall
each have been duly and validly reserved.
5.3 REGISTRATION RIGHTS AGREEMENT. The Company shall have granted such
rights with respect to the Non-Voting Common Stock issuable upon exercise of the
Warrants as are set forth in the Registration Rights Agreement.
5.4 MINIMUM INVESTMENT. The Lenders shall have tendered a minimum of
$6,500,000 to purchase the Notes and $4,853.33 to purchase the Warrants.
5.5 STOCK TRANSFER. The Lenders shall have purchased an aggregate of
1,337 shares of Series A Preferred Stock from certain stockholders of the
Company for an aggregate purchase price of $6,685,000.
5.6 OPINION. The Lenders shall have received from Cooley Godward Castro
Huddleson & Tatum, counsel to the Company, an opinion substantially in the form
attached as Exhibit G, addressed to them, dated as the date of the Closing.
5.7 AMENDMENT OF CERTIFICATE. The Company shall have taken any and all
actions necessary to cause the Company's Certificate of Incorporation to be
amended and restated and such shall have been filed with the Secretary of State
of the state of Delaware.
5.8 AMENDMENT OF BYLAWS. The Company shall have taken any and all
action necessary to cause the Company's Bylaws to be amended and restated so as
to remove the provisions dealing with rights of first refusal.
5.9 MERRILL LYNCH. The Lenders shall have received satisfactory
evidence that Merrill Lynch Business Financial Services, Inc. ("MLBFS") and the
Company have amended the WCMA Note, Loan and Security Agreement, dated as of
October 26, 1994, as amended, and the term WCMA Loan and Security Agreement,
dated as of March 28, 1995, between the Company and MLBFS to extend the maturity
dates thereof by 90 days.
5.10 AUDIT AND COMPENSATION COMMITTEES. The Lenders shall have received
satisfactory evidence of the organization of audit and compensation committees
of the Board, each of which shall include the directors designated pursuant to
Section 6 of the Registration Rights Agreement.
6 MISCELLANEOUS
6.1 BINDING AGREEMENT. The terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any third party any rights,
12.
<PAGE>
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Colorado as applied to agreements among Colorado
residents, made and to be performed entirely within the State of Colorado.
6.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
6.5 NOTICES. Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
or upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid, addressed to the Chief Executive Officer of the Company,
with a copy to the Vice President, Legal Services at 6892 S. Yosemite Street,
Englewood, CO 80112, or to a Lender at its address shown on the Schedule of
Lenders, or at such other address as such party may designate by ten (10) days
advance written notice to the other party.
6.6 EXPENSES. The Company shall pay all costs and expenses that it incurs
with respect to the negotiation, execution, delivery, and performance of this
Agreement, and the Company shall pay the attorneys fees of the Lenders up to
$15,000 and out-of-pocket expenses with respect to the negotiation, execution,
delivery, and performance of this Agreement.
6.7 MODIFICATION; WAIVER. No modification or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and approved by the holders of at least a majority in interest of the
Warrants then outstanding.
13.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
EVOLVING SYSTEMS, INC.
BY:__________________________
LENDERS:
MORGAN STANLEY VENTURE CAPITAL FUND II, L.P.
By: Morgan Stanley Venture Partners II, L.P.
its General Partner
By: Morgan Stanley Venture Capital II, Inc.
Managing General Partner
By: ___________________________________
Robert J. Loarie
Vice President
MORGAN STANLEY VENTURE CAPITAL FUND II, C.V.
By: Morgan Stanley Venture Partners II, L.P.
its General Partner
By: Morgan Stanley Venture Capital II, Inc.
Managing General Partner
By: ___________________________________
Robert J. Loarie
Vice President
MORGAN STANLEY VENTURE INVESTORS, L.P.
By: Morgan Stanley Venture Partners II, L.P.
its General Partner
By: Morgan Stanley Venture Capital II, Inc.
Managing General Partner
By: ___________________________________
Robert J. Loarie
Vice President
14.
<PAGE>
INFORMATION ASSOCIATES, L.P.
By: TRIDENT CAPITAL MANAGEMENT, L.L.C., its general partner
By: ___________________________________
INFORMATION ASSOCIATES, C.V.
By: TRIDENT CAPITAL MANAGEMENT, L.L.C., its investment general partner
By: ____________________________________
15.
<PAGE>
SCHEDULE OF LENDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS LOAN AMOUNT WARRANT AMOUNT
- ---------------- ----------- --------------
<S> <C> <C>
Morgan Stanley Venture Partners II, L.P. $2,287,354.19 170,789
Morgan Stanley Venture Capital Fund II, C.V $ 569,880.17 42,551
Morgan Stanley Venture Investors, L.P. $ 593,656.81 44,326
Information Associates, L.P. $2,966,325.53 221,486
Information Associates, C.V. $ 82,783.30 6,181
</TABLE>
<PAGE>
EXHIBIT 10.5
THE SECURITIES REPRESENTED BY THIS PROMISSORY NOTE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
SENIOR SUBORDINATED PROMISSORY NOTE
$____________ May 31, 1996
FOR VALUE RECEIVED, EVOLVING SYSTEMS, INC., a Delaware corporation, with
its principal place of business located at 6892 S. Yosemite Street, Englewood,
Colorado 80112 (the "BORROWER" or the "COMPANY") hereby promises to pay to the
order of ("LENDER"), in lawful money of the United States of
America and in immediately available funds, the principal sum of ($ )
(the "LOAN"), together with accrued and unpaid interest thereon, payable on the
dates and in the manner set forth below.
This Senior Subordinated Promissory Note (the "NOTE") is the Note referred
to in, and is executed and delivered in connection with, that certain Note and
Warrant Purchase Agreement dated as of May 31, 1996 by and between Borrower and
Lender (as the same may from time to time be amended, modified or supplemented
in accordance with its terms, the "NOTE AGREEMENT").
1. LOAN REPAYMENT. The outstanding principal amount of the Loan shall be
due and payable in four equal annual payments beginning on June 1, 2000.
Interest shall be payable on each December 1 and June 1, until the outstanding
principal amount hereof is paid in full, commencing on December 1, 1996.
2. INTEREST RATE. Interest on the outstanding principal hereof from the
date hereof until maturity shall be payable at the lower of the rate of nine
percent (9%) per annum or the maximum rate permissible by law ( the "APPLICABLE
RATE"). In the event that the amount of interest contracted for, charged or
received from Borrower or otherwise in connection with the Loan evidenced hereby
exceeds the Applicable Rate, then at Lender's option, such amount shall either
be applied as a credit against any then unpaid amounts hereof or refunded to
Borrower and the effective rate of interest will be automatically reduced to the
Applicable Rate. Upon the occurrence of an Event of Default (as hereinafter
defined), this Note shall thereafter bear interest at the rate of twelve percent
(12%) per annum or the maximum rate permissible by law, whichever is less.
3. PLACE OF PAYMENT AND NOTICES. Payments of principal and interest are
to be delivered to the holder of this Note at the following address: ___________
_________________________ or at such other address as such holder has specified
by prior written notice to the Company. Notices by holders of Senior
Indebtedness to
1.
<PAGE>
the holder of this Note are to be delivered at the following address: __________
_________________________ or at such other address as such holder has specified
by prior written notice to the holders of Senior Indebtedness. A copy of all
notices relating to payments of principal and interest hereunder and all other
notices are to be delivered to the Company as provided in the Note Agreement.
4. APPLICATION OF PAYMENTS. Payment on this Note shall be applied first
to costs of Lenders incurred in collection of this Note, if any, then to pay
accrued interest, and thereafter to the outstanding principal balance hereof.
5. PREPAYMENT. Borrower may prepay the entire balance of principal owed
under this Note in whole or in part together with interest on the principal
amount prepaid, without paying any prepayment penalty. Borrower must prepay the
entire balance of principal owed under this Note, together with any interest
owing thereunder, upon the closing of an initial public offering of the
Borrower's common stock, a merger in which Borrower's stockholders holding
voting power immediately prior to the merger do not hold in excess of 50% of the
voting power after the merger or a sale of all or substantially all of the
Borrower's assets.
6. SUBORDINATED NOTE.
(A) GENERAL. The Company, for itself, its successors and assigns,
covenants and agrees, and the Lender, by its acceptance hereof, likewise
covenants and agrees, that the payment of any obligation in respect of this Note
is hereby expressly subordinated, to the extent and in the manner hereinafter
set forth, in right of payment to the prior payment in full in cash of all
Senior Indebtedness, and that such subordination is for the benefit of and may
be enforced by the holder(s) of Senior Indebtedness against the Company and any
holders of the Note. The term "Senior Indebtedness" shall mean, unless expressly
subordinated to or expressly made on a parity with the amounts due under this
Note, (i) all obligations of the Company due in connection with (A) existing and
contemplated financing specified on Schedule 1 attached hereto, together with
all refinancings, refundings, extensions of the times for payments for, and all
other amendments and modifications to, such financing described in this clause
(i)(A), and (B) indebtedness of the Company, to banks, commercial finance
lenders, insurance companies, leasing or equipment financing institutions or
other lending institutions regularly engaged in the business of lending money,
which is for money borrowed, or purchase or leasing of equipment in the case of
lease or other equipment financing, together with all refinancings, refundings,
extensions of the times of payments for, and all other amendments and
modifications to, the obligations described in this clause (i)(B), and (ii) all
amounts of Senior Indebtedness repaid by the Company and subsequently recovered
from the holder of any Senior Indebtedness under applicable bankruptcy or
insolvency laws or otherwise; provided, however, that no indebtedness incurred
by the Company which is not described in clause (i)(A) above which causes the
aggregate amount of the Company's indebtedness outstanding to exceed the Formula
Amount (but only to the extent of such excess) or which is incurred at a time
when the aggregate of such indebtedness outstanding exceeds the Formula Amount
shall be Senior Indebtedness; provided, further, that nothing in the foregoing
proviso shall cause the amount of indebtedness outstanding which constitutes
"Senior Indebtedness" to be less than the amount set forth in clause (i)(A)
above plus $3,000,000, less the
2.
<PAGE>
amount of Senior Indebtedness which has been permanently paid down and for which
the commitment related thereto has terminated other than as a result of a
Refinancing, but any such paydown or termination of commitment shall not cause
the amount of Senior Indebtedness to be less than the Formula Amount. The term
"FORMULA AMOUNT" means that dollar amount of indebtedness of the Company at
which the ratio of (i) total liabilities of the Company minus the sum of (A)
indebtedness under this Note and all other notes issued pursuant to the Note
Agreement and (B) the Shareholder Notes, to (ii) the net worth of the Company
plus the sum of (A) indebtedness under this Note and all other notes issued
pursuant to the Note Agreement and (B) the Shareholder Notes (all as determined
on a consolidated basis according to generally accepted accounting principles)
exceeds 2.0 to 1.0. For the purposes of this Section 6, all amounts advanced
pursuant to a binding commitment to lend or lease shall be deemed to constitute
indebtedness incurred on the date of such binding commitment irrespective of any
subsequent loan paydown or lease payment. The term "REFINANCING" means any
refinancing, refunding or replacement, in whole or part, of amounts or
commitments outstanding constituting Senior Indebtedness when such Indebtedness
was incurred. By Lender's acceptance of this Note, Lender agrees to execute such
documents as the Company shall reasonably request to confirm to holders of
Senior Indebtedness the Formula Amount and the status of such holders'
investment as Senior Indebtedness. Senior Indebtedness shall constitute Senior
Indebtedness for all purposes of this Note, and the provisions of this Note
shall continue to apply thereto, notwithstanding the fact that Senior
Indebtedness or any claim in respect thereof shall be disallowed, avoided or
subordinated pursuant to the provisions of any applicable bankruptcy, insolvency
or fraudulent conveyance law or otherwise. The phrase "payment of any obligation
in respect of this Note" means any payment of any obligation in respect of the
Note, including, but not limited to, any payment of principal of or interest
hereon, any redemption, retirement or sinking fund payment, any purchase or
other acquisition of this Note for cash or property and any payment by reason of
other debt or obligations being subordinate to this Note and any payment on any
claim (whether for rescission or damages and whether based on contract or tort)
relating to the offer sale or purchase of this Note and any payment or
distribution in respect of any claim for any of the foregoing in any bankruptcy,
insolvency or similar proceedings, and in any case whether received in the form
of payment from the Company, any guarantor or any third party.
(B) NOTE SUBORDINATED TO PRIOR PAYMENT OF ALL OBLIGATIONS IN RESPECT
OF SENIOR INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE
COMPANY. Upon any payment or distribution of assets of the Company of any kind
or character, whether in cash (by set off or otherwise), properties or
securities, in connection with any dissolution, winding up, liquidation or
reorganization of the Company, whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company or otherwise,
(I) the holders of all Senior Indebtedness shall first be
entitled to receive payment in full in cash in accordance with the terms of such
Senior Indebtedness of all obligations with respect thereto before the Lender is
entitled to receive any payment of any obligation in respect of this Note; and
3.
<PAGE>
(II) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
shares of stock of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment, the payment of which is subordinated to the same extent as this
Note to the payment of all Senior Indebtedness which may at any time be
outstanding, provided that the terms of any such securities which relate to
subordination or to the realization by the holders of Senior Indebtedness of the
benefits of subordination intended to be conferred by this Note shall be
reasonably satisfactory to the holders of Senior Indebtedness or their
representative or trustee and, provided further, that nothing herein shall
preclude the holders of Senior Indebtedness from objecting to the treatment of
their claims under a plan of reorganization or readjustment (that provides for
the distribution of such securities) as improper under the provisions of 11
U.S.C. (S) 1129(b)(2)) to which the Lender would be entitled except for the
application of these subordination provisions, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of this
Note, shall be made by the liquidating trustee or agent or other person making
such payment or distribution, whether a trustee in bankruptcy, a receiver or
liquidating trustee or otherwise, directly to the holders of Senior Indebtedness
or their representative or representatives or to the trustee or trustees under
any indenture under which any instruments evidencing and of such Senior
Indebtedness may have been issued, ratably according to the aggregate amounts
remaining unpaid on account of the principal of (and premium, if any) and
interest on the Senior Indebtedness held or represented by each, to the extent
necessary to pay in full in cash all Senior Indebtedness remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.
