<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1999.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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FORMUS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 84-1362218
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
720 S. COLORADO BLVD., SUITE 600 NORTH
DENVER, COLORADO 80246
(303) 504-3200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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BERNARD G. DVORAK
720 S. COLORADO BLVD., SUITE 600 NORTH
DENVER, COLORADO 80246
(303) 504-3200
FAX: (303) 504-3201
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
<TABLE>
<S> <C>
GARTH B. JENSEN, ESQ. NICHOLAS P. SAGGESE, ESQ.
HOLME ROBERTS & OWEN LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1700 LINCOLN, SUITE 4100 300 SOUTH GRAND AVENUE, SUITE 3400
DENVER, COLORADO 80203 LOS ANGELES, CALIFORNIA 90071
(303) 861-7000 (213) 687-5000
FAX (303) 866-0200 FAX (213) 687-5600
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C>
Class A Common Stock, $.001 par value per share.... $150,000,000 $41,700
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- OCTOBER 7, 1999.
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PROSPECTUS
- ------------, 1999
[FORMUS.NET LOGO]
SHARES OF CLASS A COMMON STOCK
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FORMUS COMMUNICATIONS, INC.:
- - We provide broadband telecommunications services to business customers in
selected European countries.
- - 720 S. Colorado Blvd., Suite 600 North Denver, Colorado 80246
Phone: (303) 504-3200
PROPOSED SYMBOL AND MARKET:
- - FMUS/Nasdaq National Market
THE OFFERING:
- - We are offering shares of our Class A common stock.
- - The underwriters have an option to purchase an additional shares from us
to cover over-allotments.
- - This is our initial public offering, and no public market currently exists for
our Class A common stock. We anticipate that the initial public offering price
of the shares will be between $ and $ per share.
- - Closing: , 1999
<TABLE>
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Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Formus:
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</TABLE>
This investment involves risks. See "Risk Factors" beginning on page 6.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, OR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DONALDSON, LUFKIN & JENRETTE
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
[Diagram illustrating fixed wireless radio technology, including a central
network operations facility and the fibre connections to the Internet; microwave
point to point and point to multipoint links; rooftop and tower hub stations;
and, dedicated and multipoint channels for three types of customers.]
<PAGE> 4
[Map of Europe identifying the Formus markets, by country and city, and offered
services.]
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Dilution.............................. 15
Capitalization........................ 16
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 17
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 50
Certain Transactions.................. 57
Principal Stockholders................ 58
Description of Our Capital Stock...... 61
Certain Federal Income Tax
Considerations for Non-U.S.
Investors........................... 64
Underwriting.......................... 66
Shares Eligible for Future Sale....... 68
Legal Matters......................... 69
Experts............................... 69
Additional Information................ 70
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
Other than in the United States, we and the underwriters have not taken any
action in any jurisdiction that would permit a public offering of our Class A
common stock. No offer or sale of shares of our Class A common stock may be made
in any jurisdiction outside the United States, except under circumstances that
will result in compliance with the applicable laws of that jurisdiction. We and
the underwriters require persons to whom this prospectus comes to inform
themselves about, and to observe, any restrictions as to the offering of shares
of our Class A common stock and the distribution of this prospectus in
jurisdictions outside the United States.
i
<PAGE> 6
PROSPECTUS SUMMARY
The following summarizes information in other sections of our prospectus,
including our consolidated financial statements and the notes to those
statements. This summary does not contain all of the information that you should
consider before investing in our Class A common stock. You should read the
entire prospectus carefully, especially the risks of investing in the shares
discussed under "Risk Factors." References to "Formus," "we," "us" and "our"
mean Formus Communications, Inc. and our subsidiaries. Descriptions of our
operations in Poland include CEL Polska Sp. z o.o., which we currently manage
and have agreed to acquire, subject to government approval. See
"Business -- Poland." Certain currency amounts listed in this prospectus have
been converted into U.S. dollars at the applicable exchange rate in effect on
June 30, 1999. References to common stock mean our Class A common stock and our
Class B common stock unless otherwise indicated.
FORMUS COMMUNICATIONS
We provide broadband (i.e., high-capacity, high-speed) and other
telecommunications services to business customers in selected European markets
using primarily wireless networks. We plan to offer a full suite of
telecommunications services to our customers, including broadband Internet
access and data transport to connect geographically dispersed offices on
local-area and wide-area computer networks. We also plan to offer value-added
Internet, voice and video services such as web hosting, e-commerce, private
network voice service and video conferencing. We believe that substantial
opportunities exist to provide broadband telecommunications connections to
business customers that traditionally have used copper-wire networks. We target
business customers that do not have broadband telecommunications services either
because the cost of available broadband access is prohibitive or because the
businesses are located in areas with inadequate telecommunications
infrastructure.
Wireless networks utilize radio spectrum, which is government-regulated and
licensed to service providers. We currently have radio spectrum licenses in
Germany, Poland, Finland and New Zealand, have trial licenses in France and
Hungary, and have been notified of our right to a license in Ireland. In
addition to our radio spectrum licenses, we hold other nationwide
telecommunications licenses that allow us to provide voice and data transmission
services over land line networks in Austria and Germany. We have filed radio
spectrum license applications in two additional European countries, and have
begun the application process in several other European countries that have
recently initiated their licensing application procedures. We expect that the
continued liberalization of the telecommunications industry in Europe will
create additional license opportunities for us. In addition, we may acquire
companies that hold telecommunications licenses or other strategic assets.
The following table includes information, based on our estimates, regarding
our telecommunications licenses. The population and businesses listed under
other telecommunications licenses includes the population and businesses also
covered by our radio spectrum licenses.
<TABLE>
<CAPTION>
OTHER
RADIO SPECTRUM TELECOMMUNICATIONS
LICENSE COVERAGE LICENSE COVERAGE
------------------------- -------------------------
POPULATION BUSINESSES POPULATION BUSINESSES
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Austria.............................. -- -- 8,100 360
Finland.............................. 2,000 85 -- --
Germany.............................. 35,000 860 82,000 2,600
Ireland(1)........................... 3,600 146 -- --
New Zealand.......................... 3,700 261 -- --
Poland............................... 39,000 600 -- --
------ ------ ------ -----
Total...................... 83,300 1,952 90,100 2,960
</TABLE>
- ---------------
(1) We have been informed of our right to receive this radio spectrum license,
but it has not yet been formally issued.
1
<PAGE> 7
In Poland, we have a nationwide license that we are using to provide leased
capacity on 38 broadband connections to transport data for seven
telecommunications providers and have agreements with two other customers to
lease 90 connections. This license allows us to establish specific broadband
connections upon the filing of requisite documentation. We have additional radio
spectrum licenses for the 10 largest cities in Poland. We currently provide
broadband Internet access to 70 business customers in Warsaw and have agreements
to service an additional 91 businesses. In addition, we offer business customers
data transport services and value added telecommunications services such as
e-mail and Internet domain name registration. In an effort to increase our
customer base, we recently entered into an agreement with one of our
stockholders, Intel Corporation, to enable us to market our services in Poland
through certain of Intel's reseller channels. In Germany, we currently offer
switched long-distance voice services and were recently awarded licenses that
allow us to offer broadband telecommunications services. These are the first two
markets in which we have launched commercial operations. In France and Hungary,
we offer virtual private voice and computer networks, using dedicated lines,
broadband Internet access and Internet-based voice services on a trial basis.
We expect to offer services in the first half of 2000 under our license in
Finland and license to be awarded in Ireland and are considering various
strategic alternatives for our New Zealand license. In addition to our licenses,
we hold a 22.5% equity interest in VeloCom Inc., which provides competitive
voice services and broadband telecommunications services in Argentina and Brazil
and holds radio spectrum licenses in Colombia and Peru.
THE EUROPEAN MARKET OPPORTUNITY
The dramatic growth of the Internet, e-commerce and data intensive computer
applications has drastically increased demand for broadband telecommunications
connections. Industry analysts expect that usage of these services will continue
to accelerate. For example, Ovum, Inc. projects total peak hour traffic for
voice, Internet and corporate data in Europe will grow 87% annually, from 43,631
Mbps in 1999 to 1,866,353 Mbps in 2005. Ovum estimates data traffic to be 76% of
1999's peak hour traffic and to grow to over 97% by 2005. Until recently,
Europe's telecommunications markets have been dominated by government-owned
telephone monopolies that generally have not provided broadband access at
competitive rates. We believe that many businesses in our target markets do not
receive the telecommunications services they need and want. In European
countries where broadband telecommunications services are not available or are
expensive, we believe that there is significant unmet demand for broadband data
transmission services and Internet access. In these markets, we intend to target
businesses of all sizes. In European markets where broadband telecommunications
services are available today but are not widely used, we plan to target small-
and medium-sized businesses that we believe are not currently offered reliable
broadband services at attractive rates.
BROADBAND WIRELESS TECHNOLOGY
We deliver our broadband services primarily through wireless networks using
radio equipment to transmit and receive high frequency radio waves. These radio
waves transmit data, voice and video at speeds up to 530 times greater than the
fastest traditional dial-up modems. We primarily use broadband wireless
technology because it provides a quickly deployed, cost-effective and high
quality alternative to existing telephone, data and video delivery systems.
Radio equipment is easily installed by placing two-way antennae at different
locations and can be easily reconfigured or moved to more efficient or
profitable locations. We do not have to lay cable to establish broadband
connections to customer buildings. Consequently, our installation and labor
costs are significantly lower compared to copper and fiber-based systems, and we
can reach customer buildings more quickly. In addition, our capital expenditures
are success-based, meaning that we do not incur significant capital expenditures
until we have identified sufficient customer demand. In some markets, we may
supplement our broadband wireless network with other access technologies.
Broadband wireless technology is based on coverage areas, the size of which
depends on the frequency used. In most markets, we intend to use a two-tiered
network to maximize our customer base in these
2
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coverage areas. The first tier operates in the 24 GHz to 38 GHz spectrum range.
These frequencies have a high data carrying capacity, but can effectively
transmit only relatively short distances, typically 3 to 5 kilometers, and work
well in dense urban areas. The second tier operates in the 2.4 GHz to 10.5 GHz
range. While these lower frequencies do not have as much capacity as higher
frequencies, they transmit over greater distances, typically 10 to 12
kilometers, and work effectively in suburban areas.
OUR BUSINESS STRATEGY
To grow our revenues we intend to capitalize on the increasing demand for
Internet access and broadband telecommunications services. To meet this
objective, we will focus on the following strategies:
- Obtain telecommunications licenses in additional European markets;
- Rapidly and cost-effectively deploy our wireless networks;
- Connect businesses to our local broadband network;
- Develop strategic relationships with strong local partners; and
- Pursue acquisitions in attractive markets to accelerate growth.
FUNDING AND MANAGEMENT
To date, we have raised $202.5 million of cash from the sale of our equity
securities. In addition, we have obtained E120 million in financing, supported
by Alcatel, for our build-out in Poland. Our stockholders, including The
Centennial Funds, Chase Capital Partners, HarbourVest International Private
Equity Partners III-Direct Fund L.P., M/C Investors L.L.C., Media/Communications
Partners III Limited Partnership, Part'Com, Spectrum Equity Investors II, L.P.
and Telecom Partners II L.P., have extensive telecommunications experience.
Intel Corporation, another of our stockholders, has extensive Internet
networking and e-commerce experience. In addition, our senior management team
includes individuals with an aggregate of 101 years of telecommunications
industry experience, including 56 years with wireless companies. These
individuals have served as executive officers of Nokia Corp., UnitedGlobalCom,
Inc., Sprint PCS and U S WEST, Inc.
OUR PRINCIPAL EXECUTIVE OFFICES
Formus Communications, Inc.
720 S. Colorado Boulevard, Suite 600 North
Denver, Colorado 80246
Phone: 303-504-3200
3
<PAGE> 9
THE OFFERING
Class A common stock
offered.................... shares
Common stock to be
outstanding after this
offering:
Class A............... shares
Class B............... ____________ shares
Total............ shares
Our Class A common stock and Class B common stock are identical, except
that Class B common stock has no voting rights.
Use of Proceeds............ We plan to use the net proceeds from this offering:
- to fund capital expenditures and operating losses
associated with our roll-out of
telecommunications services in Germany, Poland
and other countries in which we have
telecommunications licenses;
- to acquire telecommunications licenses;
- for continued business development activities;
- for business acquisitions; and
- for general corporate purposes.
Nasdaq National Market
Symbol................... FMUS
Risk Factors............... You should review the "Risk Factors" section for a
discussion of certain factors about us, the
industry in which we operate and this offering that
you should consider before buying our Class A
common stock.
The number of shares of Class A common stock to be outstanding after this
offering excludes shares of common stock issuable upon the exercise of
outstanding options, shares reserved for future grants under our equity
incentive plan and shares to be issued upon the exercise of a warrant.
Generally, the information in this prospectus:
- assumes there is no exercise of the underwriters' over-allotment option;
- assumes a for stock split that will occur prior to
the close of this offering;
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock; and
- gives effect to the conversion of all shares of preferred stock
underlying an outstanding warrant into shares of common stock.
4
<PAGE> 10
SUMMARY CONDENSED CONSOLIDATED BALANCE SHEET DATA
You should read this summary condensed consolidated balance sheet data
together with our audited and unaudited consolidated financial statements and
related notes and "Management's Discussion and Analysis of Results of Operations
and Financial Condition," included elsewhere in this prospectus. The following
condensed consolidated balance sheet data as of December 31, 1998 and as of June
30, 1999 have been derived from audited and unaudited consolidated financial
statements included elsewhere in this prospectus. The unaudited pro forma
condensed consolidated balance sheet data represents actual data, as adjusted to
give effect to:
- the acquisition of the remaining interest in Callino GmbH, our German
operating company;
- the acquisition of our 22.5% interest in Velocom;
- our September 1999 offering of preferred stock; and
- the sale of shares of Class A common stock offered by us at an
assumed initial public offering price of $ per share, the midpoint of
the offering range, less underwriting fees and estimated offering
expenses.
<TABLE>
<CAPTION>
AS OF AS OF JUNE 30, 1999
DECEMBER 31, --------------------------
1998 ACTUAL PRO FORMA
------------ -------------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $22,887 $52,389 $281,102
Telecommunications licenses, net........................ 11,424 11,880 250,473
Investment in affiliates................................ -- 3,024 28,324
Total assets............................................ 53,394 85,198 577,765
Deferred income taxes................................... -- -- 81,201
Total liabilities....................................... 4,154 6,935 88,113
Minority interests in subsidiaries...................... 10,564 6,403 213
Preferred stock and total stockholders' equity
(deficit)............................................. 38,676 71,860 489,439
</TABLE>
Our unaudited statements of operations data included elsewhere in this
prospectus reflect our history of losses from operations since our inception.
5
<PAGE> 11
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider carefully the following risks, as well as all of the other
information in this prospectus, before deciding to buy our common stock.
We have a history of losses from operations and expect losses to continue
for the foreseeable future and cannot assure you that we will ever achieve
profitability or generate positive cash flow. We have incurred a loss from
operations for each year since we began our business: $96,000 for the period
from our inception in October 1996 through December 31, 1996, $6.4 million for
1997, $16.7 million for 1998 and $22.0 million for the six months ended June 30,
1999. You should also expect that any operations we start in markets where we
currently do not operate will operate at a loss for a substantial period of
time. We did not commence commercial services until May 1999 and do not expect
to generate positive operating cash flow and positive earnings for the
foreseeable future and cannot assure you that we will ever achieve profitability
or generate positive cash flow. We expect that our operating losses and negative
cash flow will increase substantially over the next several years from current
levels. Future net losses could cause our stock price to decline.
We have limited operating experience and may not perform up to our
expectations. We started operations in late 1996, and have since focused
primarily on organizational and start-up activities, such as acquiring licenses,
forming strategic partnerships and making strategic investments and
dispositions, and we have limited experience in delivering fixed wireless
services. Our success will depend upon a number of factors, including our
ability to acquire additional spectrum rights, acquire or lease transmission
sites, deploy our fixed wireless technology, and attract and retain an adequate
customer base. We are a relatively new business operating in an emerging
industry sector that has not yet been widely accepted. As a result, we have only
limited market data for comparative purposes. We only recently commenced
commercial operations and have limited experience in customer management,
billing and collection activities. Because of our limited operating history, you
have limited operating and financial data about us upon which to base an
evaluation of our performance and an investment in our common stock. You should
consider our prospects in light of the risks, expenses and difficulties we may
encounter, including those frequently encountered by new companies competing in
rapidly evolving markets. If we are unable to execute our strategies and grow
our business either as a result of the risks identified in this section or for
any other reason, this failure would have a material adverse effect on our
business, prospects, financial condition and results of operations.