(C) COMPANY NOT TO MAKE PAYMENTS WITH RESPECT TO THIS NOTE IN CERTAIN
CIRCUMSTANCES.
(I) ACCELERATION OF SENIOR INDEBTEDNESS. In the event of any
Senior Indebtedness becoming due and payable prior to its scheduled maturity,
whether by acceleration, lapse of time or otherwise, or in the event any Senior
Indebtedness remains outstanding after its scheduled maturity, no payment of any
obligation in respect of this Note shall be made until all obligations on all
such due and payable matured Senior Indebtedness shall have been paid in full in
cash.
(II) POSTPONEMENT PERIOD. During the continuance of any
default in the payment when due of any principal of and premium, if any, or
interest on any Senior Indebtedness (as so described, a "PAYMENT DEFAULT"), or
during the continuance of an event of default arising under any agreement or
instrument governing Senior Indebtedness (in each case other then a Payment
Default), the existence of which shall, or with notice or the passage of time,
or both, would give the holders of Senior Indebtedness the right to cause such
Senior Indebtedness to become due and payable prior to its scheduled maturity
(as so described, "COVENANT DEFAULT"), no payment of any obligation in respect
of this Note shall be made during the Postponement Period, as hereinafter
defined. The "Postponement Period" shall commence on the date of receipt by the
Lender of written notice from any holder or holders of Senior
4.
<PAGE>
Indebtedness of greater than $500,000 (or the representatives or trustees, as
the case may be) (such notice being herein called the "DEFAULT NOTICE") and will
end (i) in the case of a Payment Default, on the earlier of (A) 180 days from
the receipt of the Default Notice and (B) the date on which such Payment Default
shall have been cured or waived in writing, or (ii) in the case of a Covenant
Default, on the earlier of (A) 180 days from the receipt of the Default Notice
and (B) the date on which such Covenant Default shall have been cured or waived
in writing, provided, however, that in no event shall the aggregate number of
days during which one or more Postponement Periods are in effect with respect to
a Covenant Default during any period of 360 consecutive days exceed 180 days.
The Default Notice must specify in reasonable detail the Covenant Default which
is continuing.
(III) LIMITATION ON ACTIONS DURING AND AFTER POSTPONEMENT
PERIOD. During any Postponement Period and except to the extent otherwise
restricted in subparagraph (i) below, the Lender shall not be entitled to
accelerate the maturity of this Note or to commence or join in any action or
proceeding to recover any amounts due or to become due with respect to this
Note, provided, however, that the foregoing limitation on acceleration or
exercise of remedies shall not be applicable following the final maturity or the
acceleration of the Senior Indebtedness.
(IV) SUBSEQUENT DEFAULT NOTICES. For purposes of this Section
6, if any Default Notice is given, then no subsequent Default Notice may be
given with respect to a particular Covenant Default existing at the same time
such prior Default Notice is given and known to the holders of Senior
Indebtedness or their representative or trustee, as the case may be, as of the
giving of the prior Default Notice.
(D) PAYMENTS HELD IN TRUST. In the event that, notwithstanding the
terms of subordination contained herein, the Lender receives any payment or
distribution of any character, whether in cash, securities or other property, or
whether in the form of a payment (from the Company or any guarantor or any other
party), with respect to any obligation in respect of this Note which it is not
entitled to receive on account of the terms of subordination contained herein
the Lender will hold any amount so received in trust for the holders of Senior
Indebtedness and will forthwith pay over such amount to the holders of Senior
Indebtedness or their representative or trustee, as the case may be, for
application to the payment of all such obligations in respect of Senior
Indebtedness remaining unpaid until all such obligations in respect of such
Senior Indebtedness shall have been paid in full in cash, after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness.
(E) SUBROGATION UPON PAYMENT OF SENIOR INDEBTEDNESS. Upon payment in
full in cash of all Senior Indebtedness, the Lender shall be subrogated to the
rights of the holders of Senior Indebtedness to receive payments or
distributions of assets of the Company applicable to Senior Indebtedness to the
extent the distributions otherwise payable to the Lender has been applied to the
payment of Senior Indebtedness, until the principal of and premium, if any, and
interest on this Note shall have been paid in full. For the purposes of such
subrogation, no payments or distributions to the holders of Senior Indebtedness
of any cash, property or securities which the Lender would be entitled to
receive except for the application of the terms of
5.
<PAGE>
subordination contained herein shall, as between the Company, its creditors
other than the holders of Senior Indebtedness, and the Lender, be deemed to be a
payment by the Company to or on account of Senior Indebtedness.
(F) COMPANY'S OBLIGATIONS UNCONDITIONAL. The terms of subordination
contained herein are for the purpose of defining the relative rights of holders
of Senior Indebtedness on the one hand and the Lender on the other hand against
the Company and its property. Nothing herein shall impair, as between the
Company, its creditors, other than the holders of Senior Indebtedness, and the
Lender, the obligation of the Company, which is unconditional and absolute, to
pay to the Lender the principal hereof, and premium, if any, and interest
hereon, in accordance with the terms hereof and the provisions hereof, and to
comply with all of its covenants and agreements contained herein; nor shall
anything herein prevent the Lender from exercising all remedies otherwise
permitted by applicable law upon default hereunder, subject to the rights set
forth herein of the holders of Senior Indebtedness to receive payments and
distributions otherwise payable to the Lender.
Upon any payment or distribution of assets of the Company referred to
in this Note, the Lender shall be entitled to rely upon any order or decree of a
court of competent jurisdiction in which any such dissolution, winding up,
liquidation or reorganization proceeding affecting the affairs of the Company is
pending or upon a certificate of the liquidating trustee or agent or other
person making any payment or distribution to the Lender for the purpose of
ascertaining the persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Note. In
the event that the Lender determines, in good faith, that further evidence is
required with respect to the right of any person, as a holder or representative
of Senior Indebtedness, to participate in any payment or distribution pursuant
to this Section, the Lender may request such person to furnish evidence to the
reasonable satisfaction of the Lender as to the amount of Senior Indebtedness
held by such person, as to the extent to which such person is entitled to
participate in such payments or distributions, and as to other facts pertinent
to the rights of such person under this Section, and if such evidence is not
furnished, the Lender may defer payment to such person pending judicial
determination as to the right of such person to receive such payment.
(G) KNOWLEDGE OF LENDER; NOTICE. Notwithstanding the provisions of
this Note, the Lender shall not at any time be charged with the knowledge of the
existence of any facts which would prohibit the making of any payment of monies
to the Lender or which would prohibit the making of any acceleration or other
remedial action by the Lender upon the occurrence of a Payment Default or
Covenant Default, unless and until the Lender shall have received written notice
of such events or facts signed by any holder or holders of Senior Indebtedness
of greater than $500,000 (or their representatives or trustees, as the case may
be). The Company shall promptly notify the Lender of any facts known by the
Company that would cause the payment of any obligation with respect to this Note
to violate any of the provisions of the term of subordination contained herein.
6.
<PAGE>
(H) MISCELLANEOUS.
(I) The Lender, by its acceptance hereof, agrees to take such
action as may be, necessary or appropriate to effectuate the subordination as
provided in this Note.
(II) No right of any present or future holder of any Senior
Indebtedness to enforce subordination in accordance with the terms of this Note
shall at any time or in any way be prejudiced or impaired by any act or failure
to act on the part of the Company or any holder or by any noncompliance by the
Company with the terms, provisions and covenants of this Note, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.
(III) Without in any way limiting the generality of clause (ii)
of this Subparagraph (h), the holders of Senior Indebtedness may, at any time
and from time to time, without the consent of or notice to the Lender, without
modifying the definition of "Senior Indebtedness," without incurring
responsibility to the Lender and without impairing or releasing the
subordination provided herein or the obligations hereunder of the Lender to the
holders of Senior Indebtedness, do any one or more of following: (a) change the
manner, place, or terms of payment or extend the time of payment of, or refund
or refinance, or renew or alter Senior Indebtedness or any instrument evidencing
the same or any agreement under which Senior Indebtedness is outstanding; (b)
sell, exchange, release, or otherwise deal with any asset pledged, mortgaged, or
otherwise securing Senior Indebtedness; (c) release any person liable in any
manner for the collection of Senior Indebtedness; and (d) exercise or refrain
from exercising any rights against the Company or any other person.
(I) LIMITATION ON PROCEEDINGS. Until the earlier of (a) 91 days
after the Senior Indebtedness shall have been paid in full in cash, and the
termination or reduction to zero of any commitment to make extensions of credit
constituting Senior Indebtedness and (b) the commencement of any proceeding or
action referred to in subparagraph (b) above, the Lender shall not in its
capacity as Lender, without the prior written consent of the holders of Senior
Indebtedness, commence, or join in the commencement of, any bankruptcy,
insolvency or similar proceedings.
(J) PROOFS OF CLAIM. So long as any Senior Indebtedness remains
unpaid, the Lender hereby authorizes and directs the holders of the Senior
Indebtedness, or their representative or trustee, to file proofs of claim with
respect to the obligations in respect of this Note in any bankruptcy or other
proceeding under any Bankruptcy Law, but only in the event that the Lender has
failed to file such proofs of claim on or before the date thirty (30) business
days prior to the date such proofs of claim must be filed pursuant to law or the
order of any court exercising jurisdiction over such proceeding; provided,
however, that any proof of claim filed properly, in a correct amount, and in a
timely manner by the Lender, shall supersede, as to the amounts reflected in
such claim, any proof of claim filed by the holders of the Senior Indebtedness.
7. COVENANTS. Without obtaining the written consent of the holders of
fifty-one percent (51%) in outstanding principal amounts of the Notes, the
Company agrees that it will not:
7.
<PAGE>
(A) incur or suffer to exist Indebtedness, except (i) trade payables
incurred in the ordinary course of business; (ii) Senior Indebtedness, which,
prior to December 31, 1997, shall not exceed the amount permitted in clause
(i)(A) of Section 6(a) above plus $3,000,000 less the amount of Senior
Indebtedness which has been permanently paid down and for which the commitment
related thereto has terminated other than as a result of a Refinancing, but any
such paydown or termination of commitment shall not cause the amount of Senior
Indebtedness to be less than the Formula Amount; (iii) Indebtedness of the
Company to any wholly-owned subsidiary of the Company; and (iv) the Notes issued
pursuant to the Note Agreement;
(B) pledge its intellectual property, except to secure Senior
Indebtedness;
(C) sell all or a substantial portion of its assets (provided that
sales in the ordinary course of business shall not be considered to violate this
limitation);
(D) make or suffer to exist any Investments, except (i) deposit
accounts of the Company with, or certificates of deposit maturing not more than
one year from the date of investment therein of, commercial banks organized
under the laws of the United States or a state thereof, each having combined
capital, surplus and undivided profits of not less than $200,000,000; (ii)
Investments in marketable obligations issued or fully guaranteed by the United
States or any agency or state thereof and maturing not more than one (1) year
from the date of issuance; (iii) Investments in open market commercial paper
rated at least "A1" or "P1" or higher by a national credit rating agency and
maturing not more than 270 days from the creation thereof; (iv) Investments
pursuant to or arising under currency agreements or interest rate agreements
entered into in connection with bona fide hedging arrangements; (v) Investments
in wholly-owned subsidiaries of the Company up to a maximum amount of Five
Hundred Thousand Dollars ($500,000); and (vi) other Investments aggregating not
in excess of Two Hundred Fifty Thousand Dollars ($250,000) at any time;
(E) issue any dividends, make payments on any Indebtedness which is
not Senior Indebtedness or redeem any shares of its common or preferred stock
except (i) redemptions, as approved by the Compensation Committee of the Board
of Directors of the Company, of stock of employees who are terminating
employment with the Borrower; (ii) in respect of the Evolving Systems, Inc.
Shareholder Notes dated January 2, 1996 in the original aggregate principal
amount of $6,683,625 (the "SHAREHOLDER NOTES") (A) prepayments of principal on
or after the date hereof of $1,500,000 and (B) interest as such shall become due
and payable thereunder; (iii) payments of amounts due under this Note and the
other Notes issued under the Note Agreement; (iv) payments in respect of
Indebtedness owing to wholly-owned subsidiaries of the Company; and (v) stock
dividends pro rata to holders of the Company's capital stock;
(F) enter into or suffer to exist any contractual obligation or
transaction with an affiliate except upon terms at least as favorable to the
Company as would be obtained in an arms-length transaction with unaffiliated
persons, except with respect to (i) compensation to directors, officers,
employees and consultants as to which such compensation has been approved
8.