We must compete for a limited number of radio spectrum licenses, and any
licenses granted could contain restrictive terms. Competition for radio spectrum
licenses has been, and we believe will continue to be, strong. Our competitors,
many of whom have significantly more resources than we do, include state-owned
telecommunications companies, major international telecommunications entities
and local competitors. If we cannot renew our licenses upon expiration on
favorable terms, or if governments unilaterally change them, our business will
be negatively impacted, and we may be forced to cease operations in those
countries. Governments may also impose various types of fees as well as onerous
conditions or restrictions on the licenses. In addition, licenses may have
build-out or service coverage requirements. Failure to obtain or renew material
licenses could have a material adverse effect on our business, prospects,
financial condition and results of operations.
New industries and technologies are risky. Technology in the
telecommunications industry changes very rapidly. In our current markets, we use
or plan to use broadband wireless technology because of the advantages we
perceive over other technologies. However, this technology has not been widely
used. We could face unanticipated technological delays in introducing our
products and services, unanticipated technological failures and more
time-consuming and expensive marketing efforts than anticipated. We also cannot
be sure that sufficient demand for our services will develop or be maintained if
competitive services are introduced. We will need to anticipate changes in the
telecommunications industry and introduce new or enhanced services quickly to
increase revenues and remain competitive. Failure to keep our services
6
<PAGE> 12
competitive from a cost, quality or technological standpoint would result in a
material adverse effect on our business, prospects, financial condition and
results of operations.
We compete against the incumbent carrier and may not be able to connect our
networks to the incumbent carrier's network on favorable terms. We require
interconnection agreements with incumbent carriers or competitors of incumbent
carriers to connect calls or data transmissions between our customers and
non-customers or between our customers in different cities. Incumbent carriers
located in European Union countries are legally required to negotiate
interconnection agreements, but the process may be difficult and result in
unsatisfactory terms. Incumbent carriers in other countries may not be required
to provide interconnections, and there may be no competitive alternatives. We
cannot assure you that we will be able to negotiate or renegotiate
interconnection agreements in all of our markets on favorable terms.
In each of the markets served by our operating companies, we expect to
compete principally with the incumbent carriers that are the established
providers of local telephone services to all or virtually all telephone
subscribers within their service areas. It can be expensive and difficult for us
to switch a new customer to our network because:
- a potential customer could face switching costs, although this has
traditionally only been a problem with voice telephony customers; and
- we require cooperation from the incumbent carrier.
We cannot assure you that we will be able to overcome these disadvantages and
compete successfully with the incumbent carriers.
We will need and may be unable to obtain additional funding on satisfactory
terms to operate and grow our business, which could dilute our stockholders or
impose burdensome financial restrictions on our business. Deploying and
operating telecommunications systems is a highly capital intensive business. We
expect to incur substantial capital expenditures for constructing our networks,
deploying customer premise equipment and making acquisitions, which will require
us to raise substantial amounts of capital. We anticipate that our current
financial resources and the net proceeds of this offering will be sufficient to
fund our operations, expansion plans and capital requirements for the next 18
months, at which time we expect, to seek additional funding. If our plans
change, our growth rate is higher than anticipated, or our assumptions change or
prove to be inaccurate, we might require additional funding sooner than we
expect which we may be unable to obtain on satisfactory terms, if at all. If we
fail to raise sufficient capital on acceptable terms, we may be required to
change, reduce the scope of, or eliminate our anticipated system deployment and
expansion plans. This could have a material adverse effect on our business,
prospects, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Future capital requirements."
Our rapid growth will place a significant strain on our resources. Many
factors will affect our ability to manage our future growth. We are pursuing a
strategy of aggressive and rapid growth in both the geographic coverage of our
services and the number of customers. We will need to improve our operational,
accounting and financial systems and will require additional skilled employees
and management. We will also need strong and effective relationships with our
strategic partners, third-party equipment providers and our installation and
maintenance contractors in order to meet our customers' needs. We do not plan to
manufacture any equipment and will buy our equipment from multiple vendors.
There is not an industry or uniform standard for some of the equipment we will
be buying. If we are unable to obtain the equipment needed for our anticipated
services or manage our growth successfully, it could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We conduct all of our business through operating companies, some of which
are or will be partly owned by local strategic partners. Our only significant
assets are the ownership interests in our operating companies, an equity
investment in VeloCom and existing cash and cash equivalents, which we intend to
invest in operating companies. We intend to invest or loan substantially all of
the net proceeds from this
7
<PAGE> 13
offering in or to those entities. See "Use of Proceeds." Local laws and contract
restrictions may prevent our operating companies from paying us dividends or
other distributions. For example, Polish law prohibits distribution of dividends
by our Polish operating venture if it is not profitable; our Polish venture has
had no profits to date and none are anticipated in the next three to four years.
We also anticipate that our operating companies, including our Polish
operations, will incur debt as their businesses grow, which is likely to
restrict their ability to make dividends or other distributions to us. As a
result, our ability to generate any significant cash through dividends or other
distributions from our operating companies in the near future is severely
restricted.
We expect that most of our future investments will be with local strategic
partners. We attempt to structure our investments to retain control over
management decisions. We cannot guarantee, however, that we will be able to
continue to control the operations, strategies and financial decisions of all of
our current or future operating companies or sell our interests. As we negotiate
future agreements with potential strategic partners, even if they will hold
minority positions, we may be required to grant them veto power over significant
corporate actions.
We have a significant investment in VeloCom that is risky. In September
1999, we purchased a 22.5% equity interest in VeloCom Inc., a Delaware
corporation, for $28.3 million in cash and assets. Our equity interest is likely
to be significantly diluted if VeloCom successfully completes a proposed equity
financing, although we or one of our affiliates may exercise our preemptive
rights which would minimize such dilution. We cannot assure you that we will
have the financial resources needed to exercise these rights.
Our investment in VeloCom is risky. The economic, political and social
instability of Latin America creates operating risks not often found in the
United States. During the past several years, Latin American countries have been
characterized by varying degrees of inflation and political and economic
uncertainty. The high degree of influence over Latin American economies
exercised by Latin American governments and the ongoing potential for currency
fluctuations, price instability, inflation, rising interest rates, regulatory
changes, changes in tax policy and other political, social and economic
developments could affect demand for the services that VeloCom intends to offer.
VeloCom's business, financial condition and results of operations could be
materially and adversely affected as a result of these risks, as well as more
specific risks that may be inherent in operating in any of the Latin American
countries where VeloCom intends to operate. See "Risk Factors -- Foreign
investments can be risky." In addition to risks that are specific to the various
Latin American countries in which it intends to operate, VeloCom is subject to
many of the same risks as we are. If VeloCom does not successfully implement its
business and marketing strategy, we could lose all of our investment in VeloCom.
See "Business -- Equity Investment in VeloCom Inc."
Our business strategy includes acquiring other businesses, but we may not
be able to identify and properly integrate acquisitions of other companies. As
part of our business strategy, we intend to acquire other businesses. We expect
to face competition for acquisition candidates, which may limit the number of
acquisition opportunities and may lead to higher acquisition prices. Also, we
may not be able to identify, acquire or manage additional businesses profitably
or to successfully integrate any acquired businesses with our business.
Businesses that we acquire may have liabilities that we underestimate or do not
discover during our pre-acquisition investigations. Certain liabilities, even if
we do not expressly assume them, may be imposed on us as the successor to the
business. Further, each acquisition involves a number of other special risks,
that could cause the acquired business to fail to meet our expectations. For
example:
- the acquired business may not achieve expected results;
- we may not be able to retain key personnel of the acquired business;
- we may incur substantial, unanticipated costs, delays or other
operational financial problems when we try to integrate the business with
our own;
- the transfer of required permits, authorizations or licenses may be more
difficult, time consuming or costly than we anticipated;
8
<PAGE> 14
- our management's attention may be diverted; or
- our management may not be able to manage the combined entity effectively
or to make acquisitions and grow our business internally at the same
time.
We cannot predict the timing, size or success of any future acquisitions, our
ability to integrate any acquisitions, or the associated capital requirements.
In addition, we may not be able to obtain acquisition financing when required,
or such financing may only be available on terms and conditions that are
unacceptable to us. If we are unable to fund our acquisition plans, our growth
could be limited.
Increased competition could reduce our revenues. The telecommunications
industry in many of our markets is competitive and changes rapidly. In each of
our markets, we will face competition from existing and new providers of the
technology we provide and other competing technologies. In addition to our
traditional competitors, we expect to face competition from European cable
television systems, satellite service providers and other wireless technology
operators that are beginning to offer broadband telecommunications services to
business customers. These competitors may use various types of wireless and
wire-based technologies. Competition could result in the loss of customers and
reduce our revenues. Our current and future competitors may have more experience
in providing telephone services, and greater resources to spend on product
development, market expansion and customer service. Many of our competitors may
have greater political influence, larger customer bases and better name
recognition. Our competitors' cost advantages may give them the ability to
reduce their price for an extended period of time, and we may not be able to
compete effectively against such competitors. We also expect that our prices
will decline over the next few years as competition intensifies in our markets.
Adverse government regulations could limit our growth plans and revenue. In
most countries where we have invested or intend to invest, there is government
regulation of our business, including licensing of fixed wireless services,
licensing providers of switched telephone services, and regulation of rates,
network construction, system operations, service and foreign ownership
limitations. Companies that violate applicable regulations or terms of licenses
may be fined, be required to restructure their operations or lose all or part of
their license rights. Some countries do not provide exclusive geographic
licenses for fixed wireless services, so that a competitor could build over our
coverage, resulting in lower quality service levels. Other countries do not
protect providers of high frequency broadband services in certain ways, which
could result in a loss of our investment if, for example, we are not given the
right to renew a license. Laws can change at any time, and our ability to
operate as planned could be negatively affected by such changes. Many countries
in which we have licenses or plan to seek licenses have relatively new
telecommunications regulatory systems. Many legal and regulatory issues have not
been fully addressed. Future administrative or judicial interpretations may
expand the scope of regulations or significantly change the interpretation of
current laws and regulations. For example, in Poland, many legal and regulatory
issues have not been interpreted or reviewed by the courts or administrative
bodies. We believe our ownership structure of Formus Polska is consistent with
practice and complies with the current law and terms of Formus Polska's
licenses. A change in the law or a legal interpretation contrary to this
practice could materially adversely affect Formus Polska's financial condition
or operations. See "Business -- Operations and
Licenses -- Poland -- Regulation."
Our networks need clear lines of sight to provide the best service coverage
and we may not be able to secure appropriate roof installation rights to ensure
such coverage. Wireless transmission using higher band frequencies requires an
unobstructed "line of sight" between radio transmitters and receivers. Our
current plan in urban areas is to install radio equipment on rooftops of tall
structures. Where necessary, we will add additional radio equipment, which would
increase our costs. We are trying to obtain roof rights to desirable buildings
required in our markets, which may require fee payments in advance, whether or
not we ultimately exercise our rights. We cannot assure you that we will be able
to obtain adequate roof rights on commercially reasonable terms for clear
transmission. We may also experience reception problems due to weather, hills,
buildings, trees and foliage. In non-urban areas, we plan to use lower band
technologies since an unobstructed line of sight is not as critical. If we do
not have a license for lower band services, we might experience obstruction
problems in non-urban areas because there are so few structures with sufficient
height to clear local obstructions.
9
<PAGE> 15
Foreign investments can be risky. We own and plan to acquire additional
interests in telecommunications operations outside the United States. Investing
in foreign companies, and in U.S. companies doing business in foreign countries,
is risky, especially in emerging markets were civil unrest can lead to
disruptions in the political, regulatory and economic environment. Governments
in emerging markets often have substantial influence over the private sector,
and may control or own our competitors or the companies we will depend upon to
provide our services. If any of these governments decided to reverse
market-oriented initiatives, we could lose all or a significant amount of our
investments. Some foreign countries restrict foreign investors to minority
voting or economic stakes, or require a board of directors consisting of a
majority of citizens of that country. Such laws limit our control over our
operating companies. Governments may also restrict our ability to sell our
interests or our operating companies' ability to transfer funds to us. We do not
carry insurance to cover the risks of political unrest, currency convertibility
or repatriation of assets. There are certain risks inherent in conducting our
business internationally, such as:
- changes in telecommunications regulatory requirements could restrict our
ability to deliver services to our international customers;
- export restrictions, tariffs, differing regulatory regimes and other
trade barriers could impede us from adequately equipping our network
facilities;
- challenges in recruiting, retaining, and managing qualified staff who
understand the highly technical aspects of our business that could hinder
our ability to grow and compete;
- differing technology standards across countries may impede our ability to
integrate our product offerings across international borders;
- political and economic instability could lead to nationalization of our
physical assets, impeding our ability to deliver our services to
customers and harming our financial results;
- protectionist laws and business practices favoring local competition may
give unequal bargaining leverage to key vendors in countries where
competition is scarce, significantly increasing our operating costs; and
- potentially adverse tax consequences due to unfavorable changes in tax
laws or our physical presence in foreign countries.
Any of these risks could harm our international operations. In addition, we
may not be able to obtain the necessary telecommunications infrastructure in a
cost-effective manner or compete effectively in international markets. See
"Business -- Our Strategy" and "-- Regulation."
It may be difficult to enforce our legal rights in foreign countries. Many
of the agreements with our strategic partners or with our operating companies
are governed by the laws of the country where the operating company is located,
which, in some cases, may negatively impact our ability to enforce our
contractual rights against the strategic partners or operating company or
obligate us to resolve any disputes through arbitration or court proceedings in
those countries. We cannot accurately predict whether we will be able to
efficiently and fairly resolve any disputes that might arise, especially in
those countries with evolving legal systems. Even if we prevail in a dispute, we
may not be able to enforce our rights. Our inability to enforce our contractual
rights or decisions in our favor may have a material adverse effect on our
business, prospects, financial condition and results of operations.
Foreign currency exchange rate fluctuations may cause financial losses. Our
foreign operating companies currently pay some of their suppliers in foreign
currencies, which subjects them to currency fluctuation risks. In each country,
our operating companies attempt to match costs with revenues, and borrowings
with repayments in their local currencies. Nonetheless, we expect our operating
companies will purchase equipment in currencies other than their own, and some
will have debt and receivables denominated in other currencies, exposing them to
foreign currency exchange rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
10
<PAGE> 16
Capital Resources." In addition, if our operating companies are able to pay us
dividends in the future, the amount of cash we receive will also be affected by
fluctuations in exchange rates and currency devaluations such as those recently
experienced by many Asian and Latin American countries. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Inflation; foreign currency exchange risks and foreign investment
risks."
Since our inception through June 30, 1999, we have had cumulative foreign
currency translation adjustments of approximately $1.4 million. We believe that
in the future an increasing portion of our revenues and costs will be
denominated in foreign currencies. In particular, we expect that with the
introduction of the Euro, an increasing portion of our international sales may
be Euro-denominated. Fluctuations in the value of the Euro or other foreign
currencies may cause our business and prospects to suffer. We currently do not
engage in foreign exchange hedging activities and, although we have not yet
experienced any material losses due to foreign currency fluctuation, our
international revenues are currently subject to the risks of foreign currency
fluctuations and such risks will increase as our international revenues
increase.
We depend on our executive team and other key personnel. We believe that
our continued growth and success depends in significant part on the continued
employment of our executive officers named in the section entitled "Management."
We must also continue to attract and retain key management, marketing, finance
and operating personnel, both at Formus and at our operating companies.
Experienced management and other highly skilled personnel are in great demand.
It is difficult to find experienced managers, especially for overseas positions.
If we are unable to attract or retain key personnel, it could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
We could lose the ability to use certain net operating losses (NOLs). As of
December 31, 1998, we had NOLs of approximately $17.7 million for U.S. federal
income tax purposes. These NOLs, if not utilized to offset taxable income in
future periods, will begin to expire beginning in 2011. Applicable U.S. federal
income tax law imposes limitations on the ability of corporations to use NOLs if
the corporation experiences a more than 50% change in ownership during any
three-year period. It is possible that we have experienced one or more ownership
changes in 1997 and 1998 as a result of our raising various rounds of private
equity or that such an ownership change may have occurred or be deemed to have
occurred due to events beyond our control (such as transfers of common stock by
certain stockholders or the exercise or treatment of warrants, conversion rights
or stock options issued by us). We also cannot assure you that we will not take
additional actions, such as the issuance of additional stock, that would cause
an ownership change to occur. In addition, the NOLs are subject to examination
by the Internal Revenue Service (the IRS), and are thus subject to adjustment or
disallowance resulting from any such IRS examination. Accordingly, you should
not assume the unrestricted availability of our currently existing or future
NOLs, if any, in making your investment decisions.