<PAGE>
by a majority of the disinterested members of the Company's Board of Directors
and (ii) transactions between the Company and its wholly-owned subsidiaries; or
(G) create or suffer to exist any rental payment obligations under
operating leases of personal property in an amount in excess of the amount set
forth below in the indicated fiscal year:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AMOUNT
<S> <C>
December 31, 1996 $1,000,000
December 31, 1997 $1,000,000
December 31, 1998 $1,250,000
December 31, 1999 $1,500,000
December 31, 2000 $1,750,000
December 31, 2001 $2,000,000
December 31, 2002 $2,250,000
December 31, 2003 $2,500,000
</TABLE>
"INDEBTEDNESS" shall mean, for purposes of this Section 7, (a) all
obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes or other similar instruments, (c) all obligations to pay the
deferred purchase price of property or services (other than accounts payable
incurred in the ordinary course of business determined in accordance with
generally accepted accounting principles), (d) all obligations with respect to
capital leases, (e) all guaranty obligations for Indebtedness as defined herein,
(f) all obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired, (g) all reimbursement and
other payment obligations, contingent or otherwise, in respect of letters of
credit. "INVESTMENT" shall mean for purposes of this Section 7, (a) any loan or
advance of funds by such person to any other person (other than advances to
employees of such person for moving and travel expense, drawing accounts and
similar expenditures in the ordinary course of business), (b) any purchase or
other acquisition of any equity securities or Indebtedness of any other person,
(c) any capital contribution by such person to or any other investments by such
person in any other person (including, without limitation, any Indebtedness
incurred by such person of the type described in clauses (a) and (b) of the
definition of "Indebtedness" on behalf of any other person); provided, however,
that Investments shall not include accounts receivable or other indebtedness
owed by customers of such person which arose from sales or non-exclusive
licensing in the ordinary course of such person's business.
8. DEFAULT. The following events shall be events of default ("EVENTS OF
DEFAULT") under this Note::
(A) Borrower shall fail to pay timely (i) any of the principal amount
when due under this Note or (ii) any accrued interest or other amounts due under
this Note on the date the same becomes due and payable or, in each case (i) and
(ii), within five (5) calendar days thereafter;
9.
<PAGE>
(B) the Company shall fail to observe or perform any covenant,
obligation, condition or agreement set forth in this Note and such failure shall
not have been cured or waived within thirty (30) days after the Company shall
have received written notice thereof from the holder of this Note; or
(C) any representation, warranty, certificate, or other statement
(financial or otherwise) made or furnished by or on behalf of the Borrower to
Lender in writing in connection with this Note, or as an inducement to Lender to
enter into this Note and the Note Agreement, shall be materially false,
incorrect, incomplete or misleading in any material respect when made or
furnished; or
(D) Borrower shall (i) fail to make any payment when due under the
terms of any bond, debenture, note or other evidence of indebtedness, including
the Senior Indebtedness, to be paid by such person (excluding this Note but
including any other evidence of indebtedness of Borrower to Lender) and such
failure shall continue beyond any period of grace provided with respect thereto,
or (ii) default in the observance or performance of any other agreement, term or
condition contained in any such bond, debenture, note or other evidence of
indebtedness, and the effect of such failure or default is to cause the holder
or holders thereof to cause, indebtedness in an aggregate amount of Two Hundred
Fifty Thousand Dollars ($250,000) or more to become due prior to its stated date
of maturity; or
(E) the Company shall (i) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) admit in writing its inability, to pay
its debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated, or (v)
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
consent to any such relief or to the appointment of or taking possession of its
property by any official in an involuntary case or other proceeding commenced
against it; or
(F) proceedings for the appointment of a receiver, trustee,
liquidator or custodian of Borrower or of all or a substantial part of the
property thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to Borrower or the
debts thereof under any bankruptcy, insolvency or other similar law now or
hereafter in effect shall be commenced and an order for relief entered or such
proceeding shall not be dismissed or discharged within thirty (30) days of
commencement; or
(G) a final judgment or order for the payment of money in excess of
One Hundred Thousand Dollars ($100,000) (exclusive of amounts covered by
insurance issued by an insurer not an Affiliate of Borrower) shall be rendered
against Borrower or any of its Subsidiaries and the same shall remain
undischarged for a period of forty-five (45) days during which execution shall
not be effectively stayed, or any judgment, writ, assessment, warrant of
attachment, or execution or similar process shall be issued or levied against a
substantial part of the property of Borrower or any of its Subsidiaries and such
judgment, writ, or similar process
10.
<PAGE>
shall not be released, stayed, vacated or otherwise dismissed within forty-five
(45) days after issue or levy; or
9. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
any Event of Default (other than an Event of Default referred to in Sections
8(e) and 8(f)), and subject to Section 6 above, at any time thereafter during
the continuance of such Event of Default, Lender may by written notice to
Borrower, declare all outstanding amounts payable by Borrower hereunder to be
immediately due and payable without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the Purchase Agreement to the contrary notwithstanding. Upon the
occurrence or existence of any Event of Default described in Sections 8(e) or
8(f), immediately and without notice, all outstanding Obligations payable by
Borrower hereunder shall automatically become immediately due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the Purchase
Agreement to the contrary notwithstanding. In addition to the foregoing
remedies, upon the occurrence or existence of any Event of Default, Lender may
exercise any other right, power or remedy granted to it or permitted by law,
either by suit in equity or by action at law, or both.
10. NOTE TRANSFERABLE. Subject to compliance with applicable federal and
state securities laws, and the transfer restrictions set forth below, this Note
and all rights hereunder are transferable without charge by the holder hereof
(except for transfer taxes), upon surrender of this Note properly endorsed and
in compliance with the provisions of the Note Agreement. Subject to the
foregoing, transfers of this Note shall be registered upon registration books
maintained for such purpose by or on behalf of Borrower. Prior to presentation
of this Note for registration of transfer, Borrower shall treat the registered
holder hereof as the owner and holder of this Note for the purpose of receiving
all payments of principal and interest hereon and for all other purposes
whatsoever, whether or not this Note shall be overdue and Borrower shall not be
affected by notice to the contrary.
This Note may be transferred or assigned, provided that: (i) any
transferee or assignee agrees in writing to be bound by the terms of the Note
and Warrant Purchase Agreement and the exhibits thereto, (ii) upon the request
of the Company or its counsel, the holder provides the Company with an opinion
of counsel to the effect that the Note can be transferred or assigned without
registration under the Act and in compliance with all applicable state
securities laws; and (iii) any partial transfer or assignment of this Note
causes both the transferor or assignor on the one hand and the transferee or
assignee on the other hand to retain or acquire at least $1,000,000 in face
amount, and (iv) the transferee or assignee shall not be a competitor of the
Company, as shall be determined in good faith by the Board of Directors of the
Company.
11. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Colorado, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
11.
<PAGE>
12. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to
the benefit of and by binding on Borrower and any of its permitted assigns, and
shall extent to any holder hereof. Lender may assign its rights hereunder
without prior notice to Borrower.
13. AMENDMENT. The terms and conditions of this Note may not be amended,
waived or modified except in a writing signed by an authorized agent of Lender
which writing expressly states that the writing constitutes an amendment, waiver
or modification of this Note.
14. PRO RATA TREATMENT. Lender acknowledges and agrees that the payment
of all or any portion of the outstanding principal amount of this Note and all
interest hereon shall be pari passu in right of payment and in all other
respects to the other Notes issued pursuant to the Note Agreement or pursuant to
the terms of such Notes. In the event Lender receives payments in excess of its
pro rata share of the Company's payments to the holders of all of such Notes,
then Lender shall hold in trust all such excess payments for the benefit of the
holders of the other Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
[INTENTIONALLY LEFT BLANK]
12.
<PAGE>
BORROWER EVOLVING SYSTEMS, INC.
a Delaware corporation
________________________________________
Larry S. Schwartz
Vice President
ATTEST:
______________________________
Larry S. Schwartz
Secretary
13.
<PAGE>
SCHEDULE 1
[To include full availability under existing debt and letter of credit
facilities and amounts currently outstanding under lease lines]
14.
<PAGE>
EXHIBIT B
ADDENDUM TO SUBORDINATED PROMISSORY NOTE
----------------------------------------
This Addendum to Senior Subordinated Promissory Note is made as of
September 23, 1996, with respect to that certain Senior Subordinated Promissory
Note (the "Note") by EVOLVING SYSTEMS, INC. ("Borrower") to the order of the
undersigned Lender ("Lender"). Borrower and Lender have agreed to amend the Note
in accordance with the terms of this Addendum.
NOW, THEREFORE, Borrower and Lender agree as follows:
1. Section 6(c)(i) of the Note is amended to read as follows:
(c) COMPANY NOTE TO MAKE PAYMENTS WITH RESPECT TO THIS NOTE IN
CERTAIN CIRCUMSTANCES.
(i) ACCELERATION OF SENIOR INDEBTEDNESS. In the event of any
Senior Indebtedness becoming due and payable prior to its scheduled maturity,
whether by acceleration, lapse of time or otherwise, or in the event any Senior
Indebtedness remains outstanding after its scheduled maturity, (i) no payment of
any obligation in respect of this Note shall be made until all obligations on
all such due and payable matured Senior Indebtedness shall have been paid in
full in cash and (ii) Lender may not retain, or apply to the obligations
evidenced by this Note, any monies or other property obtained pursuant to the
exercise of any of its rights and remedies, whether pursuant to this Note or
applicable law, and all such monies and other properties shall be delivered to
the holders of Senior Indebtedness, ratably according to the aggregate amounts
remaining unpaid on account of the principal of (and preminum, if any) and
interest on the Senior Indebtedness held or represented by each, to the extent
necessary to pay in full in cash all Senior Indebtedness remaining unpaid.
2. The following sentence is added as the last sentence to Section
6(c)(ii) of the Note:
Notwithstanding any other term hereof, if a Payment Default or a Covenant
Default occurs and a payment or distribution of any character of the type
described in subsection (d) of this Section 6 is made to the Lender hereunder
during the period commencing on the date of such Payment Default or Covenant
Default and terminating on the date of the Default Notice with respect thereto
is received by the Lender, and such period does not exceed forty-five (45) days,
then the Lender shall hold such amount so received in trust for the holders of
Senior Indebtedness and will forthwith pay over such amount to the holders of
Senior Indebtedness or their representative or trustee, as the case may be, for
application to the payment of all such obligations in respect of Senior
Indebtedness remaining unpaid until all such obligations in respect of such
obligations in respect of such Senior Indebtedness shall have been paid in full
in cash, after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness.
3. Section 6(c)(iii) is amended to read as follows:
(iii) LIMITATION ON ACTIONS DURING AND AFTER
POSTPONEMENT PERIOD. During any Postponement Period and except to the extent
otherwise restricted in subparagraph (i) below, the Lender shall not be entitled
to accelerate the maturity of this Note or to commence or join in any action or
proceeding to recover any amounts due or to become due with respect to this
Note.
<PAGE>
4. Sections 6(l) and 6(m) are added to the Note, as follows:
(l) REINSTATEMENT. If, at any time after payment in full in cash of
the Senior Indebtedness, any payments of the Senior Indebtedness must be
disgorged for any reason (including the Company's bankruptcy), then the
subordination provisions of this Section 6 shall be reinstated as to all such
disgorged payments as though they had not been made and Lender shall immediately
pay over to the holders of the Senior Indebtedness all payments received
hereunder to the extent that such payments would have been prohibited by the
subordination provisions of this Section 6.
(m) AMENDMENTS. This Note may be not be amended at any time while any
Senior Indebtedness is outstanding if the effect of such amendment may be to
terminate or impair the subordination of the obligations evidenced by this Note
to the Senior Indebtedness without the prior written consent of all of the
holders of the Senior Indebtedness. Any amendment made without such consent
shall be void.
This Addendum may be executed in two or more counterparts, each of which
shall constitute an original.
Except as amended by this Addendum, the Note remains in full force and
effect.
ENVOLVING SYSTEMS, INC.
By:____________________________
Title:_________________________
_______________________________
By:____________________________
Title:_________________________
2
<PAGE>
EXHIBIT A
SECOND ADDENDUM TO SUBORDINATED PROMISSORY NOTE
This Second Addendum to Senior Subordinated Promissory Note is made as of
September 27, 1996 with respect to that certain Senior subordinated Promissory
Note (the "Note") by EVOLVING SYSTEMS, INC. ("Borrower") to the order of the
undersigned Lender ("Lender"). Borrower and Lender have agreed to amend the Note
in accordance with the terms of this Addendum,
NOW, THEREFORE, Borrower and Lender agree as follows:
1. Borrower and Lender agree to defer the payment of all interest accrued
on the Note from the date of issuance through November 30, 1996 (the "Deferred
Interest") as provided in Paragraph 2 below. Borrower and Lender agree that the
Deferred Interest is equal to $_______, which was calculated by taking the total
interest to be accrued on the Note through November 30, 1996 less $______
payable to Borrower by Lender for the purchase of Warrants to purchase_______
shares of the nonvoting common stock of Lender.
2. ESI shall pay the Deferred Interest to Lender by no later than
December 1, 1998, plus interest on such amount accrued at the default rate under
the Note (12%) commencing on December 1, 1996 until the date of payment of the
Deferred Interest.
3. ESI shall have the right to prepay the Deferred Interest and interest
accrued thereon at any time without penalty and shall prepay the Deferred
Interest and interest accrued thereon upon the occurrence of any event requiring
ESI to prepay the Note.
This Addendum may be executed in two or more counterparts, each of which
shall constitute an original.
Except as amended by this Addendum, the Note remains in full force and
effect.
ENVOLVING SYSTEMS, INC.
By:_______________________________
Douglas Kelsall
Vice Pres. of Finance
By:_______________________________
Larry Schwartz
Vice Pres. of Legal Services
<PAGE>
[LENDER]
By:
By:___________________________
________________________
2
<PAGE>
AMENDMENT
TO
SENIOR SUBORDINATED PROMISSORY NOTES
THIS AMENDMENT to Senior Subordinated Promissory Notes is entered into this 3rd
day of October, 1997 by and among EVOLVING SYSTEMS, INC., a Delaware corporation
(the "COMPANY"), and MORGAN STANLEY VENTURE PARTNER II, LP., MORGAN STANLEY
VENTURE CAPITAL FUND II, C.V., MORGAN STANLEY VENTURE INVESTORS, L.P.,
INFORMATION ASSOCIATES, L.P. AND INFORMATION ASSOCIATES, C.V. (individually a
"LENDER" and collectively the "LENDERS").