We are subject to international tax risks. Distributions of earnings and
other payments received from our operating companies may be subject to
withholding taxes imposed by the countries where they are operating or are
formed. If these foreign countries do not have income tax treaties with the
United States or the Netherlands, where some of our subsidiaries are
incorporated, we could be subject to high rates of withholding taxes on these
distributions and payments. We could also be subject to tax twice on income
related to operations in these non-treaty countries. Because we are unable to
reduce the taxable income of one operating company with losses incurred by
another operating company located in another country, we may have a higher
foreign effective income tax rate than that of other companies in our industry.
Although in general we may claim a credit against our U.S. federal income tax
for foreign income taxes and foreign withholding taxes we pay, the amount of the
credit that we may claim is subject to many limitations which may significantly
restrict our ability to claim a credit for all of the foreign taxes we pay.
A breach of our network security could cause delays or interruptions of
service to our customers. Our network may be vulnerable to unauthorized access,
computer viruses and other disruptive problems. Unauthorized access could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers, which might cause us to be liable to our
customers and might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require
11
<PAGE> 17
interruptions, delays or cessation of service to our customers. Any of these
factors relating to network security could have a material adverse effect on our
business, prospects, financial condition and results of operations.
You will incur immediate and substantial dilution. The initial public
offering price is substantially higher than the net tangible book value per
share of our common stock immediately after this offering. You will incur
additional dilution if holders of stock options, whether currently outstanding
or subsequently granted, exercise their options. Accordingly, if you purchase
common stock in this offering, you will incur immediate and substantial dilution
of approximately $ in the net tangible book value per share of the
common stock you purchase in this offering. See "Dilution."
Future sales of our Class A common stock in the public market could depress
our stock price. Sales of substantial amounts of our Class A common stock in the
public market following this offering, or the appearance that such sales may
occur, could adversely affect the market price. The shares of Class A common
stock being sold in this offering will be freely transferable under the
securities laws immediately after issuance, except for any shares sold to our
"affiliates." In addition, shares of our Class A common stock available for sale
in the public market will be limited by lock-up agreements under which certain
holders of our outstanding shares of common stock and preferred stock that will
be converted into shares of common stock upon the consummation of this offering,
and options to purchase common stock will agree not to sell or otherwise dispose
of shares for a period of 180 days after the date of this prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. There will be a large number of shares available for sale following
this period. Further, Donaldson, Lufkin & Jenrette Securities Corporation may,
in its sole discretion and at any time without notice, release all or any
portion of the shares subject to lock-up agreements.
After this offering, the holders of substantially all of our common stock
will have the right to require us to register the sale of their shares, subject
to limitations and to the lock-up agreements with the underwriters. These
holders also have the right to include their shares in any future public
offerings of our equity securities. Within approximately 180 days after this
offering, we intend to file a registration statement under the Securities Act to
register shares of Class A common stock subject to outstanding stock
options or reserved for issuance under our stock option plan. The sale of these
additional shares into the public market may further adversely affect the market
price of our common stock. See "Shares Eligible for Future Sale."
Our certificate of incorporation and bylaws contain anti-takeover
provisions that could delay or prevent a change in control and therefore could
hurt our stockholders. Provisions of Delaware law and our certificate of
incorporation and bylaws could make it more difficult for a third party to
acquire control of our company, even if a change in control would be beneficial
to stockholders, and could adversely affect the market price of our common
stock. For example, we are subject to Section 203 of the Delaware General
Corporation Law, which restricts some transactions between us and our
stockholders. Our certificate of incorporation allows our board of directors to
issue, without stockholder approval, preferred stock with terms set by the board
of directors. The preferred stock could be issued quickly with terms that delay
or prevent the change in control of Formus or make removal of management more
difficult, even if it is in the best interest of the stockholders. Also, the
issuance of preferred stock may adversely impact the rights of the holders of
common stock or cause the market price of our common stock to decrease. See
"Description of Our Capital Stock."
This prospectus contains forward-looking statements which may not prove to
be accurate. This prospectus contains forward-looking statements relating to,
among other things, our company and industry, as well as the economic, legal and
political situations in those countries where we do business. We generally
identify such forward-looking statements in this prospectus using words like
"believe," "intend," "expect," "should," "plan," "project," "contemplate,"
"anticipate" or similar expressions. These statements are based on our beliefs
as well as assumptions we made using information currently available to us.
Because these statements involve risks and uncertainties, including those
described under "Risk Factors" and reflect our current views concerting future
events, actual results may differ significantly from the
12
<PAGE> 18
results expressed or implied in these forward-looking statements. Market data
and forecasts used in this prospectus, including, for example, market size and
potential customer base, are largely the estimates of our management and the
management of our operating companies, and to a lesser extent have been obtained
from independent industry sources. Although we believe these sources are
reliable, we have not independently verified these data.
Our management has broad discretion in the application of proceeds, which
may increase the risk that the proceeds will not be applied effectively. Our
management will have broad discretion in determining how to spend the proceeds
of the offering. Accordingly, we can spend the proceeds from the offering in
ways which turn out to be ineffective or with which the stockholders may not
agree.
As an Internet access provider, we may incur liability for information
disseminated through our network. The Internet access business has, to date, not
been materially restricted by regulation in our markets. The legal and
regulatory environment of Internet access and e-commerce is uncertain, however,
and may change. Governments in our markets may adopt new laws and regulations
for Internet service offerings, or may apply existing laws to the new forms of
e-commerce. Uncertainty and new regulation could increase our costs or slow the
growth of e-commerce on the Internet significantly. This could delay growth in
demand for our Internet and data services and limit the growth of our revenues.
New and existing laws may cover issues such as:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright and trademark infringement;
- pornography and indecency; and
- other claims based on the nature and content of Internet materials.
As the law in this area develops, the potential imposition of liability
upon us for information carried on and disseminated through our network could
require us to implement measures to reduce our exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain service offerings. Any costs that are incurred as a result of such
measures, contesting any such claims, or the consequent imposition of liability
could have a material adverse effect on the price of our common stock.
13
<PAGE> 19
USE OF PROCEEDS
We estimate that we will receive approximately $138.5 million in net
proceeds from this offering based upon an assumed initial public offering price
of $ per share, the mid-point of the offering range, or $ million if the
underwriters exercise their over-allotment option in full, after deducting
underwriting discounts and commissions and estimated offering expenses. We
expect to use approximately $ of the net proceeds from this offering to
fund capital expenditures and operating losses associated with our roll-out of
telecommunications services in Germany and Poland. We will use the remaining net
proceeds, if any, as follows:
- to fund operations in other countries where we have or obtain licenses;
- to acquire telecommunications licenses;
- for continued business development activities;
- for business acquisitions; and
- for general corporate purposes.
The actual amount of net proceeds we spend on a particular use will depend
on many factors, including our future revenue growth, additional financing
sources, if any, our future capital expenditures, and the amount of cash
generated by our operations. Many of these factors are beyond our control.
Therefore, our management will have broad discretion in the use of the net
proceeds.
Until we use the net proceeds of this offering as described above, we
intend to invest the net proceeds in short-term investment-grade marketable
securities.
DIVIDEND POLICY
For the foreseeable future we plan to retain our earnings, if any, to
reinvest in our business. We have never declared or paid any dividends. Our
future decisions concerning the payment of dividends on the common stock will
depend upon our results of operations, financial condition and capital
expenditure plans, as well as such other factors as the board of directors, in
its sole discretion, may consider relevant. We do not anticipate declaring or
paying cash dividends in the foreseeable future.
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of June 30, 1999, was $100.5
million or $ per share of common stock. Net tangible book value is the
amount of total tangible assets minus total liabilities, pro forma for:
- our issuance of preferred stock in September 1999;
- our transaction with VeloCom in September 1999; and
- our acquisition of the remaining equity interest in our German operating
company in September 1999.
Net tangible book value per share is net tangible book value divided by the
number of shares of common stock outstanding. After giving effect to our sale of
shares of Class A common stock in this offering, at an estimated initial
public offering price of $ per share, the mid-point of the offering range,
and application of the estimated proceeds therefrom, our net tangible book value
as of June 30, 1999, would have been $ million or $ per share.
This represents an immediate dilution in net tangible book value of
$ per share to new stockholders purchasing our Class A common stock in
this offering. Dilution per share represents the difference between the price
per share paid by new stockholders for the shares issued in this offering and
the pro forma net tangible book value per share immediately after the completion
of the offering. The following table illustrates this net tangible book value
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
--------
Pro forma net tangible book value per share before the
offering............................................... $
Increase in net tangible book value per share attributable
to the offering........................................
--------
Pro forma net tangible book value per share of Class A
common stock after this offering and after giving effect
to the conversion of all outstanding shares of preferred
stock.....................................................
--------
Dilution per share of Class A common stock to new investors........... $
========
</TABLE>
The following table summarizes the difference between the existing
stockholders and new investors with respect to the total number of shares of
common stock purchased, the total cash and non-cash consideration paid and the
average price per share paid to us.
<TABLE>
<CAPTION>
PURCHASED SHARES TOTAL CONSIDERATION
------------------ ---------------------- AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT COMMON SHARE
-------- ------- ------------ ------- -----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders:
Common stockholders............... % $ 3,465,470 0.67% $
Series A & B Preferred
stockholders................... 58,200,000 11.27
Series C & D Preferred
stockholders................... 25,000,003 4.84
Series E & F Preferred
stockholders................... 279,563,690 54.16
New investors....................... 150,000,000 29.06
-------- ------ ------------ ------ --------
Total..................... 100.00% $516,229,163 100.00% $
======== ====== ============ ====== ========
</TABLE>
These tables assume that none of the stock options or the warrant
outstanding upon the closing of this offering will be exercised. As of September
30, 1999, shares of common stock were issuable upon exercise of outstanding
stock options and a warrant. If all of the outstanding stock options and the
warrant are exercised, you will experience additional dilution.
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<PAGE> 21
CAPITALIZATION
The following unaudited table sets forth our cash position and
capitalization as of June 30, 1999:
- on an actual basis;
- pro forma for the following transactions which occurred in September
1999:
- the issuance of preferred shares;
- the VeloCom transaction; and
- the acquisition of our minority partners' interest in Callino; and
- pro forma as adjusted to give effect to:
- the above transactions;
- the conversion of all of our preferred stock into common stock; and
- this offering.
Please read this table in conjunction with our audited and unaudited
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 (UNAUDITED)
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 52,389 $142,602 $281,102
======== ======== ========
Minority interest....................................... $ 6,403 $ 213 213
Preferred stock......................................... 82,006 358,845 --
Stockholders' equity (deficit)
Common stock.......................................... 3 3 61,445
Additional paid-in capital............................ 3,362 3,362 439,264
Other cumulative comprehensive income (loss).......... (1,271) (1,271) (1,271)
Accumulated deficit................................... (12,240) (10,000) (10,000)
-------- -------- --------
Total stockholders' equity (deficit)............... (10,146) (7,906) 489,438
-------- -------- --------
Total capitalization.......................... $ 78,263 $351,152 $489,651
======== ======== ========
</TABLE>
- ------------------------------
(1) Pro forma for the following events which occurred in September 1999:
- The acquisition of the remaining equity interest in Callino for $163.8
million consisting of $100 of cash and 16,371,552 shares of preferred
stock; convertible into shares of common stock;
- The transfer of certain of our assets in Latin America (valued at
approximately $7.5 million) and $20.8 million in cash in exchange for a
22.5% ownership interest in VeloCom; and
- The issuance of 11,584,817 shares of preferred stock convertible into
shares of common stock for cash consideration of $115.8 million, less
estimated offering costs of $2.7 million.
(2) Pro forma, as adjusted to give effect to this offering, including the
conversion of outstanding preferred stock into shares of our common stock.
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<PAGE> 22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet data
are presented to reflect the pro forma effect of the transactions described
below as if they occurred on June 30, 1999. The following unaudited pro forma
condensed consolidated statement of operations data are presented to reflect the
pro forma effect of the transactions described below as if they occurred on
January 1, 1998. The unaudited pro forma condensed consolidated balance sheet
and statements of operations and notes thereto do not purport to represent what
our results would actually have been if such transactions had in fact occurred
on such dates. The pro forma adjustments are based upon currently available
information and upon certain assumptions that we believe are reasonable. The
unaudited pro forma condensed consolidated financial data and accompanying notes
should be read in conjunction with our audited consolidated financial statements
and the related notes, our unaudited interim consolidated financial statements
and related notes, the financial statements of VeloCom and Callino and other
financial information, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all of which are included
elsewhere in this prospectus.
In September 1998, we acquired an initial controlling interest in Callino
through the purchase of newly issued preference shares in Callino totaling
approximately $12.1 million. The total purchase price was paid over a five-month
period ending in January 1999. In September 1999, we acquired the remaining
equity interest in Callino which we did not own for $163.8 million, consisting
of $100,000 of cash, 9,075,772 shares of our Series E Preferred Stock and
7,295,780 shares of our Series F Preferred Stock which is convertible into
16,371,552 shares of our Common Stock. We have consolidated the results of
Callino since September 1, 1998 and will continue to do so.
In September 1999, we acquired a 22.5% equity interest in VeloCom for cash
of approximately $20.8 million and assets valued at approximately $7.5 million.
The investment in VeloCom will be accounted for under the equity method of
accounting as long as we continue to hold at least a 20% interest in VeloCom.
In September 1999, we issued 11,584,817 shares of preferred stock
convertible into shares of common stock for $115.8 million, less
estimated offering costs of $2.7 million.
17
<PAGE> 23
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
---------------------------------------------
CALLINO VELOCOM PREFERRED
ACTUAL ACQUISITION TRANSACTION OFFERING(9) PRO FORMA
-------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................. $ 52,389 $ (100)(1) $(22,810)(6) $113,123 $142,602
Marketable equity securities............... 7,842 -- -- -- 7,842
Prepaid expenses and other current
assets................................... 2,003 -- (3) -- 2,000
-------- -------- -------- -------- --------
Total current assets................. 62,234 (100) (22,813) 113,123 152,444
Telecommunications licenses, net............. 11,880 238,827 (2) (234) -- 250,473
Property and equipment, net.................. 6,986 -- (36) -- 6,950
Investments in affiliates.................... 3,024 -- 25,300 (7) -- 28,324
Other assets................................. 1,074 -- -- -- 1,074
-------- -------- -------- -------- --------
Total assets......................... $ 85,198 $238,727 $ 2,217 $113,123 $439,265
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT):
Total current liabilities.................. 6,935 -- (23) -- 6,912
Deferred income taxes...................... -- 81,201 (3) -- -- 81,201
Minority interests in subsidiaries......... 6,403 (6,190)(4) -- -- 213
Preferred stock............................ 82,006 163,716 (5) -- 113,123 358,845
Stockholders' equity (deficit)............. (10,146) -- 2,240 (8) -- (7,906)
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity (deficit).................. $ 85,198 $238,727 $ 2,217 $113,123 $439,265
======== ======== ======== ======== ========
</TABLE>
- ------------------------------
(1) Represents the cash portion of the consideration we paid to acquire the
remaining equity interests in Callino in September 1999.
(2) Represents the pro forma increase in telecommunications licenses resulting
from our acquisition of the remaining interest in Callino through the
issuance of 16,371,552 shares of preferred stock (valued at $10.00 per
share).
(3) Represents the deferred tax liability associated with recording the Callino
acquisition in September 1999.
(4) Represents the elimination of the historical Callino related minority
interest at June 30, 1999 as a result of the Callino acquisition.
(5) Represents the pro forma increase in stockholders' equity for the 16,371,552
shares of preferred stock (valued at $10.00 per share) we exchanged to
purchase the remaining equity interests in Callino.
(6) Represents the pro forma decrease in cash resulting from the VeloCom
acquisition:
<TABLE>
<S> <C>
Cash paid in connection with VeloCom acquisition............ $(20,834)
Additional capital contributions to our Latin American
operations incurred between June 30, 1999 and the VeloCom
acquisition............................................... (1,976)
--------
$(22,810)
========
</TABLE>
(7) Represents the net increase in investments in affiliates due to the VeloCom
acquisition:
<TABLE>
<S> <C>
Investment made for a 22.5% equity interest in VeloCom...... $ 28,324
Elimination of historical investment in Latin American
entities due to transfer to VeloCom....................... (3,024)
---------
$ 25,300
=========
</TABLE>
(8) Represents the pro forma gain recognized on the VeloCom acquisition.
(9) Represents gross proceeds of $115.8 million less estimated offering costs of
$2.7 million from the issuance of 11,584,817 shares of our preferred stock
in September 1999.
18
<PAGE> 24
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------------------
CALLINO VELOCOM PREFERRED
ACTUAL ACQUISITION TRANSACTION OFFERING PRO FORMA
------------ ----------- ----------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Costs of services...................... $ 2,260 $ -- $ -- -- $ 2,260
Provision on impaired assets........... 1,214 -- -- -- 1,214
Selling, general and administrative.... 17,471 -- (2,310)(5) -- 15,161
Depreciation and amortization.......... 1,045 13,218 (2) -- -- 14,263
------------ -------- -------- ------- ------------
Total costs and expenses......... 21,990 13,218 (2,310)(5) -- 32,898
------------ -------- -------- ------- ------------
Income (loss) from operations.... (21,990) (13,218) 2,310 (5) -- (32,898)
Interest income (expense)................ 657 -- (3)(5) -- 654
Other income (expense), net.............. (339) -- 11 (5) -- (328)
Gain on sale of investments.............. 24,527 -- -- -- 24,527
Minority interests in subsidiaries....... 6,213 (5,950)(3) -- -- 263
Share in results of affiliated companies,
net.................................... (283) -- (1,139)(6) -- (1,422)
Deferred income tax benefit.............. -- 4,494 (4) -- -- 4,494
------------ -------- -------- ------- ------------
Net income (loss)................ $ 8,785 $(14,674) $ 1,179 $ -- $ (4,710)
============ ======== ======== ======= ============
Basic net income (loss) per share(1)..... $
============ ======= ============
Diluted net income (loss) per share(1)...
============ ======= ============
Weighted average number of common shares
outstanding -- basic(1)................
============ ======= ============
Weighted average number of common shares
outstanding -- diluted(1)..............
============ ======= ============
</TABLE>
- ------------------------------
(1) Reflects a for stock split that will be completed immediately prior
to the close of this offering.
(2) Represents the increase in amortization expense due to the pro forma
increase in telecommunications licenses resulting from the Callino
acquisition in September 1999.
(3) Represents the elimination of the historical minority interest in
subsidiaries for the six months ended June 30, 1999 related to Callino.
(4) Represents deferred tax benefit associated with amortization of
telecommunications license rights recorded in connection with acquisition of
remaining equity interests in Callino in September 1999.
(5) Represents the elimination of our historical expenses related to our Latin
American assets that we transferred in connection with the VeloCom
transaction.
(6) Represents additional share in results of affiliates as a result of the
VeloCom acquisition.
19
<PAGE> 25
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------------------
CALLINO VELOCOM PREFERRED
ACTUAL ACQUISITION ACQUISITION OFFERING PRO FORMA
-------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Costs of services............................ 1,168 -- -- -- 1,168
Selling, general and administrative.......... 14,461 736 (2) (1,105)(6) -- 14,092
Depreciation and amortization................ 1,070 26,435 (3) -- -- 27,505
-------- -------- ------- ------ --------
Total costs and expenses............... 16,699 27,171 (1,105)(6) -- 42,765
-------- -------- ------- ------ --------
Income (loss) from operations.......... (16,699) (27,171) 1,105 (6) -- (42,765)
Interest income (expense)...................... 734 -- (2)(6) -- 732
Other income (expense), net.................... 303 (51) -- -- 252
Minority interests in subsidiaries............. 1,192 (637)(4) -- -- 555
Share in results of affiliated companies,
net.......................................... -- -- (438)(7) -- (438)
Deferred income tax benefit.................... -- 8,988 (5) -- -- 8,988
-------- -------- ------- ------ --------
Net income (loss)...................... $(14,470) $(18,871) $ 665 $ -- $(32,676)
======== ======== ======= ====== ========
Basic net loss per share(1).................... $ $
======== ====== ========
Diluted net income (loss) per share(1).........
======== ====== ========
Weighted average number of common shares
outstanding -- basic(1)......................
======== ====== ========
Weighted average number of common shares
outstanding -- diluted(1)....................
======== ====== ========
</TABLE>
- ------------------------------
(1) Reflects a for stock split that will be completed immediately prior
to the close of this offering.
(2) Represents the increase in selling, general and administrative expenses
resulting from our acquisition of the remaining interest in Callino assuming
we had first consolidated Callino on January 1, 1998 rather than September
1, 1998.
(3) Represents the increase in amortization expense due to the pro forma
increase in telecommunications licenses resulting from our Callino
acquisition assuming the September 1998 and 1999 transactions had occurred
effective January 1, 1998.
(4) Represents the elimination of the historical minority interest in
subsidiaries for the year ended December 31, 1998, related to Callino.
(5) Represents deferred tax benefit associated with amortization of
telecommunications license rights recorded in connection with acquisition of
remaining equity interests in Callino in September 1999.
(6) Represents the elimination of historical expenses related to our Latin
American assets that we transferred to VeloCom in connection with the
VeloCom transaction.
(7) Represents additional share in results of affiliates as a result of the
VeloCom transaction.
20
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated statement of operations data for the period from
our inception on October 22, 1996 to December 31, 1996, for the years ended
December 31, 1997 and 1998, and for the cumulative period from our inception on
October 22, 1996 to December 31, 1998 and related balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from our audited consolidated
financial statements. The following unaudited consolidated statement of
operations data for the six months ended June 30, 1998 and 1999 and for the
cumulative period from our inception on October 22, 1996 to June 30, 1999 and
the unaudited consolidated balance sheet data as of June 30, 1999, are derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus. In our opinion, these unaudited financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial data for such periods and as of such date. You should read
the data set forth below together with our audited and unaudited consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------- JUNE 30,
1996 1997 1998 1999
------ ------- ------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $1,177 $21,528 $22,887 $52,389
Other current assets............................... -- 373 2,912 9,845
Total current assets............................... 1,177 21,901 25,799 62,234
Telecommunications licenses, net................... -- 2,422 11,424 11,880
Property and equipment, net........................ 45 491 4,391 6,986
Investments in affiliates.......................... -- -- 11,756 3,024
Other assets....................................... -- 20 24 1,074
Total assets....................................... 1,222 24,834 53,394 85,198
Total current liabilities.......................... 77 1,252 4,154 6,935
Minority interest in subsidiaries.................. -- 230 10,564 6,403
Mandatorily redeemable preferred stock............. -- 26,830 56,870 82,006
Total stockholders' equity (deficit)............... 1,146 (3,478) (18,194) (10,146)
</TABLE>
21
<PAGE> 27
<TABLE>
<CAPTION>
FOR THE PERIOD FROM CUMULATIVE FROM
OCTOBER 22, 1996 FOR THE YEARS ENDED OCTOBER 22, 1996
(INCEPTION) TO DECEMBER 31, (INCEPTION) TO
DECEMBER 31, --------------------- DECEMBER 31,
1996 1997 1998 1998
------------------- --------- --------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Costs of services.................. $ -- $ -- $ 1,168 $ 1,168
Provision on impaired assets....... -- -- -- --
Selling, general and
administrative................... 96 6,266 14,461 20,823
Depreciation and amortization...... -- 128 1,070 1,198
------- --------- --------- ---------
Total costs and expenses..... 96 6,394 16,699 23,189
Loss from operations......... (96) (6,394) (16,699) (23,189)
-- -- (17) (17)
Interest income (expense), net....... 7 328 751 1,086
Gain on sale of investment in
affiliate.......................... -- -- -- --
Other income (expense), net.......... -- (101) 303 202
Minority interests in subsidiaries... -- 20 1,192 1,212
Share in results of affiliated
companies, net..................... -- -- -- --
------- --------- --------- ---------
Net (loss) income.................... (89) (6,147) (14,470) (20,706)
------- --------- --------- ---------
Accretion of mandatorily redeemable
preferred stock.................... -- -- (182) (182)
------- --------- --------- ---------
Net (loss) income applicable to
common stock....................... $ (89) $ (6,147) $ (14,652) $ (20,888)
======= ========= ========= =========
Net (loss) income per common share
Basic net (loss) income............ $ (.13) $ (2.66) $ (4.98) $ (8.50)
Diluted net (loss) income.......... $ (.13) $ (2.66) $ (4.98) $ (8.50)
Weighted-average number of common
shares outstanding:
Basic.............................. 685,070 2,314,548 2,943,180 2,456,568
======= ========= ========= =========
Diluted............................ 685,070 2,314,548 2,943,180 2,456,568
======= ========= ========= =========
<CAPTION>
CUMULATIVE FROM
FOR THE SIX MONTHS OCTOBER 22, 1996
ENDED JUNE 30, (INCEPTION) TO
---------------------- JUNE 30,
1998 1999 1999
--------- ---------- ----------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Costs of services.................. $ 14 $ 2,260 $ 3,428
Provision on impaired assets....... -- 1,214 1,214
Selling, general and
administrative................... 5,535 17,471 38,294
Depreciation and amortization...... 313 1,045 2,243
--------- ---------- ---------
Total costs and expenses..... 5,862 21,990 45,179
Loss from operations......... (5,862) (21,990) (45,179)
-- (8) (25)
Interest income (expense), net....... 220 665 1,751
Gain on sale of investment in
affiliate.......................... -- 24,527 24,527
Other income (expense), net.......... 150 (339) (137)
Minority interests in subsidiaries... 231 6,213 7,425
Share in results of affiliated
companies, net..................... -- (283) (283)
--------- ---------- ---------
Net (loss) income.................... (5,261) 8,785 (11,921)
--------- ---------- ---------
Accretion of mandatorily redeemable
preferred stock.................... (65) (137) (319)
--------- ---------- ---------
Net (loss) income applicable to
common stock....................... $ (5,326) $ 8,648 $ (12,240)
========= ========== =========
Net (loss) income per common share
Basic net (loss) income............ $ (1.81) $ 2.90 $ (4.78)
Diluted net (loss) income.......... $ (1.81) $ .26 $ (4.78)
Weighted-average number of common
shares outstanding:
Basic.............................. 2,943,180 2,984,745 2,561,330
========= ========== =========
Diluted............................ 2,943,180 33,116,245 2,561,330
========= ========== =========
</TABLE>
22
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Consolidated Financial Data" and our audited and unaudited
consolidated financial statements and the related notes which are included
elsewhere in this prospectus. All amounts in the tables in this section (except
share and per share data) are stated in thousands.
OVERVIEW
Since our inception in 1996, our principal activities have included
securing radio spectrum and other telecommunications licenses, developing and
constructing networks, raising capital, establishing strategic partnerships, and
building our management and corporate infrastructure. We generated no revenues
from inception through June 30, 1999. We are headquartered in the United States
and conduct our principal operations in Germany and Poland. We also recently
opened an office in The Netherlands to oversee all of our European operations.
In May and July 1999, we launched our first commercial services in Poland and
Germany, respectively, and generated revenues during the quarter ended September
30, 1999. We hold additional commercial telecommunications licenses in other
countries in which we are not yet operational. We are also engaged in operations
under trial licenses in two countries and believe that these trials may give us
an advantage in obtaining commercial telecommunications licenses in the future.
Our consolidated financial statements include the accounts of Formus
Communications, Inc. and our majority-owned or -controlled subsidiaries. We
operate our business through a number of subsidiaries primarily located in
Europe. Callino was not consolidated until September 1, 1998.
We have generated significant net operating losses and negative cash flows
from operations since our inception, and we currently expect that we will
continue to incur net operating losses in the future as we acquire new radio
spectrum and other telecommunications licenses and continue to deploy our
networks. Our prior operating results are not indicative of the anticipated
results of operations which we expect to achieve in the future.
We currently evaluate our business according to the geographic location of
our markets. We identify these markets as Germany, Poland and Corporate & Other.
The following table presents information about each of these segments for the
year ended December 31, 1998, and for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998
----------------------------------------------------------
NET INCOME DEPRECIATION & CAPITAL
TOTAL ASSETS (LOSS) AMORTIZATION EXPENDITURES
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Germany..................................... $18,822 $ (1,203) $ 185 $6,977
Poland...................................... 673 (831) 68 175
Corporate & Other........................... 33,899(1) (12,436) 817 1,625
------- -------- ------ ------
Total Company..................... $53,394 $(14,470) $1,070 $8,777
======= ======== ====== ======
</TABLE>
- ------------------------------
(1) Includes approximately $11.1 million of corporate cash and cash equivalents
at December 31, 1998. In addition, the asset account includes an approximate
$11.8 million investment which was sold in April 1999.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999
---------------------------------------------------------
NET INCOME DEPRECIATION & CAPITAL
TOTAL ASSETS (LOSS) AMORTIZATION EXPENDITURES
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Germany..................................... $15,833 $(10,274) $ 554 $5,659
Poland...................................... 1,217 (638) 59 453
Corporate & Other........................... 68,148(1) 19,697 432 861
------- -------- ------ ------
Total Company..................... $85,198 $ 8,785 $1,045 $6,973
======= ======== ====== ======
</TABLE>
- ------------------------------
(1) Includes approximately $48.4 million of corporate cash and cash equivalents
at June 30, 1999.
23
<PAGE> 29
REVENUES
We expect to generate most of our recurring revenues from providing
broadband telecommunications access service, leasing dedicated connections
between customer sites, switched voice services, providing data transmission
through broadband connections for other telecommunications providers and other
value-added telecommunications services. We commenced commercial operations in
May and July 1999 in two European markets, and we expect to commence additional
commercial operations in new markets in 2000, which we expect will generate
additional revenues.
We intend to price our services competitively. We will charge customers a
monthly fee, as well as connection and usage fees for some services. As part of
our marketing activities, we may offer sales promotions that include free
installation, risk-free trials and price discount programs, each designed to
establish a market presence and address local market conditions. While pricing
will be an important element of our strategy, we believe that customer care,
reliability and consistent quality will also be critical to generating new
customers and promoting customer loyalty.
EXPENSES
We expect that our expenses will principally include costs of services
(including network operations costs) and selling, general and administrative
expenses. Our costs of services will include interconnection costs, network
operations, site lease fees, operating and maintenance costs, roof-rights fees
and license fees. We expect these costs will increase as we expand our networks
and launch commercial services in new markets. Our selling, general and
administrative expenses will include expenses related to our sales and marketing
representatives, support personnel, advertising programs, as well as general and
administrative expenses relating to corporate overhead, professional fees,
salaries and employee benefits. We expect that our costs per customer will be
higher during our initial years of operation and will decline as our sales and
marketing expenses are distributed over a greater customer base.
We expect that interconnection costs will be a major portion of our costs.
We currently have interconnection agreements with telecommunications providers
in Germany and Poland. We anticipate that we will enter into additional
interconnection agreements with other telecommunications providers as we expand
our operations, and that our interconnection costs will grow as our customer
base grows and volume increases.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Our consolidated net loss, excluding a one-time gain on sale of investments
of $24.5 million, during the six-month period ended June 30, 1999, was $15.7
million, compared to $5.3 million in the corresponding period of 1998. The
change was primarily the result of substantial start-up costs of our operations
in Germany and Poland, and corporate level business development activities and
related expenses.
We expect to continue to generate increasing operating losses and negative
cash flows from operations as we continue to expand our commercial operations
and enter new markets, even if and after we have achieved positive cash flow
from operations in our initial markets.
Revenues. We generated no revenues from inception through June 30, 1999.
While we launched service in Poland in May 1999, we offered two months of
introductory services without charge.
Costs of services. Our costs of services for the six months ended June 30,
1999, totaled $2.3 million, compared to $14,000 for the six months ended June
30, 1998. This increase is a result of our operational activities associated
with our commercial and trial telecommunications network construction and
operation.
Selling, general and administrative expenses. For the six-month period
ended June 30, 1999, selling, general and administrative expenses totaled $17.5
million compared to $5.5 million for the same period in 1998, representing a
218% increase. This change was primarily due to our acquisition of Callino
effective
24
<PAGE> 30
September 1, 1998, increased business development costs, including market
assessment and license application costs and an increase in the number of
employees and other corporate expenses.