RECITALS
A. On May 31, 1996, the Company and the Lenders entered into a Note and
Warrant Purchase Agreement under which the Company borrowed from the
Lenders the amounts set forth on the Schedule of Lenders attached hereto as
EXHIBIT A pursuant to the terms of senior subordinated notes (the "NOTES"),
one of which is attached hereto as EXHIBIT B.
B. Pursuant to Section 7 of the Notes, the Company agreed to abide by certain
Covenants (the "COVENANTS").
C. Section 7(g) of the Covenants provided certain limitations on rental
payment obligations under operating leases of personal property based upon
what the parties believed were adequate amounts for then existing and for
future operating leases.
D. Since execution of the Notes, the Company has grown its operations and
changed the focus of its business. In addition, much of the Company's
equipment has become obsolete and in order to sustain the Company's
continued growth and profitability, the value of the Company's operating
leases needs to be increased for the mutual benefit of the Company and the
Lenders.
NOW, THEREFORE, in consideration of the Company's successful performance since
the date of execution of the Notes, and in order to sustain continued growth of
the Company for the mutual benefit of the Company and the Lenders, the parties
agree as follows:
1. The first paragraph of Section 7(g) of the Notes is hereby revoked and the
following provision inserted in its place and stead:
(g) create or suffer to exist any rental payment obligations under
operating leases of personal property in an amount in excess of the amount
set forth below in the indicated fiscal year:
1
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AMOUNT
<S> <C>
December 31, 1996 $1,500,000
December 31, 1997 $2,000,000
December 31, 1998 $2,250,000
December 31, 1999 $2,500,000
December 31, 2000 $2,750,000
December 31, 2001 $3,000,000
December 31, 2002 $3,250,000
December 31, 2003 $3,500,000
</TABLE>
The remainder of Section 7(g) shall continue in full force and effect.
2. The Lenders, individually and collectively, hereby waive any and all claims
they may have against the Company, based upon the Company's operating
leases of personal property being in excess of the amounts described in May
31, 1996 Notes.
3. All the remaining provisions of the Notes shall continue in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EVOLVING SYSTEMS, INC.
By: /s/ J. Richard Abramson
-------------------------------------
J. Richard Abramson
Chief Executive Officer and President
LENDERS:
MORGAN STANLEY VENTURE CAPITAL FUND II, L.P.
By: Morgan Stanley Venture Partners II, L.P.
Its General Partner
By: Morgan Stanley Venture Capital II, Inc.
Managing General Partner
By: /s/ Robert J. Loarie
--------------------------------------
Robert J. Loarie
Vice President
MORGAN STANLEY VENTURE CAPITAL FUND II, C.V.
By: Morgan Stanley Venture Partners II, L.P.
Its Investment General Partner
By: Morgan Stanley Venture Capital II, Inc.
Managing General Partner
By: /s/ Robert J. Loarie
--------------------------------------
Robert J. Loarie
Vice President
2
<PAGE>
MORGAN STANLEY VENTURE INVESTORS, L.P.
By: Morgan Stanley Venture Partners II. L.P.
Its General Partner
By: Morgan Stanley Venture Capital II. Inc.
Managing General Partner
By: /s/ Robert J. Loarie
--------------------------------------
Robert J. Loarie
Vice President
INFORMATION ASSOCIATES, L.P.
By: TRIDENT CAPITAL MANAGEMENT, LLC., its general partner
By: /s/ Donald Dixon
--------------------------------------
Donald Dixon
INFORMATION ASSOCIATES, C.V.
By: TRIDENT CAPITAL MANAGEMENT, L.L.C., its investment general partner
By: /s/ Donald Dixon
--------------------------------------
Donald Dixon
<PAGE>
EXHIBIT 10.6
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE
SHARES OF NON-VOTING COMMON STOCK OF
EVOLVING SYSTEMS, INC.
(VOID AFTER MAY 31, 2003)
THIS CERTIFIES that _______________________________________("HOLDER"),
or assigns, for value received, are entitled to purchase from EVOLVING SYSTEMS,
INC., a Delaware corporation (the "COMPANY"), having a place of business at 6892
S. Yosemite Street, Englewood, Colorado 80112, a maximum of ____________ fully
paid and nonassessable shares of the Company's Non-Voting Common Stock ("NON-
VOTING COMMON STOCK") for cash at a price of one dollar twenty cents ($1.20) per
share (the "STOCK PURCHASE PRICE") at any time or from time to time up to and
including 5:00 p.m. (Mountain Time) May 31, 2003 (the "EXPIRATION DATE"), upon
surrender to the Company at its principal office (or at such other location as
the Company may advise the Holder in writing) of this Warrant properly endorsed
and, if applicable, upon payment in cash or by check of the aggregate Stock
Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof. The Stock
Purchase Price and the number of shares purchasable hereunder are subject to
adjustment as provided in Section 3 of this Warrant.
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
(A) GENERAL. This Warrant is exercisable at the option of the Holder
of record hereof, at any time or from time to time, up to the Expiration Date
for all or any part of the shares of Non-Voting Common Stock (but not for a
fraction of a share) which may be purchased hereunder.
(B) ISSUANCE OF CERTIFICATES. The Company agrees that the shares of
Non-Voting Common Stock purchased under this Warrant shall be and are deemed to
be issued to the Holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered,
properly endorsed and payment made for such shares. Certificates for the shares
of Non-Voting Common Stock so purchased, together with any other securities or
property to which the Holder hereof is entitled upon such exercise, shall be
delivered to the Holder hereof by the Company at the Company's expense within a
reasonable time after the rights represented by this Warrant have been so
exercised. In case of a purchase of less than all the shares which may be
purchased under this Warrant, the Company shall cancel this Warrant and execute
and deliver a new Warrant or Warrants of like tenor for the balance of the
shares purchasable under the Warrant surrendered upon such purchase to the
Holder hereof within a reasonable time. Each stock certificate so delivered
shall be in such denominations of
<PAGE>
Non-Voting Common Stock as may be requested by the Holder hereof and shall be
registered in the name of such Holder or as directed by such Holder.
(C) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Non-Voting
Common Stock is greater than the Stock Purchase Price (at the date of
calculation as set forth below), in lieu of exercising this Warrant for cash,
the Holder may elect to receive shares equal to the value (as determined below)
of this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company and notice of such election in
which event the Company shall issue to the Holder a number of shares of Non-
Voting Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the
Holders
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the date of such calculation)
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation)
B = Stock Purchase Price (as adjusted to the date of such
calculation)
For purposes of the above calculation, the fair market value of one share of
Non-Voting Common Stock shall be determined by the Company's Board of Directors
in good faith; provided, however, that where there exists a public market for
the Company's Non-Voting Common Stock at the time of such exercise, the fair
market value per share shall be the average of the closing bid and asked prices
of the Non-Voting Common Stock quoted in the Over-The-Counter Market Summary or
the last reported sale price of the Non-Voting Common Stock or the closing price
quoted on the Nasdaq National Market or on any exchange on which the Non-Voting
Common Stock is listed, whichever is applicable, as published in the Western
Edition of The Wall Street Journal for the five (5) trading days prior to the
date of determination of fair market value. This Section I(C) is applicable only
upon or after an initial public offering of the Company's Non-Voting Common
Stock or other liquidation event, including, but not limited to, a sale of all
or substantially all the assets of the Company.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all shares of Non-Voting Common Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any stockholder, except as set forth in the Registration
Rights Agreement, as amended, and free of all taxes, liens and charges with
respect to the issue thereof. The Company further covenants and agrees that,
except as noted in the introductory paragraph of this Warrant, during the period
within which the rights
2
<PAGE>
represented by this Warrant may be exercised, the Company will at all times have
authorized and reserved, for the purpose of issue or transfer upon exercise of
the subscription rights evidenced by this Warrant, a sufficient number of shares
of authorized but unissued Non-Voting Common Stock, or other securities and
property, when and as required to provide for the exercise of the rights
represented by this Warrant. The Company will take all such action as may be
necessary to assure that such shares of Non-Voting Common Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Non-Voting
Common Stock may be listed; provided, however, that the Company shall not be
required to effect a registration under federal or state securities laws with
respect to such exercise except as set forth in the Registration Rights
Agreement. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (i) if the total number of shares of Non-
Voting Common Stock issuable after such action upon exercise of all outstanding
warrants, together with all shares of Non-Voting Common Stock then outstanding
and all shares of Non-Voting Common Stock then issuable upon exercise of all
options and upon the conversion of all convertible securities then outstanding,
would exceed the total number of shares of Non-Voting Common Stock then
authorized by the Company's Amended and Restated Certificate of Incorporation,
or (ii) if the total number of shares of Non-Voting Common Stock issuable after
such action upon the conversion of all such shares of Preferred Stock, together
with all shares of Non-Voting Common Stock then issuable upon exercise of all
options and upon the conversion of all such shares of Preferred Stock, together
with all shares of Non-Voting Common Stock then outstanding and all shares of
Non-Voting Common Stock then issuable upon exercise of all options and upon the
conversion of all convertible securities then outstanding would exceed the total
number of shares of Non-Voting Common Stock then authorized by the Company's
Amended and Restated Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
(A) SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Non-Voting Common Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Non-Voting Common Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
(B) DIVIDENDS IN NON-VOTING COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holder of Non-Voting
Common Stock
3
<PAGE>
(or any shares of stock or other securities at the time receivable upon the
exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(I) Non-Voting Common Stock or any shares of stock or other
securities which are at any time directly or indirectly convertible into or
exchangeable for Non-Voting Common Stock, or any rights or options to subscribe
for, purchase or otherwise acquire any of the foregoing by way of dividend or
other distribution;
(II) Any cash paid or payable otherwise than as a cash dividend;
or Non-Voting Common Stock or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification, combination of
shares or similar corporate rearrangement (other than (i) shares of Non-Voting
Common Stock issued as a stock split, adjustments in respect of which shall be
covered by the terms of Section 3(a) above or (ii) an event for which adjustment
is otherwise made pursuant to Section 3(c) below), then and in each such case,
the Holder hereof shall, upon the exercise of this Warrant, be entitled to
receive, in addition to the number of shares of Non-Voting Common Stock
receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the case referred to in clause 3(b)(ii) above) which such Holder would hold
on the date of such exercise had he been the holder of record of such Non-Voting
Common Stock as of the date on which Holder of Non-Voting Common Stock received
or became entitled to receive such shares or all other additional stock and
other securities and property.
(C) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation shall be effected
in such a way that Holder of Non-Voting Common Stock shall be entitled to
receive stock, securities, or other assets or property, then, as a condition of
such reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the Holder hereof shall thereafter
have the right to purchase and receive (in lieu of the shares of the Non-Voting
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Non-Voting Common
Stock equal to the number of shares of such stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby;
provided, however, that in the event the value of the stock, securities or other
assets or property (determined in good faith by the Board of Directors of the
Company or, if the Holder shall disagree with such determination by an
investment banker or business appraiser mutually acceptable to the Company and
Holder who is engaged at the Company's expense) issuable or payable with respect
to one share of the Non-Voting Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby is in excess of ten dollars ($10.00) at the time of the
merger and the resale of securities received in such reorganization, if any, is
registered so that such securities may be immediately resold, then this Warrant
shall expire unless exercised
4
<PAGE>
prior to the reorganization. In any reorganization described above in which the
Warrant does not terminate appropriate provision shall be made with respect to
the rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Stock Purchase Price and of the number of shares purchasable and receivable
upon the exercise of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets of the
surviving corporation or its parent thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if other
than the Company) or such corporation's parent resulting from such consolidation
or the corporation purchasing such assets shall assume by written instrument,
executed and mailed or delivered to the registered Holder hereof at the last
address of such Holder appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
purchase.
(D) NOTICE OF ADJUSTMENT. Upon any adjustment of the Stock Purchase
Price or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such Holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(E) OTHER NOTICES. If at any time:
(I) the Company shall declare any cash dividend upon its Non-
Voting Common Stock;
(II) the Company shall declare any dividend upon its Non-Voting
Common Stock payable in stock or make any special dividend
or other distribution to the Holder of its Non-Voting
Common Stock;
(III) there shall be any capital reorganization or
reclassification of the capital stock of the Company; or
consolidation or merger of the Company with, or sale of all
or substantially all of its assets to, another corporation;
(IV) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(V) there shall be an initial public offering of Company
securities;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the
5
<PAGE>
books of the Company, (a) at least twenty (20) days prior written notice of the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, and (b) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or public offering, at least twenty (20) days prior
written notice of the date when the same shall take place; provided, however,
that the Holder shall make a best efforts attempt to respond to such notice as
early as possible after the receipt thereof. Any notice given in accordance with
the foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the Holder of Non-Voting
Common Stock shall be entitled thereto. Any notice given in accordance with the
foregoing clause (b) shall also specify the date on which the Holder of Non-
Voting Common Stock shall be entitled to exchange their Non-Voting Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up or public offering, as the case may be.
(F) CERTAIN EVENTS. If any change in the outstanding Non-Voting
Common Stock of the Company or any other event occurs as to which the other
provisions of this Section 3 are not strictly applicable or if strictly
applicable would not fairly protect the purchase rights of the Holder of the
Warrant in accordance with such provisions, the Board of Directors of the
Company shall make an adjustment in the number and class of shares available
under the Warrant, the Stock Purchase Price or the application of such
provisions, so as to protect such purchase rights as aforesaid. The adjustment
shall be such as will give the Holder of the Warrant upon exercise for the same
aggregate Stock Purchase Price the total number, class and kind of shares as he
would have owned had the Warrant been exercised prior to the event and had he
continued to hold such shares until after the event requiring adjustment.