We are assembling locally based, direct sales forces in our local markets.
To attract and retain a highly qualified sales force, we plan to offer our sales
and customer-care personnel a highly competitive incentive-based compensation
package. The number of employees increased from 40 as of June 30, 1998, to 129
as of June 30, 1999. We expect that our employee base, including the number of
our sales and marketing personnel, will grow significantly as we offer new
services and expand into new markets. We expect our selling, general and
administrative costs will increase as we develop and expand our operations,
acquire additional telecommunications licenses and build our management and
corporate infrastructure.
Depreciation and amortization. For the six months ended June 30, 1999, we
have recorded depreciation and amortization expense of $1.0 million, compared to
$313,000 for the similar period in 1998. This change is due to increases in
network buildouts and the acquisition of telecommunications licenses related to
Callino.
Other income. Interest income for the six months ended June 30, 1999 was
$665,000. In the comparable period in 1998, interest income was $220,000. The
change is due to the increase in cash and cash equivalents resulting from
additional equity financing activities and the proceeds received from the sale
of our interest in WNP Communications and from the sale of shares in NEXTLINK.
WNP Communications transaction. For the period ended June 30, 1999, we had
net income of $8.8 million. Included in net income was a gain totaling
approximately $24.5 million, related to the sale of our investment in WNP
Communications, for cash and shares of NEXTLINK Communications. During 1998, we
purchased a minority interest in WNP Communications, Inc. for cash consideration
totaling approximately $11.8 million. In January 1999, NEXTLINK agreed to
acquire WNP, resulting in WNP becoming a wholly owned subsidiary of NEXTLINK. In
connection with the merger, NEXTLINK issued us shares of its common stock, as
well as cash consideration in exchange for our interest in WNP. We recognized a
gain of approximately $24.5 million associated with the shares and cash
received. Subsequent to the merger between NEXTLINK and WNP Communications, we
completed a sale of a portion of the shares we received from NEXTLINK resulting
in total net cash proceeds to us of approximately $16.5 million. During the
third quarter we sold our remaining interest in NEXTLINK and received additional
net cash proceeds of approximately $10.2 million, resulting in an additional
gain of approximately $2.3 million.
Minority interest in subsidiaries. During the six months ended June 30,
1999, and for the comparable period in 1998, $6.2 million and $231,000,
respectively, of losses were allocated to minority shareholders of our
consolidated subsidiaries. The increase of $6.0 million in the 1999 period over
the 1998 period relates to the consolidation of Callino effective September 1,
1998.
Asset write-down. During the second quarter, we recorded a $1.2 million
write down for certain assets in Ecuador as we determined that we were not going
to pursue further development opportunities in Ecuador. We are currently in
negotiations regarding the sale of our entire interest in Ecuador.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
For the year ended December 31, 1998, we had a net loss of $14.5 million,
compared to a net loss of $6.1 million in 1997.
Costs of services. In 1998, we incurred costs of services of $1.2 million
as a result of operational activities associated with commercial and trial
network buildouts. We did not record any costs of services during the year ended
December 31, 1997.
Selling, general and administrative expenses. In 1998, we increased our
development and corporate activities, including increasing the number of our
employees and our use of outside service providers, and increased our other
general corporate and administrative activities. As a result, our selling,
general and administrative expenses increased $8.2 million, to $14.5 million,
during the year ended December 31, 1998,
25
<PAGE> 31
from $6.3 million during the year ended December 31, 1997. Also contributing to
the increase in expenses was our consolidation of the financial results of
Callino effective as of September 1, 1998.
Depreciation and amortization. Our depreciation and amortization expense
increased $942,000, to $1.1 million, during the year ended December 31, 1998, as
a result of our network buildout activities and the acquisition of
telecommunications licenses primarily associated with our acquisition of Callino
in September 1998.
Other income. In 1998, interest income increased $423,000 to $751,000 from
$328,000 in 1997. Net other income increased $404,000 to $303,000, compared to a
net expense of $101,000 for the year ended December 31, 1997. The increase was
due primarily to a payment made to us by WNP Communications for reimbursements.
As a result of our acquisition of Callino, our minority interest in net loss of
subsidiaries increased to $1.2 million during the year ended December 31, 1998,
as compared to $20,000 for the year ended December 31, 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
We commenced business operations in October 1996. As a result, we only had
two months of operations in fiscal year 1996 as compared to 12 months for fiscal
year 1997. For the year ended December 31, 1997, we had a net loss of $6.2
million, compared to a net loss of $89,000 in 1996.
Costs of services. We did not record any costs of services in 1997 or 1996.
Selling, general and administrative expenses. Our selling, general and
administrative expenses in 1997 were $6.3 million, compared to $96,000 during
the year ended December 31, 1996. This increase is attributable to our
development activities and hiring personnel.
Depreciation and amortization. In 1997, we recorded depreciation and
amortization expense of $128,000. In 1996, we did not recognize any depreciation
and amortization expenses as we did not hold any depreciable assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities can vary significantly from period to
period depending upon the timing of operating cash receipts and payments,
prepaid expenses and other assets, accounts payable and accrued liabilities.
From our inception through June 30, 1999, we have experienced net operating
losses which is the primary cash component of net cash from operating
activities. Net cash from operating activities was approximately $17.8 million
for the six months ended June 30, 1999. This was largely derived from our net
income of approximately $8.8 million offset by the gain realized from the WNP
Communications transaction of approximately $24.5 million and non-cash
depreciation and amortization expenses of approximately $1.0 million and a
provision on impaired assets of approximately $1.2 million. Net cash from
operating activities was approximately $13.3 million for the twelve months ended
December 31, 1998. This was largely derived from our net loss of approximately
$14.5 million offset by non-cash depreciation and amortization expenses of
approximately $1.1 million. Net cash from operating activities was approximately
$6.1 million for the twelve months ended December 31, 1997. This was largely
derived from our net loss of approximately $6.1 million.
Net cash from investing activities was approximately $17.9 million for the
six months ended June 30, 1999. This was mainly comprised of the cash proceeds
of approximately $28.5 million from the WNP Communications transaction and
subsequent sale of NEXTLINK shares, offset by cash outflows for
telecommunications licenses of approximately $3.6 million, property and
equipment of approximately $3.3 million and capital contributions to an
affiliate of approximately $3.3 million. Net cash from investing activities was
approximately $20.1 million for the twelve months ended December 31, 1998. This
is largely comprised of our investment in WNP Communications of approximately
$11.8 million, acquisition of telecommunications licenses of approximately $4.9
million and purchases of property and equipment of approximately $3.8 million.
Net cash from investing activities was approximately $2.1 million for the twelve
months ended December 31, 1997. This was due to our Ecuador investment of
approximately
26
<PAGE> 32
$1.4 million, purchase of radio spectrum license in Poland of approximately
$478,000 and the purchase of property and equipment of approximately $267,000.
Net cash from financing activities was approximately $30.2 million for the
six months ended June 30, 1999. This was mainly comprised of the net cash
proceeds from our preferred stock offering in February 1999 of approximately
$25.0 million and approximately $4.9 million from capital contributions by
minority shareholders. Net cash from financing activities was approximately
$34.9 million for the twelve months ended December 31, 1998. This is largely
comprised of the net cash proceeds from the issuance of a portion of our
preferred stock offering in July and November 1998 of approximately $29.9
million and approximately $6.0 million from capital contributions by minority
shareholders. Net cash from financing activities was approximately $28.8 million
for the twelve months ended December 31, 1997. This is mainly comprised of the
net cash proceeds from the issuance of a portion of our preferred stock offering
in August and November 1997 of approximately $26.8 million and approximately
$1.7 million from the issuance of common stock.
As of June 30, 1999, we had $52.4 million of cash and cash equivalents and
short-term investments and net working capital of $55.3 million. On a pro forma
basis, giving effect to the issuance of preferred stock in September 1999, the
Callino transaction and the VeloCom transaction, we had cash and cash
equivalents of $142.6 million and net working capital of $145.5 million.
Since our inception, we have relied on the proceeds from a series of equity
financings as our primary source of capital. We have raised approximately $202.5
million in cash from the issuance of shares of our common stock and preferred
stock. The following table shows the shares issued and capital raised from each
of these equity financing transactions:
<TABLE>
<CAPTION>
GROSS
SECURITY ISSUED PROCEEDS
- --------------- --------
<S> <C>
Common stock................................................ $ 3,465
Series A and B preferred stock.............................. 58,200
Series C and D preferred stock.............................. 25,000
Series E and F preferred stock(1)........................... 115,848
--------
Total Capital..................................... $202,513
========
</TABLE>
- ------------------------------
(1) Does not include shares issued to acquire the minority interest in Callino.
Capital Expenditures. During the six months ended June 30, 1999, we
incurred capital expenditures of $3.3 million, for the deployment of our
telecommunications networks. During the same period in 1998, we expended $1.6
million for similar capital expenditures. We expect that our plans for expanding
our telecommunications networks will require increased capital expenditures. We
currently anticipate that our plans to expand our current commercial operations
in Germany and Poland and to build out our systems in Finland and Ireland will
require substantial capital expenditures through 2000. Further, if we are
successful in acquiring additional telecommunications licenses, we will have
additional capital needs to fund the expansion.
Future Capital Requirements. Based on our current business plan, we
estimate that through the end of 2000 we will need substantial funds to fund the
deployment and operation of networks in Germany, Poland, Finland and Ireland
(including requirements to finance capital expenditures, working capital and
operating losses in those markets). The actual amount and timing of our future
capital requirements may differ materially from our estimates as a result of,
among other things:
- the cost of deploying our networks in each of our target markets;
- the demand for our services;
- changes in the regulatory, technological or competitive environment,
including new market opportunities within or outside of our initial
markets;
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<PAGE> 33
- changes in our development plans or projections that cause us to alter
our network roll-out schedule, or change our markets or service
offerings;
- acquisitions or strategic alliances, if any;
- the decision to deploy networks in other markets other than those in our
current business plan; and
- the cost of obtaining radio spectrum licenses.
Our costs and expenses and revenues may vary from expected amounts,
possibly by a significant degree. Any variation would affect our future capital
requirements. We cannot be sure that we will be able to obtain the additional
financing to satisfy our additional capital requirements, if any, on acceptable
terms or at all. If we cannot obtain such financing on terms acceptable to us,
we may be forced to curtail our planned expansion activities and may be unable
to fund our ongoing operations.
In September 1999, Formus Polska entered into a secured senior facility
agreement with Westdeutsche Landesbank (France) S.A., and other lenders, that
enables it to borrow a total principal amount of E120 million in four staggered
installments, as follows:
- Up to E31 million before June 30, 2000;
- Up to E31 million, plus any unused amounts from the preceding phases,
during the period between July 1, 2000 and June 30, 2001;
- Up to E31 million, plus any unused amounts from the preceding phases,
between July 1, 2001 and June 30, 2002; and
- Up to E27 million, plus any unused amounts from the preceding phases,
between July 1, 2002 and June 30, 2003.
We may borrow under this facility solely to purchase equipment from Alcatel
for the deployment of our broadband wireless network in Poland, after we have
received invoices exceeding E1 million. The loans under this facility will be
secured by a pledge of our interest in Formus Polska. Formus Polska will also
pledge its assets, and assign its contracts and bank accounts. In addition, we
have agreed to contribute up to E50 million of capital to Formus Polska by the
end of 2000, in accordance with Formus Polska's business plan.
Interest on the loan is payable quarterly at an interest rate based on
EURIBOR plus 5% per year, or the European Overnight Interest Rate plus 5% per
year, depending on the type of advance. Under the facility we are subject to
restrictive covenants, including with respect to acquisitions of assets,
incurrence of debt and encumbrances on assets. The facility includes prepayment
provisions and does not allow us to reborrow any re-paid amounts.
INFLATION, FOREIGN CURRENCY EXCHANGE RISKS AND FOREIGN INVESTMENT RISKS
We may conduct business in countries that are experiencing a much higher
rate of inflation than the rate of inflation in the United States. This trend
could have a material adverse effect on our financial results. However,
inflation has not had a significant adverse effect on our historical operating
results.
We are exposed to changes in currency exchange rates and, as a result, our
financial condition and results of operations, as reported in U.S. dollars may
be affected by a change in the value of the local currencies in which we
transact business as compared with the U.S. dollar. The functional currency of
our foreign subsidiaries is either the applicable local currency or the U.S.
dollar. We determine the functional currency based upon the primary economic
environment in which our foreign subsidiaries operate, typically, this is the
currency in which they will generate and expend cash. The assets and liabilities
of our foreign subsidiaries for which the functional currency is the local
currency are translated into the U.S. dollar at the applicable exchange rate in
effect at the end of the period being reported on, and our revenues and costs
are translated at the average exchange rate during the period being reported on.
In
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<PAGE> 34
addition, we anticipate that our foreign subsidiaries will have debts or
receivables that are denominated in other currencies, exposing them to foreign
currency exchange rate fluctuations. We believe that in the future we will be
generating an increasing portion of our revenues and costs in foreign
currencies, which could have a negative impact on our earnings and cash flows
and financial condition. See "Risk Factors -- Foreign currency exchange rate
fluctuations may cause financial losses."
We are also affected by the political and economic factors in each foreign
country that could negatively affect our earnings and cash flows. We anticipate
that with the introduction of the euro currency, we may experience a lesser
impact from local political or economic changes in European Union countries such
as Germany.
YEAR 2000 CONVERSION
The "year 2000 conversion" generally describes the various problems that
may result from the improper processing of dates and date-sensitive calculations
by computers and other equipment as a result of computer hardware and software
using only the last two digits of the year to identify the year in a date field.
If a computer program or other piece of equipment fails to properly process
dates including and after the year 2000, the computer's calculations may be
inaccurate and equipment may malfunction.
State of readiness. Generally, we have identified two areas for year 2000
review: internal systems and operations, and external systems and services. As a
relatively young company, we do not have internal legacy systems that are not
year 2000 ready. We have purchased our customer and network support systems with
explicit specifications, warranties and remedies that all systems be year 2000
ready. However, until well into the year 2000, we cannot assure you that all
systems will function adequately.
We have contacted our external suppliers, vendors and providers to obtain
information about their year 2000 readiness. Based on that information we are
assessing the extent to which these external systems (including embedded
technology) could cause a material adverse effect on our operations.
Costs to address year 2000 issues. We have not incurred any significant
incremental costs in identifying and remediating year 2000 issues.
Risks of year 2000 issues. We cannot reasonably ascertain the extent of the
risks involved in the event that any one system fails to process date-sensitive
calculations accurately because we have not identified any material year 2000
issues. Potential risks include:
- the inability to process customer billing accurately or in a timely
manner;
- delays in receiving payment or equipment from customers or suppliers as a
result of their systems' failure;
- the inability to provide accurate financial reporting to management,
auditors, investors and others; and
- litigation costs associated with potential suits from customers and
investors.
Any one of these risks, if they materialize, could individually have a material
adverse effect on our business, prospects, financial condition and results of
operations.
All of our information technology and non-information technology systems
and products are manufactured or supplied by third parties outside of our
control. As a result, we cannot assure you that the systems of any of those
companies will be year 2000 ready. In particular, we will be dependent upon an
incumbent public telecommunications provider for interconnection capabilities in
Germany and Poland. These interconnection arrangements are critical to our
ability to conduct our business operations in Poland and failure by this
provider to be year 2000 ready may have a material adverse effect on our
business, prospects, financial conditions and results of operations in Poland.
Contingency plans. We have attempted to ensure that our own network and
telephone systems are backed up with auxiliary power supplies capable of
operating for short periods of time (less than one half
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<PAGE> 35
hour) should public power supplies fail. Despite our contingency plans, which
are intended to avoid singular significant disruptions, we cannot assure you
that we will not experience numerous disruptions, individually insignificant,
but in the aggregate sufficient to cause a material disruption to our
operations.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
(excluding Denmark, Greece, the United Kingdom and Sweden, which may convert to
the euro at later dates) established fixed conversion rates between their then
existing sovereign currencies (the legacy currencies) and the euro and adopted
the euro as their common legal currency on that date. The legacy currencies are
scheduled to remain legal tender in the participating countries as denominations
of the euro until January 1, 2002. During the transition period, public and
private parties may pay for goods and services using either the euro or the
participating countries' legacy currency.
We have purchased and specified our business support systems, including
billing, to accommodate euro transactions and dual currency operations during
the transition period. In addition, we intend to require all vendors supplying
third party software to us to warrant compliance.
We will be dependent on banks, customers and other providers to complete
business transactions and we will be exposed to problems inherent in these
third-party systems. During the transition period, to the extent we are
supplying local service, we can continue billings and collections in the legacy
currency to avoid euro conversion problems. However, to the extent we have
international transactions in European Union countries, we will be exposed to
euro-related risks.
The establishment of the European Monetary Union may have a significant
effect on the economies of the participant countries. While we believe that the
introduction of the euro will eliminate exchange rate risks in respect of the
currencies of those member states that have adopted the euro, there can be no
assurance as to the relative strength of the euro against other currencies.
Since a substantial portion of our net sales will be denominated in euro or
legacy currencies, we will be exposed to that risk.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment portfolio and interest rate sensitivity. We do not think we are
exposed to significant changes in fair value of our investment portfolio because
of our investment strategy. Under our investment policy, we invest primarily in
financial instruments with a maturity of one year or less (with certain limited
exceptions) that meet high credit quality standards, such as obligations of the
United States government or any European Economic Community member government or
any agency thereof guaranteed by the country, certificates of deposits, money
market deposits, and commercial paper with a rating of A-1 or P-1, SP1, MIG1 or
VMIG1.
Interest income earned on our investment portfolio is affected by changes
in short-term interest rates. We are thus exposed to market risk related to
changes in market interest rates. To date, we have managed these risks by
monitoring market rates and the duration of our investments.
Impact of foreign currency rate changes. We are exposed to foreign exchange
rate changes related to the monetary assets and liabilities and to the financial
results of our foreign operating subsidiaries when their respective financial
statements are translated into U.S. dollars in consolidation.
Our operating subsidiaries' monetary assets and liabilities are subject to
foreign currency exchange risk because purchases of network equipment and
services may be denominated in currencies other than the subsidiary's own
functional currency.
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<PAGE> 36
The spot rates and the average spot rate for the period for the euro,
German Deutsche Mark and Polish zloty are shown below per U.S. dollar.
<TABLE>
<CAPTION>
EURO(1) DEUTSCHE MARK ZLOTY
------- ------------- -----
<S> <C> <C> <C>
June 30, 1999.......................................... 0.97 1.89 3.92
6 months ended June 30, 1999 -- Average................ 0.92 1.80 3.85
December 31, 1998...................................... 0.86 1.68 3.50
12 months ended December 31, 1998 -- Average........... -- 1.76 3.49
December 31, 1997...................................... -- 1.79 3.51
12 months ended December 31, 1997 -- Average........... -- 1.73 3.28
</TABLE>
- ------------------------------
(1) The euro was not legal tender before January 1, 1999.
We intend to manage exchange rate risk by causing our operating
subsidiaries to incur financing liabilities denominated in their own functional
currency. In addition, under our agreement with Westdeutsche Landesbank, we may
be required to take actions to hedge currency exchange exposure affecting the
Polish zloty. We will continue to evaluate our exposure to other foreign
currency exchange rate risks and may adopt hedging strategies in the future.
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<PAGE> 37
BUSINESS
We provide broadband telecommunications access services to business
customers in selected European markets. Our networks provide broadband Internet
access and enable customers to quickly transmit large quantities of data. We
plan to offer a full suite of telecommunications services to our clients. We
deliver our services primarily through wireless networks that use radio waves.
We currently have commercial operations in Germany and Poland and operations on
a trial basis in France and Hungary. We also hold radio spectrum licenses in
Finland and New Zealand, have the right to a license in Ireland and have a
number of license and development activities underway in other European
countries.
INDUSTRY OPPORTUNITY
We believe that broadband services offer companies the opportunity to
increase productivity and manage resources more efficiently by increasing the
speed of communications and information transfer between customers, suppliers,
business units and office locations. In addition, broadband access allows
businesses to more efficiently exploit the Internet as a distribution channel
for goods and services. Datamonitor believes that the European e-commerce market
is growing faster than that of the rest of the world, and expects that this
trend will continue until at least 2002. Datamonitor projects that by 2004, 5.4
million businesses in Europe, accounting for 65% of all European businesses,
will be users of the Internet.
The following table shows estimated historical and projected European
Internet access spending for small- and medium-sized businesses from 1998 to
2001, and illustrates a 116.4% compound annual growth rate over that time
period.
[Table showing European Internet access spending by business segment during a
four-year period, including 1998 through 2001]
Currently, most businesses in Europe have access to the Internet only
through dial-up modem connections. These standard connections are slow and
generally require the user to wait before a connection is established. These
dial-up connections are generally more expensive than similar services in the
United States, and users are required to pay for local calls based on the
duration of the call. Fiber optic cable, an alternative to dial-up connections,
is significantly faster, but is expensive to install and reaches only the
largest buildings in the more developed markets. Industry analysts estimate that
less than 5% of all buildings in the United States are reached by fiber optic
cable, and we believe that fiber optic cable penetration rates in Europe are
significantly below those of the United States. We believe that more
cost-effective broadband technologies offer attractive alternatives to fiber
optic cable.
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<PAGE> 38
While there is substantial fiber infrastructure joining major cities in
Europe and within many commercial districts, very few businesses have a
high-speed connection to this infrastructure. Broadband wireless technology
offers an economical solution to connecting businesses to existing fiber rings.
Our broadband networks are engineered to allow transmission speeds of up to 30
Mbps, which is 530 times greater than the fastest available dial-up modem
connections. Additionally, broadband wireless Internet access is always on,
meaning that business users do not need to dial and wait for a connection in
order to transmit and receive data. International Data Corporation reports that
broadband access is currently the fastest growing segment of the Internet access
market, and that Europe will exhibit growth rates in this segment near, or over,
100% from 1999 to 2003.
OUR STRATEGY
We intend to grow our revenues and cash flows by focusing on the following
strategies:
Obtain telecommunications licenses in additional European markets. As the
demand for telecommunications services has increased, governments have begun
allocating previously unused radio spectrum in an effort to increase the
capacity of telecommunications networks and allow new competitive carriers to
provide advanced and traditional telecommunications services. We are focusing
our efforts on obtaining radio spectrum licenses in selected European markets.
We hold radio spectrum licenses in three European countries, have the right to
receive a license in a fourth country and hold trial licenses in two other
countries. We have filed radio spectrum license applications in two additional
European countries and have begun the application process in a number of others.
European governments are trying to encourage development of additional
telecommunications capacity and competition in markets dominated by incumbent
telephone companies. The process of licensing spectrum is different than in the
United States. Spectrum is licensed in the United States through an auction
process with licenses generally awarded to the applicants that submit the
highest bids. In most cases, European government agencies make licenses
available through a tender process that requires applicants to submit detailed
business plans, demonstrate their qualifications for building broadband wireless
networks and otherwise prove that they are the best candidate for spectrum
awards. We have been successful in our licensing application activities in
Europe. We have applied for spectrum licenses in five countries that have
awarded licenses and have been awarded licenses in four of these countries.
Rapidly and cost effectively deploy our wireless network. We plan to
rapidly and cost-effectively deploy our wireless networks in our existing and
future markets. In each of the countries and local markets that we have entered,
we seek to establish a strong market presence ahead of our competitors. Our
strategy includes several elements:
- Develop in-country operating teams;
- Obtain roof rights in business districts;
- Deploy our networks in the largest cities in our license areas first;
- Commence operations with a single radio site in the central business
district of a city;
- Roll-out multiple radio sites in a city as needed to meet customer
demands; and
- Expand our services into other cities once we have established a presence
in the largest cities in our license areas.
Our deployment strategy allows us to establish broadband connections
without laying underground cable. Once we secure building access we are able to
quickly install antennae and establish a connection to the customer. We connect
customer sites to our network when we are ready to commence generating revenues.
This allows us to tie capital expenditures directly to demand.
Connect businesses to our local broadband network. We believe that our
products will appeal to businesses seeking broadband Internet access and the
ability to link multiple office locations, typically
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<PAGE> 39
referred to as wide-area networks. By focusing on customers with multiple
product and service needs, we intend to maximize revenues per customer
connection and reduce capital investments in the early stage of operations. We
anticipate that business customers' demand for bandwidth access will grow as
data-intensive Internet applications increase in usage.
In markets with more developed telecommunications infrastructure, such as
Germany, we intend to focus initially on providing broadband access for small-
and medium-sized businesses that have not accessed such services due to high
costs and limited availability. In markets with less developed
telecommunications infrastructure, such as Poland, we intend to focus on
business customers of all sizes.
Develop strategic relationships with strong local partners. We intend to
partner with strong local strategic investors, who can assist us with the
licensing process and reduce the uncertainties of dealing with local political
and regulatory issues. In addition, we seek partners who have strong market
presence and can help us quickly deploy our networks and market our services. We
intend to pursue strategic relationships in our target markets to access
equipment, sales channels, services, skilled installation and engineering
personnel, and equipment financing.
Pursue acquisitions in attractive markets to accelerate growth. In addition
to applying for licenses, we intend to continue to evaluate opportunities to
acquire licensed telecommunications companies. We will evaluate companies that
have not developed their licenses, as well as companies with commercial
operations. For example, to increase our presence in Poland, we recently agreed
to acquire CEL Polska. We will use CEL Polska's nationwide wireless license to
provide broadband connections to large business customers and lease broadband
capacity to other telecommunications providers. In addition, CEL Polska provides
us with existing customers, roof rights and additional experienced managers.
SALES AND MARKETING
For each market that we enter, we plan to have a unique entry strategy and
a customized product menu. Generally we plan to offer a suite of services to our
customers, including broadband Internet access, high-speed data transport and
value-added voice and video services. These services include:
- Broadband Internet access;
- Local-area and wide-area computer network connections using Internet
Protocol;
- Dedicated digital private data and voice networks using multiple transfer
protocols;
- Telephone services on a private network basis, using Internet Protocol;
- Business switched telephone services (where and when regulatory
conditions permit);
- Web hosting;
- Domain name registration;
- E-mail;
- E-commerce;
- Business video services such as teleconferencing;
- Streaming video; and
- Virtual offices/telecommuting.
We intend to use a highly trained direct sales force to identify and market
our products to businesses. Generally, we locate the first radio site near a
central business district where most businesses are clustered. As we construct
additional radio sites and our sales force develops, we will begin to offer
services to businesses in the areas outside the central business district. We
will tailor our strategy to each market and intend to design our network in each
city so that, once it is fully deployed, approximately 80% of the potential
customer base will be within the signal coverage area of our network. As our
customer base broadens, we intend to use other distribution channels for our
services, such as the marketing relationship in Poland that we have undertaken
with Intel Corporation. As a complement to our sales force, we plan to use a
number of print and advertising media to reach our potential customers.
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<PAGE> 40
Initially, we intend to provide customers with broadband Internet access
and local- and wide-area connections for their data networks. We anticipate that
we will provide our customers with higher capacity connections over time as
their usage of the Internet and more data-intensive products increases. In
addition, we believe that providing these basic services will give us an
advantage as we market incremental value-added services to our customers.
OPERATIONS AND LICENSES
We are actively growing our business and have operations and projects at
various stages of development primarily in several European countries. These
consist of companies with commercial operations, companies with trial licenses
and development work associated with licenses that we have been awarded. The
chart below summarizes our activities as of September 30, 1999, and are based on
our estimates:
<TABLE>
<CAPTION>
ESTIMATED
NUMBER OF
POPULATION BUSINESSES
COVERED BY COVERED BY NATIONWIDE
TOTAL OUR OUR SWITCHED
POPULATION SPECTRUM SPECTRUM VOICE
IN COUNTRY LICENSES PERCENTAGE LICENSES LICENSES
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial Operations
Germany............................ 82,000 35,000(4) 43% 860 X
Poland(1).......................... 39,000 39,000 100% 600
------- ------ -----
Subtotal................... 121,000 74,000 1,460
Other Licenses Awarded
Austria(2)......................... 8,100 -- -- -- X
Finland............................ 5,200 2,000 38% 85
Ireland(3)......................... 3,600 3,600 100% 146
New Zealand........................ 3,700 3,700 100% 261
------- ------ -----
Subtotal................... 20,600 9,300 492
------- ------ -----
Total...................... 141,600 83,300 1,952
======= ====== =====
</TABLE>
- ------------------------------
(1) These represent CEL Polska's nationwide licenses. Formus Polska's licenses
cover an estimated population of 6.7 million and 265,000 businesses.
(2) Our Austrian switched voice licenses cover 360,000 businesses.
(3) We have been informed of our right to receive this radio spectrum license,
but it has not yet been formally issued.
(4) In Germany we have licenses in both the 3.5 GHz and 26.6 GHz bands.
Population covered is derived by eliminating overlapping coverages.
In addition, we have trial licenses in France and Hungary and provide
services on a trial basis. We are also pursuing telecommunications licenses in
additional European countries.
GERMANY
Overview. In May 1999, we were granted radio spectrum licenses to provide
wireless broadband services in certain parts of Germany. We have licenses for
the 3.5 GHz frequency covering approximately 26 million people and approximately
725,000 businesses and licenses for the 26.6 GHz frequency covering
approximately 18 million people and approximately 485,000 businesses. Our
licenses cover primarily industrial areas in metropolitan vicinities as well as
less populated cities where there are fewer broadband wireless competitors.
These licenses overlap, and the total population and businesses covered is 35
million and approximately 860,000, respectively. We also have applied for other
radio spectrum licenses in additional areas in Germany. We cannot assure you
that we will be able to obtain any of these additional licenses. In addition, we
hold nationwide competitive local exchange carrier (CLEC) licenses, which allow
us to own and operate telecommunications facilities and to provide
telecommunications services over
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<PAGE> 41
networks constructed by third parties. These licenses enable us to offer local
and long distance telephone services and data transmission services to a
population of approximately 82 million.
Market opportunity. The German telecommunications market is one of the
world's largest and is estimated to be approximately $49 billion in 1999. This
market has also become one of the most liberalized in Europe since January 1998,
when a new regulatory program was adopted that allows new entrants to compete
with Deutsche Telekom. Germany represents an attractive market for broadband
telecommunications due to the following factors:
- One of the world's largest economies with a GDP of $2.1 trillion in 1998;
- Liberalized telecommunications regulatory environment that favors
competition from new entrants and mandates interconnection with the
incumbent carrier on reasonable terms;
- Robust national infrastructure on which to build local connections;
- Population density of approximately 235 people per square kilometer;
- Business Internet access revenues that are expected to grow at an
approximately 25% compound annual growth rate through 2003; and
- Over seven million estimated Internet users.
Roll-out plan. We began providing fixed-line switch-based reseller
services, including regional and domestic long distance telephone service, in
July 1999 through resale of Deutsche Telekom's regional and long distance
capacity. We have installed switches in Munich, Hamburg and Stuttgart, where we
currently offer services as a facilities-based CLEC. We expect to install three
additional switches in Frankfurt, Dusseldorf and Berlin during 2000. Currently,
we have seven points of interconnection with Deutsche Telekom. In order to
optimize our sales structure, we plan to add three additional points of
interconnection by December 31, 1999 and an additional 13 in 2000. We have an
interconnect agreement with Deutsche Telekom that expires December 31, 1999, and
we are currently negotiating a new two-year agreement. We cannot assure you that
we will be able to negotiate a new agreement on acceptable terms. We also have
interconnection agreements with several other German telecommunications
operators. We expect to build a national switching network, targeting other
major cities and subsequently their surrounding areas.
We currently provide our customers with voice and high-speed data telecom
services over wired networks. Customers can select us as their discounted rate
provider for the following services:
- Call-by-call voice telephone service using a prefix code to obtain our
reduced rates;
- Calls from a particular phone or location using our service, but other
carriers' connection to the customer;
- Direct subscription/local exchange services using our connection to the
customer, most likely for corporations and high-end residential
customers; and
- Internet dial-up service to both individuals and businesses seeking
Internet access.
We plan to deploy two radio sites in Landshut by the end of 1999. By the
end of 2000, we plan to have a total of 50 radio sites installed. We also expect
to have six regional operating centers in major German cities by the end of
2000. The following table summarizes Callino's year 2000 roll-out plan for its
wireless licenses and is based on our estimates.