4. ISSUE TAX. The issuance of certificates for shares of Non-Voting
Common Stock upon the exercise of the Warrant shall be made without charge to
the Holder of the Warrant for any issue tax (other than any applicable income
taxes) in respect thereof; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of the
then Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Non-Voting Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provision
6
<PAGE>
hereof in the absence of affirmative action by the holder to purchase shares of
Non-Voting Common Stock, and no mere enumeration herein of the rights or
privileges of the holder hereof, shall give rise to any liability of such holder
for the Stock Purchase Price or as a stockholder of the Company, whether such
liability is asserted by the Company or by its creditors.
7. REGISTRATION RIGHTS AGREEMENT. The registration rights of the Holder
(including Holder' successors) with respect to this Warrant and the underlying
stock are set forth in a Registration Rights Agreement of even date herewith.
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, and the transfer restrictions set forth below, this
Warrant and all rights hereunder are transferable, in whole or in part, without
charge to the holder hereof (except for transfer taxes), upon surrender of this
Warrant properly endorsed and in compliance with the provisions of the Note and
Warrant Purchase Agreement. Each taker and holder of this Warrant, by taking or
holding the same, consents and agrees that this Warrant, when endorsed in blank,
shall be deemed negotiable, and that the holder hereof, when this Warrant shall
have been so endorsed, may be treated by the Company, at the Company's option,
and all other persons dealing with this Warrant as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented by
this Warrant, or to transfer this Warrant on the books of the Company any notice
to the contrary notwithstanding; but until such transfer on such books, the
Company may treat the registered owner hereof as the owner for all purposes.
This Warrant may be transferred or assigned by the Holder only to a
transferee or assignee of a Warrant to purchase not less than 50,000 shares of
Non-Voting Common Stock (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits and the
like), provided that: (i) any transferee or assignee agrees in writing to be
bound by the terms of the Note and Warrant Purchase Agreement and the exhibits
thereto, and (ii) upon the request of the Company or its counsel, the Holder
provides the Company with an opinion of counsel to the effect that the Warrant
can be transferred or assigned without registration under the Act and in
compliance with all applicable state securities laws.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the Holder of this Warrant and of the Holder of
shares of Non-Voting Common Stock issued upon exercise of this Warrant, referred
to in Sections 7 and 8 shall survive the exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party or parties against which enforcement of the same is sought,
provided that any change, waiver, discharge or termination agreed to in writing
by a majority in interest of warrants of the Company of even date herewith
issued pursuant to the Note and Warrant Purchase Agreement shall be binding on
Holder and assigns.
11. NOTICES. Any notice, request or other document required or permitted
to be given or delivered to the Holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the Company
7
<PAGE>
or to the Company at the address indicated therefor in the first paragraph of
this Warrant or such other address as either may from time to time provide to
the other.
12. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Non-Voting Common Stock issuable upon the exercise of
this Warrant shall survive the exercise and termination of this Warrant. All of
the covenants and agreements of the Company shall inure to the benefit of the
successors and assigns of the holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Colorado.
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
[INTENTIONALLY LEFT BLANK]
8
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its officers, thereunto duly authorized this 31st day of May, 1996.
EVOLVING SYSTEMS, INC.
a Delaware corporation
___________________________________
Larry S. Schwartz
Vice President
ATTEST:
____________________________
Larry S. Schwartz
Secretary
9
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EXHIBIT 10.7
EVOLVING SYSTEMS, INC.
REGISTRATION RIGHTS AGREEMENT
May 31, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. FULL AND COMPLETE UNDERSTANDING..................................... 1
2. DEFINITIONS......................................................... 1
3. RESTRICTIONS ON TRANSFER; REGISTRATION.............................. 3
3.1 Restrictions on Transfer.................................... 3
3.2 Demand Registration......................................... 4
3.3 Piggyback Registrations..................................... 5
3.4 Form S-3 Registration....................................... 7
3.5 Obligations of the Company.................................. 7
3.6 Termination of Registration Rights.......................... 9
3.7 Furnish Information......................................... 9
3.8 Delay of Registration....................................... 9
3.9 Indemnification............................................. 9
3.10 Assignment of Registration Rights........................... 11
3.11 Amendment of Registration Rights............................ 11
3.12 Limitation on Subsequent Registration Rights................ 11
3.13 "Market Stand Off" Agreement................................ 12
4. COVENANTS OF THE COMPANY............................................ 12
4.1 Basic Financial Information and Reporting.................... 12
4.2 Confidentiality.............................................. 13
4.3 Termination of Covenants..................................... 13
5. RIGHT OF FIRST REFUSAL.............................................. 13
5.1 Right of First Refusal of Securityholder Issuances........... 13
5.2 Right of First Refusal of Company Issuances.................. 15
6. CO-SALE RIGHTS...................................................... 17
6.1 Sales by Original Investors.................................. 17
6.2 Exempt Transfers............................................. 18
6.3 Termination of Co-Sale Rights................................ 19
7. BOARD OF DIRECTORS.................................................. 19
7.1 Election of Directors........................................ 19
7.2 Termination of Board Rights.................................. 20
8. INSURANCE........................................................... 20
8.1 Transfers at Death........................................... 20
8.2 Required Policies............................................ 20
8.3 Termination of Required Policies............................. 21
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C>
9. MISCELLANEOUS....................................................... 21
9.1 Governing Law............................................... 21
9.2 Survival.................................................... 21
9.3 Successors and Assigns...................................... 21
9.4 Severability................................................ 21
9.5 Amendment and Waiver........................................ 21
9.6 Delays or Omissions......................................... 21
9.7 Notices, etc................................................ 22
9.8 Attorneys' Fees............................................. 22
9.9 Titles and Subtitles........................................ 22
9.10 Counterparts................................................ 22
</TABLE>
ii
<PAGE>
EVOLVING SYSTEMS, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of
the 31st day of May, 1996, by and among EVOLVING SYSTEMS, INC., a Delaware
corporation (the "COMPANY"), the parties listed on Exhibit A hereto (the
"PURCHASERS") and the parties listed on Exhibit B hereto (the "ORIGINAL
INVESTORS").
WHEREAS, certain existing stockholders of the Company propose to sell and
issue up to an aggregate of 1,337 shares of Series A Preferred Stock of the
Company pursuant to that certain Stock Transfer Agreement dated as of even date
herewith (the "TRANSFER AGREEMENT");
WHEREAS, the Company proposes to sell and issue warrants to purchase up to
485,333 shares of Non-Voting Common Stock (the "WARRANTS") pursuant to that
certain Note and Warrant Purchase Agreement dated as of even date herewith (the
"NOTE AND WARRANT AGREEMENT"); and
WHEREAS, as a condition of entering into the Transfer Agreement and the
Note and Warrant Agreement, the prospective purchasers have requested that the
Company extend certain registration rights, rights of first refusal and rights
to financial information to the Purchasers and Original Investors as set forth
below.
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
considerations and releases contained herein, the parties hereby agree as
follows:
1. FULL AND COMPLETE UNDERSTANDING
This Agreement constitutes the full and entire understanding among the
parties with regard to the subject matter hereof, and no party shall be liable
or bound to any other party in any manner by any warranties, representations or
covenants relating to the subject matter, except as specifically set forth
herein.
2. DEFINITIONS
2.1 The term "NEW HOLDER" means any Purchaser owning of record Registrable
Securities that have not been sold to the public or any assignee of a Purchaser
of such Registrable Securities in accordance with Section 3.10 hereof.
2.2 The term "ORIGINAL HOLDER" means any Original Investor owning of
record Registrable Securities that have not been sold to the public or any
assignee of record of such Registrable Securities in accordance with Section
3.10 hereof.
2.3 An Original Holder's "PERSONAL REPRESENTATIVE" includes any
administrator, executor, trustee, or other personal representative who is vested
with the responsibility for administering the disposition of any stock on
account of a deceased original holder's death, and equally any individual who
holds such stock as a legatee, distributee, or successor in interest, or
1
<PAGE>
trustee where no executor, administrator, or similar fiduciary is appointed or
where any appointed executor, administrator, or fiduciary does not have control
over any of the deceased original holder's shares of the stock.
2.4 The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
2.5 The term "REGISTRABLE SECURITIES" means (a) Common Stock of the
Company issued or issuable upon conversion of the Series A Preferred Stock (the
"PREFERRED STOCK"); (b) shares of Non-Voting Common Stock issuable upon exercise
of the Warrants; (c) shares of Common Stock purchased by the Holders or issued
or issuable to Holders upon conversion of other securities purchased by Holders
pursuant to their right of first refusal in Section 5 of this Agreement; (d) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for, conversion of or in
replacement of, such above-described securities; and (e) shares of Common Stock
owned by the Original Investors as of the date hereof. Notwithstanding the
foregoing, Registrable Securities shall not include any securities sold by a
person to the public either pursuant to a registration statement or Rule 144 or
sold in a private transaction in which the transferor's rights under Section 3
of this Agreement with respect to such registration rights are not assigned and
shall not include securities held by a person if all the securities held by such
person may be sold pursuant to Rule 144 in any three month period.
2.6 The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING"
shall be determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
2.7 The term "SECURITIES" shall mean (a) any stock or similar security of
the Company, (b) any security convertible, with or without consideration, into
any stock or similar security of the Company, (c) any security carrying any
warrant or right to subscribe to or purchase any stock or similar security of
the Company, or (d) any such warrant or right.
2.8 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
2.9 The term "SECURITYHOLDER" shall refer to any holder of Securities.
2.10 The term "FORM S-3" means such form under the Securities Act as in
effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
2.11 The term "HOLDER" or "HOLDERS" refers to the New Holders and Original
Holders combined.
2
<PAGE>
2.12 The term "SEC" or "COMMISSION" means the Securities and Exchange
Commission.
3. RESTRICTIONS ON TRANSFER; REGISTRATION
3.1 RESTRICTIONS ON TRANSFER
(A) Each Holder agrees not to make any disposition of all or any
portion of the Preferred Stock or Registrable Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
Sections 3, 5 and 6 of this Agreement, provided and to the extent such Section
is then applicable and:
(I) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(II) (A) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(III) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder to its affiliates or by a Holder which is a
partnership to its partners or affiliates in accordance with partnership
interests provided the transferee will be subject to the terms of this Section
3.1 to the same extent as if he were an original Holder hereunder.
(B) Each certificate representing Preferred Stock or Registrable
Securities shall (unless otherwise permitted by the provisions of the Agreement)
be stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws or as provided elsewhere in the Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR
BASED ON OTHER WRITTEN EVIDENCE IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
3
<PAGE>
(C) The Company shall reissue promptly unlegended certificates at the
request of any holder thereof if the holder shall have obtained an opinion of
counsel (which counsel may be counsel to the Company) reasonably acceptable to
the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend.
(D) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
3.2 DEMAND REGISTRATION.
(A) Subject to the conditions of this Section 3.2, if the Company
shall receive at any time after the earlier of six months after the effective
date of the first underwritten public offering of the Company's securities (the
"INITIAL OFFERING") or June 30, 1998 a written request from the New Holders of
not less than forty percent (40%) of the outstanding Registrable Securities then
owned by the New Holders (the "INITIATING HOLDERS") that the Company file a
registration statement under the Securities Act covering the registration of
Registrable Securities having an aggregate offering price, net of underwriting
discounts and commission, in excess of $5,000,000, then the Company shall,
within thirty (30) days of the receipt thereof, give written notice of such
request to all Holders, and subject to the limitations of Section 3.2(b),
effect, as soon as practicable, the registration under the Securities Act of all
Registrable Securities that the New Holders request to be registered (a "DEMAND
REGISTRATION"). Provided that such request of the New Holders is satisfied, the
Original Holders may, subject to the limitations of Section 3.2(b), participate
in such Demand Registration.
(B) Any registration under this Section 3.2 must be a firmly
underwritten offering with an underwriter or underwriters of nationally
recognized standing selected for such underwriting by a majority in interest of
the Initiating Holders (which underwriter or underwriters shall be reasonably
acceptable to the Company). The right of any New Holder and Original Holder, if
any, to include his Registrable Securities in such registration shall be
conditioned upon such New Holder's and Original Holder's, if any, participation
in such underwriting and the inclusion of such New Holder's and Original
Holder's, if any, Registrable Securities in the underwriting to the extent
provided herein. All New Holders and Original Holders, if any, proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters.
Notwithstanding any other provision of this Section 3.2, if the underwriter
advises the Company in writing that marketing factors require a limitation of
the number of securities to be underwritten (including Registrable Securities)
then the Company shall so advise all New Holders and Original Holders, if any,
of Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated, first, to the New Holders on a pro rata basis based on the number of
Registrable Securities held by all such New Holders (including the Initiating
Holders); second, to the Original Holders, if any, on a pro rata basis based on
the number of Registrable Securities
4
<PAGE>
held by all such Original Holders; and third, to shares to be registered and
sold for the Company's own account. In any event the New Holders shall be
entitled to include in such registration no less than fifty percent (50%) of all
the Registrable Securities included by all Holders.
(C) The Company is obligated to effect only two (2) such
registrations pursuant to this Section 3.2. A registration pursuant to this
Section 3.2 may be the Initial Offering.
(D) The Company shall not be required to effect a registration
pursuant to this Section 3.2 during the period starting with the date of filing
of, and ending on the date ninety (90) days following the effective date of the
registration statement pertaining to the Initial Offering, provided that the
Company is making reasonable and good faith efforts to cause such registration
statement to become effective. In addition, the Company shall not be required to
effect a registration pursuant to this Section 3.2 if within thirty (30) days of
receipt of a written request from Initiating Holders pursuant to Section 3.2(a),
the Company gives notice to the Holders of the Company's intention to make its
Initial Offering and files the registration statement with respect thereto
within sixty days of such notice.