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<TABLE>
<CAPTION>
ESTIMATED NO. PROJECTED SERVICE
NUMBER OF MARKETS POPULATION OF BUSINESSES COMMENCEMENT
----------------- ---------- ------------- -----------------
<S> <C> <C> <C>
5.................................................. 2,653,900 81,500 1st Quarter 2000
2.................................................. 1,414,100 42,900 2nd Quarter 2000
2.................................................. 684,500 16,500 3rd Quarter 2000
1.................................................. 496,400 11,200 4th Quarter 2000
- -- --------- -------
10................................................. 5,248,900 152,100
== ========= =======
</TABLE>
As we build out our wireless networks in Germany, we intend to provide a
full suite of telecommunications services to our customers. Initially we plan to
provide Internet access services and local- and wide-area network connectivity,
followed by additional value-added services such as e-commerce, web hosting and
similar services. In the German market, we plan to focus on medium- and
small-sized businesses. In markets where we do not have radio spectrum, we
intend to use other technology, such as digital subscriber line (DSL).
Callino has recently begun selecting transmission sites for its wireless
networks. Callino has not yet executed any agreements to use roofs to install
equipment, but does not expect substantial difficulties in securing appropriate
roof rights.
Competition. We face competition from a number of established companies in
Germany. Our chief competitors include Deutsche Telekom, Mannesmann Arcor AG and
ViagInterkom GmbH & Co. Deutsche Telekom, the largest European telecom operator,
is 66% government-owned. It has invested heavily in recent years in a new
nationwide broadband network. In addition to traditional telephone services,
Deutsche Telekom offers Asynchronous Transfer Mode, residential ISDN and online
services, and is developing DSL and Internet Protocol telephony technologies.
Although we hold broadband licenses for the exclusive use of the spectrum
in the territories for our awarded frequencies, German regulators may award
additional broadband spectrum licenses in different frequency bandwidths in the
future. There are already two licenses available in each locality to provide
competition. If additional licenses are awarded, we may face additional
competition in our service territory or may enter new service territories where
our existing competitors already have a presence. Further competition for
broadband telecommunications services may arise from cable television providers
or other technologies.
Licenses. At the time we acquired our initial interest in our German
operating company, Callino, in September 1998, it held licenses to provide
national switched voice and data transmission services. These licenses currently
cover the entire country of Germany. Our radio spectrum licenses entitle us to
use 28 and 56 MHz of spectrum from the 3.5 GHz frequency band and 56 and 112 MHz
of spectrum in the 26.6 GHz frequency band. The 26.6 GHz licenses have an
initial term through 2007. The 3.5 GHz licenses have an indefinite term. German
law requires spectrum licenses to be distributed efficiently and in the public
interest. Callino's frequency permits have several requirements, including a
requirement to use the spectrum within one year after grant. Callino could lose
its permits if it fails to meet these requirements.
Callino pays an annual fee for each spectrum license it holds. The fee is
based on the population covered by the license. Callino must also pay a small
fee for each radio device it installs. Callino is also required to file an
annual report about the maintenance of its operations.
Ownership and management. We now own 100% of Callino. We acquired our
interests in a number of steps between September 1998 and September 1999.
Matthias Weber joined Callino as chief executive officer in February 1999.
Previously, Mr. Weber was President of Deutsche Telekom Asia. Mr. Weber has over
a decade of experience in leading telecommunications businesses.
Regulation. As a new carrier, Callino must report its tariff and pricing of
services to the Telecommunications Ministry for publication. Callino's rates are
not subject to rate regulation.
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German law does not restrict foreign ownership of telecommunications
companies, and new competitors are building networks and infrastructure to
compete with Deutsche Telekom. In order to offer broadband wireless services,
operators need a license based on transmission method as well as the frequency.
Our transmission license, combined with our broadband wireless licenses, satisfy
this requirement.
Under German law, Deutsche Telekom is subject to a minimum price that it
can charge for the telecommunications services that it provides. Deutsche
Telekom is also limited by a maximum price it can charge other companies, such
as Callino, to lease its lines and provide competitive telecommunications
services. These price controls create a favorable environment for the entry of
new competitors to lease capacity from Deutsche Telekom and resell it profitably
at rates lower than the minimum price Deutsche Telekom can charge. While this is
a favorable entry strategy, we expect Deutsche Telekom to modify its retail
pricing structure to become more competitive. Deutsche Telekom has entered
interconnection agreements with a number of companies.
POLAND
Overview. In August 1997, we and our strategic partners entered the Polish
market to provide broadband wireless communications to select areas. In October
1997, Formus Polska obtained a license to provide broadband wireless services in
the 10 largest cities in Poland. We estimate that Formus Polska's license areas
contain a population of 6.7 million and approximately 265,000 businesses. We
hold an 85% economic interest in Formus Polska, and recently signed a memorandum
of understanding to acquire an additional 13% economic interest.
In July 1999, we agreed to purchase 100% of CEL Polska Sp. z o.o., a Polish
company for approximately $5.4 million. CEL Polska provides intra-provincial
local data transmission services for other telecommunications carriers pursuant
to a nationwide license. We expect the acquisition of CEL Polska to close in
mid-2000.
Market opportunity. Poland is one of the world's largest emerging markets
with a population of over 38 million and is attractive because of the following:
- Favorable competitive environment;
- High-growth economy with projected GDP growth of 3.3% in 1999 and 4.3% in
2000;
- Low teledensity of 21 phones per 100 people;
- 1.2 million Internet users at the end of 1998, projected to grow to 3.0
million by 2000;
- Underdeveloped and outmoded telecommunications infrastructure; and
- Expected liberalization of telecommunications regulation due to Poland's
expected entry into the European Union.
While some telecommunications infrastructure projects have been initiated
primarily using copper wire, coaxial cable and microwave communications, we
believe the emerging business market is still significantly underserved. In
particular, broadband communication capabilities are generally unavailable.
Roll-out plan. Formus Polska's operations will initially focus on network
deployment in Warsaw, followed by other cities, eventually covering 6.7 million
people. Formus Polska has applied to install up to nine radio sites in Warsaw,
Katowice and Gdansk and will begin operations as soon as such approvals are
received. We expect to receive these approvals in the near future. Formus Polska
plans to establish radio sites in other cities with a total of 42 radio sites by
mid-2001, subject to final governmental approvals of the radio sites. Formus
Polska launched commercial operations of its network in Warsaw in May 1999,
offering two months of service without charge. Currently, 70 business customers
are using our service, and Formus Polska has begun charging for its services.
Formus Polska currently has agreements with another 91 business customers. Our
pricing strategy is to price our services 10-15% below comparable services
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offered by the incumbent telecommunications providers. In addition, basic e-mail
service and domain name registration of type yourcompany.formus.pl is included
in the price of the basic service. Other domain name registrations, web hosting,
and other services are available at additional cost. CEL Polska currently has 38
links to transport data for telecommunications providers and has agreements for
90 additional links.
The following chart represents our current deployment plan for cities in
Poland, based on our estimates:
<TABLE>
<CAPTION>
ESTIMATED ACTUAL OR
NO. OF PROJECTED SERVICE
CITY POPULATION BUSINESSES COMMENCEMENT(1)
---- ---------- ---------- -------------------
<S> <C> <C> <C>
Warsaw..................................... 1,635,000 86,500 May 1999
Gdansk..................................... 715,000 18,200 Fourth Quarter 1999
Katowice................................... 352,000 4,700 Fourth Quarter 1999
Remaining cities........................... 3,998,000 155,500 2000 to 2001
--------- -------
6,700,000 264,900
========= =======
</TABLE>
- ------------------------------
(1) Subject to final governmental approvals of spectrum.
Formus Polska will concentrate first on business customers within the
central business districts of our coverage areas. As demand dictates, we will
expand the network to cover more businesses and a larger area within each city.
Initially, we intend to provide customers with broadband Internet access
and local-area and wide-area computer connections. We anticipate that we will
provide our customers with higher capacity connections over time as their usage
of the Internet and more data-intensive products increases. In addition, we
believe that providing these basic services will give us an advantage as we
market incremental value-added services to our customers.
Customers will be able to choose from a variety of connections speeds and
capacities. Formus Polska will lease capacity to customers who are communicating
within multiple locations of their operations and between cities covered by
Formus Polska's networks. We will provide the same services to customers on an
intra-city basis.
Formus Polska has an interconnect agreement with Telekomunikacja
Energetyczna TEL-ENERGO S.A. which allows each party to access and lease
capacity on the other party's network in order to provide telecommunications
services at agreed-upon rates. The agreement is terminable upon 24 months'
notice or shorter periods in the event of breach.
Competition. In Poland, we will face competition from several competitors.
Our primary competitors include TPSA, Telbank and Netia. TPSA is the state-owned
telecommunications provider and, at the end of 1997, had approximately 7.4
million subscribers. TPSA has invested substantially in network development and
traditionally has provided broadband services to the largest customers in
Poland. These competitors have significantly more resources and operating
experience in Poland than we do.
Supply agreements. We have entered into equipment supply agreements with
two vendors to obtain equipment and services in our markets in Poland. In May
1999, we entered into an agreement with Alcatel for the purchase, supply and
installation of equipment. The agreement also provides that Alcatel will furnish
support, maintenance and training services. Under this agreement, we have agreed
to purchase 80% of our base station and terminal station equipment requirements
in Poland from Alcatel at specified rates subject to standard commercial terms
and conditions. The agreement terminates in June 2003. The agreement provides
for equipment purchases in several stages. We may decide at any time not to
proceed with further stages. We also purchase equipment from Nortel.
Licenses. In October 1997, the Ministry of Communications granted Formus
Polska a 10-year license subject to extension to provide telecommunications
services in 11 cities, including the 10 largest cities in Poland, with an
aggregate population of approximately 6.7 million. The license authorizes Formus
Polska
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to provide telecommunications services, including Internet access, data
transmission services and voice services over private networks, and to build a
telecommunications network. The license allows Formus Polska to use 1.0 GHz of
radio spectrum from the 28 GHz frequency band spanning 27.5 - 29.5 GHz for
point-to-multipoint links as well as for interconnection of base stations in its
network. Formus Polska received a subsequent award of 300 MHz in May 1998. While
under its license this spectrum has been set aside for its use, Formus Polska
must apply to the Ministry of Telecommunications for definitive allocation of
this spectrum when Formus Polska's network is in place. Formus Polska has
obtained this definitive allocation for its Warsaw network and expects to obtain
similar definitive allocations in each of its other licensed areas as it
activates its network.
In April 1998, the Polish Ministry of Communications granted CEL Polska a
15-year license subject to extension to provide intra-provincial wireless
communications service to network operators over point-to-point connections
using spectrum at 38 GHz. The license permits CEL Polska to offer
intra-provincial services, covers all of the provinces in Poland and allows CEL
Polska to establish specific broadband connections upon the filing of requisite
documentation. The license does not allow CEL Polska to offer services that
cross area code zones or that connect different area code zones. During the
first half of 1999, CEL Polska applied for additional wireless licenses that
would allow it to expand its product offerings and to install equipment on
residential buildings. We cannot assure you that CEL Polska will obtain these
additional licenses.
Ownership and management. We own 49% of the voting securities of Formus
Polska. We hold an 85% economic interest in Formus Polska which reflects our
proportion of shareholder funding of this company. We have signed a memorandum
of understanding with the other shareholder to acquire an additional 13%
economic interest in Formus Polska.
In connection with a supply agreement and a financing arrangement, Formus
Polska has granted Alcatel Polska a warrant to purchase a 2% voting and economic
interest in Formus Polska. The option may be exercised after September 2000, and
it expires on the earlier of September 2005 or the listing of Formus Polska's
shares on a national exchange.
Through Formus Polska's organizational documents and shareholders'
agreement, we have significant voting and other rights and negative controls
with respect to board or shareholder decisions affecting Formus Polska. The
supervisory board oversees the affairs of the company while the management board
is responsible for the day-to-day operations of the company. Formus Polska's
charter provides that two of its five supervisory directors are elected directly
by us and the remaining three supervisory directors are elected by all of the
shareholders. We and the other shareholders have agreed that we will elect
supervisory directors to reflect the shareholders' proportionate economic
interests. We have similar contractual arrangements with respect to the election
of members of Formus Polska's management board. As long as required by law, a
majority of the supervisory directors and the managing directors must be Polish
citizens residing in Poland. See "-- Regulation."
We and Formus Polska have entered into a technical assistance agreement,
under which we provide technical assistance and consulting services to Formus
Polska, for which we receive a monthly fee of the greater of our direct and
indirect expenses or 4.75% of Formus Polska's gross revenues. Formus Polska also
has entered into a consulting agreement with the three principals of Formus
Polska's other shareholder, under which each principal receives a monthly fee of
the greater of $1,500 or .083% of Formus Polska's gross revenues. Under a
memorandum of understanding between us and the three principals, this consulting
agreement will terminate upon our purchase of a portion of their interest. Both
agreements have a term of five years and automatically renew for additional
one-year terms until terminated by either party.
Jaroslaw Mulewicz joined us in October 1999 as general manager of Formus
Polska. Previously, Mr. Mulewicz was senior account director at NCR Poland. He
has also held positions as major account manager at Tandem Poland, president of
Sanchez Computer Associates Poland and various executive positions at Digital
Equipment Poland.
Prior to closing our purchase of 100% of CEL Polska, a four-person
transition committee has been installed to review the operation of CEL Polska
and consider strategies for integrating CEL Polska's and
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our businesses. We appoint two members to the transition committee and the other
parties appoint the other two members.
Regulation. Polish law permits interconnection with data services (but not
public switched voice transmissions) and with private networks for voice, video
and data services. While the user connection of networks is not regulated,
service (such as the transfer of data from one person to another) requires a
license. Poland is preparing for inclusion in the European Union (EU) and has
announced plans to privatize its state telephone monopoly. TPSA retains a
monopoly over long distance services through the end of 1999, and its
international services monopoly will last through 2003, but local services have
been liberalized to allow competition. Deregulation of Poland's
telecommunications industry may be delayed, however, because of delays in
reaching general agreements on the terms under which Poland will join the EU or
negotiated changes in connection with Poland's admission to the EU.
Under Polish telecommunications law and Formus Polska's license, our
capital share and voting interest in Formus Polska cannot exceed 49% and a
majority of both its management and supervisory boards must be Polish citizens
domiciled in Poland. Under a shareholders' agreement, upon the liberalization of
foreign ownership restrictions, the management boards will take whatever action
is necessary for the shareholdings in Formus Polska to be adjusted to the
maximum extent then permitted to reflect the economic interests of the
shareholders. The Ministry of Communications must approve the transfer of any
shares of Formus Polska. Since CEL Polska's services are limited to
intra-provincial transmissions, foreign ownership restrictions do not apply, and
we can own 100% of the voting interest in CEL Polska, subject to the Ministry of
Telecommunications' approval of the transfer. See "Risk Factors -- Adverse
government regulations could limit our growth plans and revenue."
OTHER LICENSES AWARDED
In addition to our operating countries, we have been awarded licenses in
other countries which we have not yet begun to develop. We believe these
licenses have substantial value and we intend to develop them as quickly as is
practical.
Austria. We hold nationwide telecommunications licenses in Austria that
provide us access to a total population of approximately 8 million and 360,000
medium- to small-sized businesses. We intend to apply for both higher band and
lower band radio spectrum licenses in Austria; however, we cannot assure you
that we will be able to obtain any such licenses. We believe the Austrian market
presents opportunities similar to those in the German market.
Finland. In July 1999, we obtained broadband spectrum licenses in Finland
allowing us to provide both higher band and lower band services in 15 cities in
Finland with a population of 2 million and an estimated 85,000 businesses. Our
licenses allow us to be one of the first market entrants providing fixed
wireless access services. Because we have obtained licenses for a total of 315
MHz in high-, and low-frequency bands, we will be able to provide
telecommunications services to a wide variety of customers, including large-,
medium- and small-sized businesses and potentially some residential customers.
Our licenses require us to begin operations by the end of 2000. We believe
Finland is an attractive market because it has one of the highest penetration
rates for Internet technology in the world.
Ireland. In September 1999, we were notified of our right to a nationwide
broadband spectrum license for 112 MHZ of spectrum in the 26.6 GHz frequency
band. This license should cover 3.6 million people and 146,000 businesses. We do
not know all of the terms and conditions that will be included in this license.
We are the only company that was awarded the right to a license that is not an
existing telecommunications provider in Ireland. We intend to commence providing
broadband services in Ireland in the first quarter of 2000. We believe Ireland
is an attractive market because it is one of the fastest growing European
countries and has a high technology uptake rate.