(E) Notwithstanding the foregoing, if the Company shall furnish to
the New Holders requesting a registration statement pursuant to this Section
3.2, a certificate signed by the Chief Executive Officer of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for a period of not more than ninety (90) days after receipt of the
request of the Initiating Holders; provided that such right to delay a request
shall be exercised by the Company no more than once in any one-year period.
(F) All expenses incurred in connection with the registrations
pursuant to this Section 3.2 (excluding underwriters' discounts and commissions,
which shall be paid by the selling New Holders and Original Holders, if any, pro
rata), including without limitation all registration, filing, qualification,
printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements of a single counsel for the
selling New Holders and Original Holders, if any, shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 3.2 if the
registration request is subsequently withdrawn by the Initiating Holders, unless
the withdrawal of the registration request results from either (i) intentional
actions by the Company outside the normal course of business or (ii) the
discovery of information about the Company that is not known at the time of the
Initiating Holders' request made pursuant to Section 3.2(a) that materially
reduces the feasibility of the registration proceeding.
3.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities (or their transferees who have received the Registrable
Securities in compliance with Section 3.1 of this Agreement, who for purposes of
this Section 3.3 shall be deemed to be a
5
<PAGE>
Holder) in writing at least thirty (30) days prior to the filing of any
registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans and corporate reorganizations) and will afford each such Holder an
opportunity to include in such registration statement all or part of such
Registrable Securities held by such Holder. Each Holder desiring to include in
any such registration statement all or any part of the Registrable Securities
held by it shall, within twenty (20) days after receipt of the above-described
notice from the Company, so notify the Company in writing. Such notice shall
state the intended method of disposition of the Registrable Securities by such
Holder. If a Holder decides not to include all of its Registrable Securities in
any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(A) If the registration statement under which the Company gives
notice under this Section 3.3 is for an underwritten offering, the Company shall
so advise the Holders of Registrable Securities. In such event, the right of any
such Holder to be included in a registration pursuant to this Section 3.3 shall
be conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting. If the underwriter determines in good faith that marketing factors
require a limitation of the number of shares to be underwritten, the number of
shares that may be included in the underwriting shall be allocated, first, to
the Company for its own account; second, to the Holders on a pro rata basis
based on the total number of Registrable Securities held by the Holders; and
third, to any stockholder (other than a Holder) invoking contractual rights to
have their securities registered, if any, on a pro rata basis. No such reduction
shall reduce the securities being offered by the Company for its own account to
be included in the registration and underwriting, except that in no event shall
the amount of securities of the selling Holders included in the registration be
reduced below twenty-five percent (25%) of the total amount of securities
included in such registration, unless such offering is the Initial Offering, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter, delivered at
least five (5) days prior to the effective date of the registration statement.
Any Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration.
(B) The Company shall bear all fees and expenses incurred in
connection with any registration under this Section 3.3, including without
limitation all registration, filing, qualification, printers' and accounting
fees, fees and disbursements of counsel to the Company, and the reasonable fees
and disbursements of a single counsel to the selling Holders, except that each
participating Holder shall bear its proportionate share of all amounts payable
to underwriters in connection with such offering for discounts and commissions.
6
<PAGE>
3.4 FORM S-3 REGISTRATION. In case the Company shall receive a written
request or requests from Holders of Registrable Securities owning at least one
percent (1%) of the outstanding shares of the Company's Common Stock on an as-
converted (fully diluted) basis that the Company effect a registration on Form
S-3 and any related qualification or compliance with respect to all or a part of
the Registrable Securities owned by such Holder or Holders, the Company will:
(I) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and
(II) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 3.4: (a) if
Form S-3 is not available for such offering by the Holders, (b) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public of $1,000,000 or
less, (c) if the Company shall furnish to the Holders a certificate signed by
the Chief Executive Officer of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than ninety (90) days after receipt of the request of the Holder or Holders
under this Section 3.4, (d) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected two (2)
registrations on Form S-3 for the Holders pursuant to this Section 3.4, or (e)
in any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(III) Subject to the foregoing, the Company shall file a Form S-
3 registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. The Company shall pay all expenses
incurred in connection with all registrations requested pursuant to this Section
3.4 (excluding underwriters' discounts and commissions, which shall be paid by
the selling Holders pro rata), including without limitation all registration,
filing, qualification, printers' and accounting fees, fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of a single
counsel for the selling Holder or Holders.
3.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(A) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become
7
<PAGE>
effective, and, upon the request of the Holders of a majority of the Registrable
Securities registered thereunder, keep such registration statement effective for
up to ninety (90) days.
(B) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(C) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(D) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(E) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(F) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(G) Furnish, at the request of any Holder requesting registration of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
8
<PAGE>
3.6 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted
under this Section 3 shall terminate and be of no further force and effect after
the date seven (7) years following the Company's Initial Offering.
3.7 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 3.2, 3.3 or
3.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to effect the
registration of their Registrable Securities.
3.8 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 3.
3.9 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under Sections 3.2, 3.3 or 3.4:
(A) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Securities Exchange Act of 1934, as amended, (the
"1934 ACT"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the 1934 Act
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation") by the Company: (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state securities law in connection with the offering covered
by such registration statement; and the Company will reimburse each such Holder,
partner, officer or director, underwriter or controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this Section 3.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
(B) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers, each person, if any, who
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controls the Company within the meaning of the Securities Act, any underwriter
and any other Holder selling securities under such registration statement or any
of such other Holder's partners, directors or officers or any person who
controls such Holder, against any losses, claims, damages or liabilities (joint
or several) to which the Company or any such director, officer, controlling
person, underwriter or other such Holder, or partner, director, officer or
controlling person of such other Holder may become subject under the Securities
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Holder, or partner, officer, director or
controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action if it is judicially
determined that there was such a Violation; provided, however, that the
indemnity agreement contained in this Section 3.9(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 3.9(b) exceed the gross proceeds from the offering
received by such Holder.
(C) Promptly after receipt by an indemnified party under this Section
3.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 3.9, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 3.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 3.9.
(D) If the indemnification provided for in this Section 3.9 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that
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resulted in such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by a court of law by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(E) The foregoing indemnity agreements of the Company and Holders are
subject to the condition that, insofar as they relate to any Violation made in a
preliminary prospectus but eliminated or remedied in the amended prospectus on
file with the SEC at the time the registration statement in question becomes
effective or the amended prospectus filed with the SEC pursuant to SEC Rule
424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus was furnished to the
indemnified party and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.
(F) The obligations of the Company and Holders under this Section 3.9
shall survive the completion of any offering of Registrable Securities in a
registration statement, and otherwise.
3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities pursuant to this Section 3 may be assigned by a
Holder to a transferee or assignee of Registrable Securities; provided, however,
that except as provided below no such transferee or assignee shall be entitled
to registration rights under Sections 3.2, 3.3 or 3.4 hereof unless (i) it owns
a minimum of 100,000 shares of Registrable Securities (on an as-converted basis
and subject to subsequent adjustments for stock splits, stock dividends, reverse
stock splits and similar events) or (ii) with respect to an aggregate of thirty
(30) shares as provided in Section 5.1(a)(iv), and the Company shall promptly be
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned. Notwithstanding the foregoing, rights to cause the Company to
register Registrable Securities may be assigned to any subsidiary or parent of a
Holder or to any general or limited partner of any Holder.
3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 3 may
be amended, and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company, New Holders holding a majority of the
Registrable Securities held by all New Holders and Holders holding a majority of
Registrable Securities held by all Holders. Any amendment or waiver effected in
accordance with this Section 3.11 shall be binding upon each Holder and the
Company. By acceptance of any benefits under this Section 3, Holders of
Registrable Securities hereby agree to be bound by the provisions hereunder.
3.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this
Agreement, the Company shall not, without the prior written consent of both a
majority of the Holders and a majority of the New Holders, enter into any
agreement with any holder or
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prospective holder of any securities of the Company that would permit such
holder to require to participate in any registration of securities of the
Company or that the Company register any securities held by such holder.
3.13 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that during
the 180-day period following the effective date of a registration statement of
the Company filed under the 1933 Act, it shall not, to the extent requested by
the Company and the managing underwriter, sell or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any Common Stock of
the Company held by it at any time during such period except Common Stock
included in such registration; provided, however, that:
(A) Such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(B) All officers and directors of the Company and all other persons
with registration rights (whether or not pursuant to this Agreement) enter into
similar agreements.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
4. COVENANTS OF THE COMPANY
4.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(A) The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(B) As soon as practicable after the end of each fiscal year of the
Company, and in any event within 120 days thereafter, the Company will furnish
each Purchaser an audited consolidated balance sheet of the Company, as at the
end of such fiscal year, an audited consolidated statement of income and an
audited consolidated statement of cash flows of the Company, for such year, all
prepared in accordance with generally accepted accounting principles and setting
forth in each case, in comparative form, the figures for the previous fiscal
year, all in reasonable detail. Such financial statements shall be accompanied
by a report and opinion thereon by independent public accountants of national
standing selected by the Company's Board of Directors.
(C) The Company will furnish each Purchaser (i) at least thirty (30)
days prior to the beginning of each fiscal year an operating plan for such
fiscal year and (ii) within thirty (30) days after the end of each month, an
unaudited sheet and statements of income and
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cash flows, prepared in accordance with generally accepted accounting
principles, which also set forth applicable budget figures and variances from
budget.
4.2 CONFIDENTIALITY. Each Purchaser shall, at the request of the Company,
enter into a non-disclosure and non-use agreement reasonably acceptable to the
Purchaser and the Company with respect to the information it receives from the
Company.
4.3 TERMINATION OF COVENANTS. All covenants of the Company contained in
Section 4 of this Agreement shall expire and terminate as to each Purchaser upon
the closing of an underwritten public offering of Common Stock of the Company
made pursuant to an effective registration statement under the Securities Act.
5. RIGHT OF FIRST REFUSAL
5.1 RIGHT OF FIRST REFUSAL OF SECURITYHOLDER ISSUANCES. No Securityholder
shall sell, assign, pledge, or in any manner transfer any of the Securities of
the Company or any right or interest therein, whether voluntarily or by
operation of law, or by gift or otherwise, except by a transfer which meets the
requirements hereinafter set forth in this Section 5.1.
(A) If the Securityholder receives from anyone a bona fide offer
acceptable to the Securityholder to purchase any of his Securities, then the
Securityholder shall first give written notice thereof to the Company. The
notice shall name the proposed transferee and state the price and quantity of
the Securities to be transferred, as well as all other terms and conditions of
the offer; provided, however, that this Section 5.1(a) shall not apply to either
(i) Morgan Stanley Venture Capital Fund II, L.P. and affiliated funds or to
Trident Capital Management, L.L.C. and affiliated funds or to their transferees,
(ii) the sale by Wesley L. Folsom to David J. Molny of ten (10) shares of Series
A Preferred Stock, (iii) the sale by Wayne A. Pulick to Timothy J. Drummond of
three (3) shares of Series A Preferred Stock, and (iv) the sale by Harry B. Fair
or Wesley L. Folsom of up to thirty (30) shares of Series A Preferred Stock to
officers of the Company.
(B) For fifteen (15) days following receipt of such notice, the
Company shall have the option to purchase all or a portion of the Securities
specified in the notice at the price and upon the terms set forth in such bona
fide offer. In the event the Company elects to purchase all or a portion of the
Securities, it shall give written notice to the selling Securityholder of its
election and settlement for said shares shall be made as provided below in
paragraph (d).
(C) In the event the Company does not elect to acquire all of the
Securities specified in the selling Securityholder's notice, the Secretary of
the Company shall, within fifteen (15) days of receipt of said selling
Securityholder's notice, give written notice thereof to the Original Investors
and Purchasers of the Company other than the selling Securityholder. Said
written notice shall state the number of Securities that the Company has elected
to purchase and the number of Securities remaining available for purchase (which
shall be the same as the number contained in said selling Securityholder's
notice, less any such Securities that the Company has elected to purchase). Each
of the Original Investors and Purchasers shall have the option to purchase a
maximum of that proportion of the Securities available for purchase as the
number of shares of Common Stock of the Company owned by each such Original
Investor or
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Purchaser, on an as-converted (fully diluted) basis, bears to the total issued
and outstanding shares of Common Stock of the Company held by all Original
Investors and Purchasers, on an as-converted (fully diluted) basis, excepting
those shares owned by the selling Securityholder. An Original Investor or
Purchaser electing to exercise such option shall, within ten (10) days after
mailing of the Company's notice, give notice to the Company specifying the
number of Securities such Original Investor or Purchaser will purchase and
specifying any additional Securities such Original Investor or Purchaser will
purchase if additional Securities are made available. Failure to respond in
writing within said ten day period to the notice given by the Secretary of the
Company shall be deemed a rejection of such Original Investor's and Purchaser's
right to acquire a proportionate part of the Securities of the selling
Securityholder. In the event one or more Original Investors or Purchasers do not
elect to acquire the Securities available to them, said Securities shall be
allocated on a pro rata basis to the Original Investors and Purchasers who
requested Securities in addition to their pro rata allotment.
(D) In the event the Company and/or Original Investors and
Purchasers, other than the selling Securityholder, elect to acquire any of the
Securities of the selling Securityholder as specified in said selling
Securityholder's notice, the Secretary of the Company shall so notify the
selling Securityholder and settlement thereof shall be made in cash within
thirty (30) days after the Secretary of the Company receives said selling
Securityholder's notice; provided that if the terms of payment set forth in said
selling Securityholder's notice were other than cash against delivery, the
Company and/or its other Original Investors and Purchasers shall pay for said
Securities on the same terms and conditions set forth in said selling
Securityholder's notice.
(E) In the event the Company and/or its other Original Investors and
Purchasers do not elect to acquire all of the Securities specified in the
selling Securityholder's notice, said selling Securityholder may, within the
sixty day period following the expiration of the option rights granted to the
Company, sell elsewhere the Securities specified in said selling
Securityholder's notice which were not acquired by the Company and/or its other
Original Investors and Purchasers, in accordance with the provisions of
paragraph (d) of this Section 5.1, provided that said sale shall not be on terms
and conditions more favorable to the purchaser than those contained in the bona
fide offer set forth in said selling Securityholder's notice. All Securities so
sold by said selling Securityholder shall continue to be subject to the
provisions of Section 5 in the same manner as before said transfer.
(F) Anything to the contrary contained herein notwithstanding, the
following transactions shall be exempt from the provisions of this Section 5.1:
(I) A Securityholder's transfer of any or all Securities held
by such Securityholder to such Securityholder's immediate family or to a
charity, provided it is a bona fide gift. "IMMEDIATE FAMILY" as used herein
shall mean spouse (or domestic partner), lineal descendant (by birth or
adoption), father, mother, brother, sister, niece, nephew or lineal descendant
of father or mother (by birth or adoption) of the Securityholder making such
transfer and shall include any trust established primarily for the benefit of
the Securityholder or his immediate family;
(II) A Securityholder's bona fide pledge or mortgage of any
Securities with a commercial lending institution, provided that any subsequent
transfer of said Securities by said institution shall be conducted in the manner
set forth in this Section 5.1;
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(III) A Securityholder's transfer of any or all of such
Securityholder's Securities to the Company;
(IV) A Securityholder's transfer of any or all of such
Securityholder's Securities to a person who, at the time of such transfer, is an
officer or director of the Company;
(V) A corporate Securityholder's transfer of any or all of its
shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of the
corporate stockholder, or pursuant to a sale of all or substantially all of the
stock or assets of a corporate stockholder;
(VI) A corporate Securityholder's transfer of any or all of its
Securities to any or all of its Securityholders; and
(VII) A transfer by a Securityholder which is a limited or
general partnership to any or all of its partners.
In any such case, the transferee, assignee, or other recipient
shall receive and hold such Securities subject to Section 5.1 of this Agreement,
and there shall be no further transfer of such stock except in accordance with
this Agreement.
(G) Any sale or transfer, or purported sale or transfer, of
Securities of the Company shall be null and void unless the terms, conditions,
and provisions of this Section 5 are strictly observed and followed.
(H) The rights of first refusal established by this Section 5.1 shall
terminate upon the consummation of a public offering of the Company's securities
satisfying the conditions for automatic conversion of the Series A Preferred
Stock set forth in Section IVA4k(1) of the Company's Amended and Restated
Certificate of Incorporation (a "QUALIFIED INITIAL OFFERING").
(I) The certificates representing shares of stock of the Company
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"The shares represented by this certificate are subject to a right of
first refusal option in favor of the Company and certain stockholders of the
Company, as provided in the Registration Rights Agreement."
(J) The Company is specifically authorized to enter into individual
contracts with its stockholders respecting the transfer of shares of stock of
the Company. In that event, the terms of such contract shall prevail and this
Agreement shall not apply as long as such contract is in effect.
5.2 RIGHT OF FIRST REFUSAL OF COMPANY ISSUANCES. Each Holder shall have a
right of first refusal to purchase a maximum of that proportion of the
Securities available for purchase as the number of shares of Common Stock of the
Company owned by each such Original Investor or Purchaser, on an as-converted
(fully diluted) basis, bears to the total issued and outstanding shares of
Common Stock of the Company held by all Original Investors and Purchasers, on an
as-converted (fully diluted) basis (the "PRO RATA SHARE") of all Securities that
the Company may, from time to time, propose to sell and issue after the date of
this Agreement, other than the Securities excluded by Section 5.2(e) hereof.
Each Holder's pro rata share is equal to the ratio of
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the number of shares of Preferred Stock and Common Stock (or Common Stock
issuable upon conversion thereof) with respect to which such Holder is deemed to
be a holder immediately prior to the issuance of such Securities to the total
number of outstanding shares of Preferred Stock and Common Stock (or Common
Stock issuable upon conversion thereof) held by all Holders.
(A) EXERCISE OF RIGHTS. If the Company proposes to issue any
Securities, it shall give each Holder written notice of its intention,
describing the Securities, the price, and the terms and conditions upon which
the Company proposes to issue the same. Each Holder shall have twenty (20) days
from the receipt of such notice to agree to purchase its pro rata share of the
Securities for the price and upon the terms and conditions specified in the
notice by giving written notice to the Company and stating therein the quantity
of Securities to be purchased. Any Holder electing to purchase its pro rata
share of Securities to be issued may assign its right to purchase such
Securities to a successor fund or entity. Notwithstanding the foregoing, the
Company shall not be required to offer or sell such Securities to any Holder who
would cause the Company to be in violation of applicable federal securities laws
by virtue of such offer or sale.
(B) ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the Holders
fail to exercise in full the rights of first refusal within such twenty (20) day
period, the Company shall have ninety (90) days thereafter to sell the
Securities in respect of which the Holders' rights were not exercised, at a
price and upon terms and conditions no more favorable to the purchasers thereof
than specified in the Company's notice to the Holders pursuant to Section 5.2(a)
hereof. If the Company has not sold such Securities within such ninety (90)
days, the Company shall not thereafter issue or sell any Securities, without
first offering such securities to the Holders in the manner provided above.
(C) TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first
refusal established by Section 5.2 shall terminate upon the consummation of a
Qualified Initial Offering.
(D) TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal
of each Holder under this Section 5.2 may be transferred (a) to any subsidiary
or parent of such Holder or to any successor in interest to all or substantially
all the assets of such Holder or (b) with respect to at least 100,000 shares of
Registrable Securities (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits and similar
events), to a transferee other than a direct competitor of the Company, provided
that the Company is given written notice by the Holder stating the name and
address of the transferee and identifying the Registrable Securities with
respect to which the rights under this Section 5.2 are being assigned.
(E) EXCLUDED SECURITIES. The rights of first refusal established by
this Section 5.2 shall have no application to any of the following Securities :
(I) shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to the Company
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or any subsidiary, pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board of Directors of the Company;
(II) any Securities issued pursuant to any rights or agreements
outstanding as of the date of this Agreement, including without limitation
convertible securities, options and warrants; and any Securities issued pursuant
to any such rights or agreements granted after the date of this Agreement,
provided that the rights of first refusal established by this Section 5.2
applied with respect to the initial sale or grant by the Company of such rights
or agreements;
(III) any Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
(IV) any Securities that are issued by the Company as part of an
underwritten public offering of the Company's securities pursuant to a
registration statement filed under the Securities Act;
(V) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company
(VI) shares of Common Stock issued upon conversion of the
Preferred Stock; and
(VII) any Securities issued pursuant to any venture equipment
leasing arrangement approved by the Board of Directors.
6. CO-SALE RIGHTS
6.1 SALES BY ORIGINAL INVESTORS.
(A) If an Original Investor proposes to sell or transfer any shares
of Preferred Stock or Common Stock (the "CO-SALE STOCK"), and if such Co-Sale
Stock is not all repurchased by the Company, Purchasers or Original Investors
pursuant to the Amended and Restated Bylaws of the Company, then the Original
Investor shall promptly give written notice (the "NOTICE") to the Purchasers and
other Original Holders at least thirty (30) days prior to the closing of such
sale or transfer. The Notice shall describe in reasonable detail the proposed
sale or transfer including, without limitation, the number of shares of Co-Sale
Stock to be sold or transferred, the nature of such sale or transfer, the
consideration to be paid, and the name and address of each prospective purchaser
or transferee.
(B) Each Purchaser and Original Holder shall have the right,
exercisable upon written notice to such Original Investor within fifteen (15)
days after the Notice, to participate in such sale of Co-Sale Stock on the same
terms and conditions based upon its Pro Rata Share. Such notice shall indicate
the number of shares of Common Stock or Preferred Stock such Purchaser or
Original Holder wishes to sell under his or her right to participate. To the
extent one or more of the Purchasers or Original Holders exercises such right of
participation in
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accordance with the terms and conditions set forth below, the number of shares
of Co-Sale Stock that such Original Investor may sell in the transaction shall
be correspondingly reduced.
(C) Each Purchaser or Original Holders who elects to participate in
the sale pursuant to this Section 6.1 shall effect its participation in the sale
by promptly delivering to such Original Investor for transfer to the prospective
purchaser one or more certificates, properly endorsed for transfer, which
represent the type and number of shares of stock which such Purchaser or
Original Holder elects to sell.
(D) The exercise or non-exercise of the rights of the Purchasers or
Original Holders hereunder to participate in one or more sales of Co-Sale Stock
made by such Original Investor shall not adversely affect their rights to
participate in subsequent sales of Co-Sale Stock subject to Section 6.1.
(E) If none of the Purchasers or Original Holders elect to
participate in the sale of the Co-Sale Stock subject to the Notice, such
Original Investor may, not later than sixty (60) days following delivery of the
Notice, enter into an agreement providing for the closing of the transfer of the
Co-Sale Stock covered by the Notice within thirty (30) days of such agreement on
terms and conditions not more materially favorable to the transferor than those
described in the Notice. Any proposed transfer on terms and conditions
materially more favorable than those described in the Notice, as well as any
subsequent proposed transfer of any of the Co-Sale Stock by an Original
Investor, shall again be subject to the co-sale rights of the Purchasers or
Original Holders as described in this Section 6.1.
6.2 EXEMPT TRANSFERS.
(A) Notwithstanding the foregoing, the co-sale rights of the
Purchasers shall not apply to:
(I) any transfer or transfers by an Original Investor which in
the aggregate, over the term of this Agreement, amount to no more than one
hundred thousand (100,000) shares of Co-Sale Stock (on an as-converted basis)
held by an Original Investor as of the date hereof,
(II) any transfer of Co-Sale Stock to such Original Investor's
immediate family or to a charity, provided it is a bona fide gift. "IMMEDIATE
FAMILY" as used herein shall mean spouse (or domestic partner), lineal
descendant (by birth or adoption), father, mother, brother, sister, niece,
nephew or lineal descendant of father or mother (by birth or adoption) of the
Original Investor making such transfer and shall include any trust established
primarily for the benefit of the Original Investor or his immediate family.
(III) an Original Investor's bona fide pledge or mortgage of any
Co-Sale Stock with a commercial lending institution,
(IV) a corporate Original Investor's transfer of any or all of
its Co-Sale Stock to any or all of its securityholders,
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(V) a transfer by an Original Investor which is a limited or
general partnership to any or all of its partners; and
(VI) the sale by Wesley L. Folsom to David J. Molny of ten (10)
shares of Series A Preferred Stock, the sale by Wayne A. Pulick to Timothy J.
Drummond of three (3) shares of Series A Preferred Stock, and the sale by Harry
B. Fair or Wesley L. Folsom of up to thirty (30) shares of Series A Preferred
Stock to officers of the Company.
Except with respect to Co-Sale Stock transferred under clause (i)
above (which Co-Sale Stock shall no longer be subject to the co-sale right of
the Purchasers), such transferred Co-Sale Stock shall remain "Co-Sale Stock"
hereunder, and such pledgee, transferee or donee shall be treated as the
"Original Investor" for purposes of Section 6.1.
(B) Notwithstanding the foregoing, the provisions of Section 6.1
shall not apply to the sale of any Co-Sale Stock to the public pursuant to a
registration statement filed with, and declared effective by, the Commission
under the Securities Act.
6.3 TERMINATION OF CO-SALE RIGHTS. The rights granted under Section 6 will
terminate upon the consummation of a Qualified Initial Offering.
7. BOARD OF DIRECTORS
7.1 ELECTION OF DIRECTORS.
(A) Each of the Holders agrees to take any and all action necessary,
including, without limitation, the voting of its shares of Equity Securities of
the Company, the execution of written consents, the calling of special meetings,
the removal of directors, the filling of vacancies in directorships on the
Board, the waiving of notice, the attending of meetings and the amendment of the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, so as to cause the Board to at all times include George A.
Hallenbeck, Harry B. Fair, one member designated by Morgan Stanley Venture
Capital Fund II, L.P. ("MSVCF"), one member designated by the mutual consent of
the Company and MSVCF and one additional director selected by a majority in
interest of the stockholders other than George A. Hallenbeck, Harry B. Fair and
the Purchasers and their assignees.
(B) Concurrently with the execution of this Agreement, there shall be
imprinted, or otherwise placed, on the certificates representing the
shares, the following restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF A REGISTRATION RIGHTS AGREEMENT, DATED
MAY 31, 1996, WHICH PLACES CERTAIN RESTRICTIONS ON THE VOTING OF
THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST
IN SUCH SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND
BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH
REGISTRATION RIGHTS AGREEMENT WILL BE
19
<PAGE>
FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON
WRITTEN REQUEST TO EVOLVING SYSTEMS, INC. AT ITS PRINCIPAL PLACE OF
BUSINESS.
7.2 TERMINATION OF BOARD RIGHTS. The rights granted pursuant to this
Section 7 shall terminate upon a Qualified Initial Offering.
8. INSURANCE
8.1 TRANSFERS AT DEATH. For a period of fifteen (15) months after the
death of any Original Holder, the Personal Representative of such deceased
Original Holder's estate shall have the option to demand that the Company redeem
stock owned by such deceased Original Holder having value up to the amount of
life insurance proceeds received by the Company under the Required Policies (as
defined in Section 8.2 hereof) as a result of such Original Holder's death, plus
all interest earned on those proceeds through the date of demand, and such stock
shall be purchased by the Company at the then-current fair market price as
determined by the Board; provided, however, that if the Personal Representative
disagrees with the Board's valuation he/she may request, at his/her own cost,
the Company to engage an independent appraiser acceptable to the Company to
value such stock. The Company agrees to keep all life insurance proceeds
received upon an Original Holder's death in a segregated, interest bearing
account during the above-described period to assure that funds necessary to
accomplish the redemption are readily available. In the event that no demand is
made within such fifteen (15) month period, the Company shall have no obligation
to purchase any stock of the deceased Original Holder and shall be free to use
the life insurance proceeds as it sees fit.
8.2 REQUIRED POLICIES. The Company now owns and is the beneficiary of
policies of life insurance on the lives of its Original Holders having a face
value as follows:
<TABLE>
<CAPTION>
STOCKHOLDER FACE AMOUNT OF COVERAGE
------------ -----------------------
<S> <C>
George A. Hallenbeck $3,500,000
Harry B. Fair $3,500,000
Wesley L. Folsom $1,000,000
Wayne A. Pulick $1,000,000
John A. Elmgren $1,000,000
Timothy J. Drummond NONE
David J. Molny NONE
</TABLE>
The Company will take any actions required to maintain in force life
insurance policies on each Original Holder having an aggregate face amount as
set forth above for such Original Holder (the "REQUIRED POLICIES"), and will not
cause a lesser amount of life insurance to be owned by the Company on the life
of any Original Holder without the prior written consent of such Original
Holder; provided, however, that the aggregate face amount of coverage required
for each Original Holder will decrease by a proportional amount to be determined
by the
20
<PAGE>
Company when and if an Original Holder's ownership interest in the Company
decreases due to a sale of his securities.
8.3 TERMINATION OF REQUIRED POLICIES. The Company's obligation to maintain
in force the Required Policies as specified in Section 8.2 will terminate upon
the consummation of a Qualified Initial Offering.
9. MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed in all respects by the
laws of the State of Colorado.
9.2 SURVIVAL. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each person who shall be
a holder of Registrable Securities from time to time; provided, however, that
prior to the receipt by the Company of adequate written notice of the transfer
of any Registrable Securities specifying the full name and address of the
transferee, the Company may deem and treat the person listed as the holder of
such shares in its records as the absolute owner and holder of such shares for
all purposes, including the payment of dividends or any redemption price.
9.4 SEVERABILITY. In case any provision of the Agreement shall be invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
9.5 AMENDMENT AND WAIVER.
(A) Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of the Company and a majority
of the New Holders and a majority of the Holders.
(B) Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of a majority of the New Holders and a majority of the
Holders.
9.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be
21
<PAGE>
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent, or
approval of any kind or character on any Holder's part of any breach, default or
noncompliance under the Agreement or any waiver on such Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, by law, or otherwise afforded to Holders,
shall be cumulative and not alternative.
9.7 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent by registered or
certified mail, return receipt requested, postage prepaid, and, if to an address
outside the United States of America, by telex or facsimile transmitted
substantially concurrently with the mailing of such written notice, addressed:
(a) if to a Holder, at such Holder's address as set forth on the Company's
records, or at such other address as such Holder shall have furnished to the
Company in writing, or (b) if to the Company, at its address as set forth at the
end of this Agreement, or at such other address as the Company shall have
furnished to the Holders in writing.
9.8 ATTORNEYS' FEES.' If legal action is brought to enforce or interpret
this Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and legal costs in connection therewith.
9.9 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
9.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth in the first paragraph hereof.
COMPANY: PURCHASERS:
EVOLVING SYSTEMS, INC. MORGAN STANLEY VENTURE CAPITAL
FUND II, L.P.
By:______________________________
Name:____________________________ By: Morgan Stanley Venture Partners
Title:___________________________ II, L.P. its General Partner
By: Morgan Stanley Venture Capital
II, Inc. Managing General Partner
INVESTORS:
By:_____________________________________
_________________________________ Robert J. Loarie
Timothy J. Drummond Vice President
_________________________________
John A. Elmgren MORGAN STANLEY VENTURE CAPITAL
FUND II, C.V.
_________________________________ By: Morgan Stanley Venture Partners
Harry B. Fair II, L.P. its Investment General
Partner
_________________________________ By: Morgan Stanley Venture Capital II,
Wesley L. Folsom Inc. Managing General Partner
_________________________________ By:_____________________________________
George A. Hallenbeck Robert J. Loarie
Vice President
_________________________________
David J. Molny MORGAN STANLEY VENTURE INVESTORS, L.P.
_________________________________ By: Morgan Stanley Venture Partners II,
Wayne A. Pulick L.P. its General Partner
By: Morgan Stanley Venture Capital II,
Inc. Managing General Partner
By:_____________________________________
Robert J. Loarie
Vice President
23
<PAGE>
Information Associates, L.P.
By: Trident Capital Management, L.L.C.
its General Partner
By:___________________________________
Its:__________________________________
Information Associates, C.V
By: Trident Capital Management, L.L.C.
its Investment General Partner
By:___________________________________
Its:__________________________________
24
<PAGE>
EXHIBIT A
PURCHASERS
<TABLE>
<CAPTION>
COMMON SERIES A
NAME OF PURCHASER STOCK STOCK
<S> <C> <C>
Morgan Stanley Venture Partners II, L.P. 0 470
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Attn: Robert Loarie
Fax: (415) 233-2626
Morgan Stanley Venture Capital Fund II, C.V. 0 117
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Attn: Robert Loarie
Fax: (415) 233-2626
Morgan Stanley Venture Investors, L.P. 0 122
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Attn: Robert Loarie
Fax: (415) 233-2626
Information Associates, L.P. 0 611
2480 Sand Hill Road
Menlo Park, CA 84025
Phone: (415) 233-4300
Information Associates, C.V. 0 17
2480 Sand Hill Road
Menlo Park, CA 84025
Phone: (415) 233-4300
------- -------
TOTAL: 0 1,337
</TABLE>
<PAGE>
EXHIBIT B
ORIGINAL INVESTORS
<TABLE>
<CAPTION>
COMMON SERIES A
NAME OF INVESTOR STOCK STOCK
<S> <C> <C>
Timothy J. Drummond 10,000 83
Evolving Systems, Inc.
6892 South Yosemite
Englewood, Colorado 80112
John A. Elmgren 100,000 750
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
Harry B. Fair 350,000 2,200
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
Wesley L. Folsom 100,000 300
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
George A. Hallenbeck 350,000 2,800
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
David J. Molny 10,000 90
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
Wayne A. Pulick 100,000 600
Evolving Systems, Inc
6892 South Yosemite
Englewood, Colorado 80112
--------- ----------
TOTAL: 1,020,000 6,823
</TABLE>
<PAGE>
EVOLVING SYSTEMS, INC.
FIRST AMENDMENT
TO
REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO THE REGISTRATION RIGHTS AGREEMENT, (the
"Registration Agreement") is entered into as of August 7, 1997, by and among
EVOLVING SYSTEMS, INC., a Delaware corporation (the "Company"), the parties
listed on Exhibit A hereto (the "Purchasers") and the parties listed on Exhibit
B hereto (the "Original Investors").
RECITALS
WHEREAS, the Company, the Purchasers and the Original Investors are parties
to the Registration Agreement;
WHEREAS, the Company, the Purchasers and the Original Investors desire to
amend certain provisions of the Registration Agreement governing election of
directors; and
WHEREAS, under Section 9.5 of the Registration Agreement, the Registration
Agreement may be amended with only the written consent of the Company, a
majority in interest of each of the New Holders and Holders (as those terms are
defined in the Registration Agreement).
In consideration of the mutual agreements, covenants and considerations
contained herein, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein without definition shall
have the meanings ascribed to them in the Registration Agreement.
2. ELECTION OF DIRECTORS. Section 7.1(a) of the Registration Agreement is
amended in its entirety to read as follows:
"(a) The authorized number of directors is as set forth in the Company's
Bylaws. Each of the Holders agrees to take any and all action necessary,
including, without limitation, the voting of its shares of Equity Securities of
the Company, the execution of written consents, the calling of special meetings,
the removal of directors, the filing of vacancies in directorships on the Board,
the waiving of notice, the attending of meetings and the amendment of the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, so as to cause the Board to at all times include (a) George A.
Hallenbeck, (b) Harry B. Fair, (c) one member designated by Morgan Stanley
Venture Capital Fund II, L.P. ("MSVCF"), (d) one member selected by a majority
in interest of the stockholders other than George A. Hallenbeck, Harry B. Fair
and the Purchasers and their assignees, and (e) one member designated by the
mutual consent of the Board of Directors and MSVCF (which Board consent shall be
evidenced by the consent of the directors designated under (a), (b), and (d)
above). Any Board seats in
1
<PAGE>
excess of the five seats designated above shall be filled in accordance with the
Company's Bylaws."
3. EFFECT OF AMENDMENT. Except as amended as set forth above, the Registration
Agreement shall continue in full force and effect.
[THIS SPACE INTENTIONALLY LEFT BLANK]
2.
<PAGE>
Exhibit 11.1
Evolving Systems, Inc.
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
1996 1997
---- ----
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income (loss) ($1,257,341) ($ 146,467)
============ ===========
Shares outstanding
Weighted average number of
common shares outstanding 1,533,004 1,552,850
Assuming exercise of stock options 2) -- --
Assuming repurchase of treasury stock 2) -- --
------------ -----------
Net incremental shares 1) -- --
Assuming exercise of stock options considered cheap stock 261,487 261,487
Conversion of Preferred Shares 5,952,329 6,120,000
Pro Forma weighted average number of common shares outstanding as adjusted 7,746,819 7,934,337
============ ===========
Pro Forma primary earnings per common share: (0.16) (0.02)
============ ===========
Supplemental Pro Forma EPS (3)
- ------------------------------
Adjusted net income (654,691) 346,610
============ ===========
Shares issued to retire notes payable 1,112,273 1,447,019
Supplemental pro forma weighted average number of common shares outstanding 8,859,092 9,381,356
Supplemental Pro Forma Primary Earnings per Common Share (0.07) 0.04
=========== ===========
FULLY DILUTED EARNINGS PER SHARE
Net income (loss) (1,257,341) (146,467)
============ ===========
Shares outstanding
Weighted average number of common shares outstanding 1,533,004 1,552,850
Assuming exercise of stock options 2) -- --
Assuming repurchase of treasury stock 2) -- --
------------ -----------
Net incremental shares 1) -- --
Assuming exercise of stock options considered cheap stock 261,487 261,487
Conversion of Preferred Shares 5,952,329 6,120,000
Pro Forma weighted average number of common shares outstanding as adjusted 7,746,819 7,934,337
============ ===========
Pro Forma fully diluted earnings per common share: (0.16) (0.02)
============ ===========
Supplemental pro forma EPS (3)
- --------------------------------
Adjusted net income (loss) (654,691) 346,610
Shares issued to retire notes payable 1,112,273 1,447,019
Supplemental pro forma weighted average number of common shares outstanding 8,859,092 9,381,356
Supplemental Pro Forma Fully Diluted Earnings per Common Share (0.07) 0.04
=========== ===========
</TABLE>
1) Application of the treasury stock method results in a repurchase of less than
20% of weighted shares outstanding for all periods presented; therefore, no
adjustment to net income or shares outstanding are required pursuant to the
modified treasury stock method as prescribed by APB 15 paragraph 28 and
footnote 13.
2) Common stock equivalents have been excluded from the APB 15 calculation as
they are anti-dilutive.
3) Supplemental pro forma earnings per share based on shares outstanding prior
to sale plus shares required to be sold to retire the debt, calculated using the
net proceeds received per common share, and adjusting net income to eliminate
the interest expense net of related tax effect.
<PAGE>
January 9, 1998
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments in the section entitled "Change in
Accountants" included in the attached Form S-1 dated January 9, 1998, of
Evolving Systems, Inc. to be filed with the Securities and Exchange Commission.
Yours truly,
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 8, 1998 relating
to the financial statements of Evolving Systems, Inc. as of and for the nine-
month period ended September 30, 1997, which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the nine-month period ended September 30, 1997 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audit referred to in such
report also included this schedule. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boulder, Colorado
January 8, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Evolving Systems, Inc.
on Form S-1 of our report dated March 4, 1997, except for Note 7, as to which
the date is ____, appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Evolving Systems, Inc., listed
in Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
__________, 1998
The accompanying financial statements reflect a one-for-two reverse split of
Non-voting Common Stock and Voting Common Stock, which is to be effected prior
to the effective date of a proposed initial public offering. The above consent
and report on schedule is in the form which will be signed by Deloitte & Touche
LLP upon consummation of the above event, which is described in Note 7 of Notes
to Financial Statements, and assuming that, from March 4, 1997 to the date of
such event, no other event shall have occurred that would affect the
accompanying financial statements and notes thereto as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVOLVING
SYSTEMS, INC. REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 3,184 3,134
<SECURITIES> 155 129
<RECEIVABLES> 10,628 13,799
<ALLOWANCES> 298 476
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,206 18,652
<PP&E> 17,476 19,863
<DEPRECIATION> 7,635 10,312
<TOTAL-ASSETS> 24,356 28,428
<CURRENT-LIABILITIES> 7,816 13,060
<BONDS> 18,096 16,486
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 994 1,042
<TOTAL-LIABILITY-AND-EQUITY> 24,356 28,428
<SALES> 0 0
<TOTAL-REVENUES> 36,918 30,034
<CGS> 0 0
<TOTAL-COSTS> 24,531 19,102
<OTHER-EXPENSES> 12,141 10,948
<LOSS-PROVISION> 577 413
<INTEREST-EXPENSE> 1,500 1,246
<INCOME-PRETAX> (1,176) (1,094)
<INCOME-TAX> 81 (948)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,257) (146)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