New Zealand. In January 1998, we obtained nationwide licenses for 1.45 GHz
of contiguous broadband spectrum from 26.4 - 27.85 GHz. Our licenses cover 3.7
million people and an estimated 261,000 businesses. We believe that New Zealand
is an attractive market for the delivery of broadband
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wireless services because of the country's stable political environment, healthy
economy and good market demographics. We are considering various strategic
alternatives for our New Zealand licenses.
TRIAL LICENSES
We are engaged in trial operations in two countries in cooperation with
their governments in order to prove the viability of broadband wireless
technology. We are using these trials to develop interactive relationships with
government ministries and believe that we may have an advantage in developing
applications for commercial license awards. Receiving a trial license does not
assure receipt of a commercial license.
France. In April 1999, we obtained a trial license to provide broadband
wireless communications services in Strasbourg, including Internet access,
high-speed data and video until the end of 1999. We currently provide Internet
access with speeds of 2 Mbps to six customers, and expect to provide 15 to 20
business customers with broadband Internet access during the trial period.
Hungary. In September 1998, we obtained a trial license to provide
broadband wireless services in Budapest. The initial trial as of May 1999,
provided broadband data communication service to four customers at 12 locations
and broadband Internet access to one. Since then, we have added additional
customers to the broadband Internet access service, including an Internet cafe,
a cable TV operator and a four-star hotel allowing its guests to have individual
direct access to the Internet from their rooms. A trial of voice services over
the Internet between Budapest and Denver, Colorado has also been initiated.
During the trial, we will provide broadband Internet access and dedicated
broadband digital circuits for up to 20 customers, at approximately 30
locations. We expect the trial to last until the Hungarian telecommunication
authority awards permanent licenses, anticipated in the spring of 2000.
DEVELOPMENT OPPORTUNITIES
We are aggressively pursuing additional telecommunications licenses across
Europe. In general, these licenses are awarded based on reputation, financial
condition and build-out plans. We believe that our broadband wireless expertise
positions us advantageously vis-a-vis governments considering license awards. We
have filed applications for radio spectrum licenses and other telecommunications
licenses in two additional European countries. We cannot assure you that we will
be awarded licenses in any of these countries.
EQUITY INVESTMENT IN VELOCOM INC.
We currently own 22.5% of VeloCom. VeloCom's strategy is to build
competitive local exchange carriers in newly liberalized Latin American markets
that its management believes have attractive growth prospects and significant
unmet demand. VeloCom has significant ownership interests in operating companies
with licenses in Brazil covering 17 states with a total population of 125
million, including the Sao Paulo and Rio de Janeiro metropolitan areas. The
Brazilian licenses provide for switched fixed voice telephone, circuit-switched
data, dial-up data and Internet services. VeloCom has a duopoly with the
incumbent provider in local services in its licensed territories through at
least January 2002.
VeloCom now holds licenses for the provision of voice and/or data services
in Brazil, Argentina, Peru and Colombia covering approximately 205 million
people, in aggregate. It also has license applications pending in Colombia,
Brazil, Uruguay, Venezuela, Chile and Bolivia. VeloCom partners with
multinational companies with substantial in-country operating experience (such
as Bell Canada International, Inc. and Qualcomm Incorporated), as well as with
South American groups that it believes bring significant local operating
experience. VeloCom also intends to explore acquisition opportunities with
existing companies in the region.
Under a three-year technical services agreement with VeloCom, we will
provide network design, strategic planning and consulting services to VeloCom
for a monthly fee.
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In September 1999, we acquired our interest in VeloCom for $20.8 million in
cash and assets valued at approximately $7.5 million. VeloCom currently plans to
raise additional equity financing from its investors, and our ownership interest
will be substantially diluted if VeloCom is successful in raising the funds. We
or an affiliate of ours may exercise our preemptive rights which would minimize
this dilution, although we cannot assure you that we will have the funds needed
to exercise these rights. See "Certain Transactions -- The VeloCom Transaction."
TECHNOLOGY
OUR ACCESS TECHNOLOGY
Multipoint technology. We expect that most of our customers will be
connected to our network using our two-tiered approach where both higher band
and lower band licenses are available. Both higher-band and lower-band licenses
employ multipoint technology, sometimes referred to as Local Multipoint
Distribution Service, or LMDS. Broadband wireless technology allows wireless
services on a one-way or two-way basis, using point-to-point or
point-to-multipoint connections with very high communications capacity. Radio
spectrum licenses are in the millimeter-wave and centimeter-wave microwave
bands. The radio links provided using higher band spectrum frequencies are a few
kilometers or less. Radio links using lower band frequencies are typically up to
10 kilometers in length.
We have concentrated on broadband wireless methods of service delivery for
several reasons:
- Millimeter-wave bands in the range 20 GHz to 50 GHz have the capacity to
provide data access at speeds up to 622 Mbps to several customers, or at
lower speeds to thousands of customers, for every hub station built;
- Radio technology is easily and quickly deployed without the need for
digging up streets, deploying cable lines or, in many cases, acquiring
zoning permissions;
- Radio is very flexible, allowing any combination of dedicated or shared
channels and symmetrical (equal upstream and downstream bandwidths) or
asymmetrical (different upstream and downstream bandwidths) channels, and
it can be reconfigured at will as the market changes; and
- With suitable technical approaches, such as using multipoint radio sites
and shared access to channels, the cost per customer of providing
services is much lower than in conventional, land line approaches.
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We intend to deploy three types of radio technologies:
(1) Conventional point-to-point technology. With this technology, each
customer (or multi-tenant building) is connected to our network through a
dedicated, point-to-point, two-way radio link that is set up between a pair
of narrow-beam antennae pointing at each other.
This approach has been used for decades throughout the world, and
equipment is currently available off-the-shelf. We will use point-to-point
links to connect our network to large customers with high data throughput
and to connect our radio sites to our network wherever fiber is not
available for this purpose.
(2) Dedicated access multipoint equipment. Here, dedicated channels
for each customer or building are retained, but the network side of the
radio link is connected through a "multipoint transceiver" in which an
antenna with a larger beam (typically 45 to 180 degrees) communicates with
several customer terminals simultaneously. The following diagram
illustrates this concept.
[Diagram illustrating dedicated access multipoint technology, including: hub
antenna and multiple customer terminals]
We have acquired dedicated access multipoint equipment from several
vendors. We began deploying this equipment for customer use beginning in
April, 1999. The equipment is best suited to connect medium to large
corporate and institutional customers to our network.
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(3) Multiple access multipoint equipment. This utilizes the
intermittent demand nature of data communications to layer in multiple
customers with smaller data throughput into the same data channel as users
with larger data throughput when those users are idle. This approach
extends the dedicated access multipoint concept to include the use of
packet communication technology that will allow many users to access a
common channel, as illustrated in the diagram below.
[Diagram illustrating multiple access multipoint technology, including the hub
antenna and multiple customer terminals]
Multiple access multipoint equipment is currently commercially available
from multiple vendors. This equipment allows small and medium-sized businesses,
small office/home office and telecommuter customers to be connected to our
network. Eventually, we may offer service to residential customers, if
economically feasible. With few exceptions, we will service only multiple-family
dwellings because of the difficulty of establishing line of sight visibility to
the rooftops of single family residences.
We provide our customers with high quality digital transmission with signal
quality and reliability comparable or superior to competing technologies. Our
networks are engineered to deliver specifications that are superior to most
copper wire networks and an alternative to fiber-optic technology. For example,
we expect our network to operate 99.99% of the time, and transmit, on average, 1
trillion bits of uncorrupted data for every one bit of corrupted data. This
availability equates to less than one hour of downtime per year, compared with
four to 44 hours for an average copper-wire network. We intend that our
operations grow consistently and efficiently, and have created uniform
operational procedures and customer support systems, including network
operations centers, customer care centers and billing systems.
DSL technology. Where it is economically attractive, we may use digital
subscriber line technology, or DSL, to offer services to our customers. Through
our use of DSL technology, we can effectively leverage the existing telephone
network copper infrastructure to deploy service more quickly. Use of DSL
technology does not require spectrum licenses.
DSL technology emerged in 1990 and is commercially available today to
address the performance bottlenecks of the public switched telephone network.
DSL equipment, when deployed at each end of standard copper telephone lines,
increases the data carrying capacity of these lines from analog modem speeds of
56.6 Kbps for the fastest modems and ISDN speeds of 128 Kbps to DSL speeds of up
to
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6 Mbps depending on the length and condition of the copper line. Also, recent
advances in semiconductor technology and digital signal processing algorithms
and falling equipment prices have made the deployment of DSL technology on a
widespread basis more economical. We anticipate that equipment prices will
continue to fall as a result of continued advances in semiconductor technologies
and increases in equipment production volumes.
Internet Protocol technologies. The wires, cables and spectrum that
comprise the physical layer of our networks can support a variety of
communications technologies. We seek to offer customers a full suite of
technology options to meet their changing needs, and to introduce new
technologies as necessary. Specifically, we believe that a service platform
based on Internet Protocol, or IP technology, will provide us with significant
future opportunities, because it will enable data, voice and video to be carried
inexpensively over our end-to-end, facilities-based network. Therefore, we have
begun to supplement our current data and voice switching technology with IP and
Asynchronous Transfer Mode, or ATM, equipment.
These technologies will enable us to offer our customers additional
services, such as high-speed Internet access, Internet web hosting, e-commerce
and other Internet services. Because they are more efficient, IP and ATM
technologies increase the effective capacity of networks for these types of
applications, and in the future may become the preferred technology for voice
calls, as well as faxes.
There are two widely used switching technologies currently deployed in
communications networks: circuit-switching systems and packet-switching systems.
Circuit-switch communications systems, which currently dominate the public
telephone network, establish a dedicated channel for each communication (such as
a telephone call for voice or fax), maintain the channel for the duration of the
call, and disconnect the channel at the conclusion of the call. Packet-switch
systems, which format the information to be transmitted into a series of shorter
digital messages called "packets," are the preferred means of data transmission.
Each packet consists of a portion of the complete message plus the addressing
information to identify the destination and return address. A key feature that
distinguishes Internet architecture from the public telephone network is that on
the packet-switched Internet, a single dedicated channel between communication
points is not required.
Packet-switch systems offer several advantages over circuit-switch systems,
particularly the ability to commingle packets from several communications
sources together simultaneously onto a single channel. For most communications,
particularly those with bursts of information followed by periods of "silence,"
the ability to commingle packets provides for superior network utilization and
efficiency, resulting in more information being transmitted through a given
communication channel.
IP technology is an open protocol that allows unrelated computer networks
to exchange data and is the technological basis of the Internet. The explosive
growth of the Internet in recent years has focused intensive efforts worldwide
on developing IP-based networks and applications. In contrast to other existing
protocols, such as ATM, that are the product of elaborate negotiations among
monopoly telephone companies around the world, IP is an open standard and is
subject to continuous improvement. We believe that a form of IP-based switching
will eventually replace both ATM and circuit-switched technologies, and will be
the foundation of integrated networks that treat all transmissions, including
voice, fax and video, simply as forms of data transmission. Current
implementations of IP technology over the Internet lack the necessary quality of
service to support real-time applications like voice and fax at commercially
acceptable quality levels. We expect that a combination of increased bandwidth
and improved technology will correct these deficiencies.
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NETWORK ARCHITECTURE
Our network architecture is illustrated below. It includes a central
facility containing switches, routers, servers and other data communications
devices, together with customer care, billing, and network operations systems.
The central facility is connected to the Internet, and where necessary, to the
incumbent local or long-distance telephone company or alternate backbone
transmission provider(s) through broadband fiber or microwave connections.
[Diagram showing the fixed wireless network architecture, including: a central
facility and fiber connections to the Internet; higher frequency rooftop hub
stations; lower frequency tower hub station; fiber backhaul connections; and,
multiple customer terminals]
SCALABILITY
An important advantage of broadband wireless technology is that it
facilitates a highly scalable network buildout. A broadband wireless business
can begin with coverage focused only on those areas deemed to have the highest
customer traffic density (and thus the highest profitability). From this initial
coverage area, additional cells can be built according to customer demand to
increase coverage. This is in contrast to mobile wireless networks, which
require a large coverage area at service launch in order to be competitive.
Also, the portion of the network capital expenditures associated with the
equipment installed at the customer building does not need to be incurred until
customer orders have been received for that building. Together, these
characteristics of fixed wireless access technology enable a "success-based"
capital expenditure structure where network expenditures are more closely tied
to customer demand.
COMPETITION
We intend to continue pursuing additional telecommunications licenses in
various European markets. Many of the bidders for the types of licenses we are
seeking are large European telecommunications providers and multinational
companies. Often these other bidders have significantly more resources and more
extensive operating histories than we do. The license application process
generally is becoming more competitive, and we expect this competition will
continue to intensify as additional European countries begin their license
application processes. In markets where we have or obtain telecommunications
licenses, we will face competition from telecommunications providers using a
variety of technologies, including
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cable, satellite and land line operators as well as other broadband wireless
companies. Some of these competitors are major multinational companies and
state-owned incumbent providers. Many of these companies have substantially more
financial resources and operating experience than we do.
REGULATION
Our fixed wireless telecommunications services and systems are subject to
regulation by various governmental agencies in the countries in which we operate
or plan to operate. These laws and regulations often control, among other
things:
- license application and renewal procedures;
- allocation of radio spectrum;
- the rates that can be charged;
- the quality of service to be provided;
- foreign ownership of licenses and providers;
- technology specifications and service quality; and
- interconnection to other telecommunications providers.
In addition to national laws and regulations, there may be local regulations
governing telecommunications services providers and network installations.
The scope and type of regulation varies from country to country, although
in some significant respects regulations are harmonized in EU countries.
Austria, France, Finland, Germany and Ireland are all member states of the EU.
Poland is scheduled to become a member of the EU by 2003. Although not an EU
member state, Hungary has generally implemented or is implementing the same
principles on the same timetable as EU member states.
Central aims of the EU's telecommunications policy have been to liberalize
the telecommunications industry in the EU member states and to reduce the
monopoly power of the incumbent telecommunications operators in order to
introduce competition in the European market. Liberalization measures have been
adopted under the EU's competition rules and harmonization measures have been
put in place through the adoption of the so-called Open Network Provision and
Licensing directives. These directives set out the framework for procedures for
granting licenses to provide telecommunication services and the installation and
operation of related infrastructure. Under the framework specified by these
directives, providers of telecommunications services generally require either no
authorization or a general authorization that is conditional upon "essential
requirements," such as the security and integrity of a network's operation.
Licensing conditions and procedures must be objective, transparent and non-
discriminatory. Another directive sets forth the general framework for
interconnection, including general obligations for public telecommunication
network operators to negotiate interconnection agreements on a
non-discriminatory basis. Operators with dominant market share, such as the
incumbent national telecommunications providers, are prohibited from
discriminating between operators that offer similar services and their
interconnection charges must follow the principles of transparency and be based
on the actual cost of providing the interconnection.
Although we believe we have complied with all necessary and appropriate
regulatory processes to date, changes in existing laws, rules and regulations
governing our services, including those relating to obtaining necessary
licenses, could have a material adverse effect on our business, prospects,
financial condition and results of operations. See "Risk Factors -- Adverse
government regulations could limit our growth plans and revenues."
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<PAGE> 54
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, nor are we currently
aware of any threatened material legal proceedings. From time to time, we may
become involved in litigation relating to claims arising out of our operations
in the normal course of our business.
EMPLOYEES
As of September 30, 1999, we had 218 employees. None of our employees are
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
INCORPORATION
We were incorporated in 1996 in Delaware.
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<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
We have a board of 12 members. Currently, we have 11 directors in office.
The holders of our Series E and Series F preferred stock have the right to
designate the 12th director but they have not yet done so. The current executive
officers and directors of Formus, along with their backgrounds, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- --------
<S> <C> <C>
William J. Elsner..................... 48 Chairman of the Board of Directors
Osmo A. Hautanen...................... 45 Chief Executive Officer and Director
Steven C. Halstedt.................... 53 Director
Michael R. Hannon..................... 39 Director
Michael R.A. Honig.................... 49 Director
William A. Johnston................... 47 Director
Ian Kidson............................ 40 Director
Kevin J. Maroni....................... 37 Director
Trygve E. Myhren...................... 62 Director
Frederick A. Vierra................... 67 Director
James F. Wade......................... 43 Director
Vernon F. Kenley...................... 59 President and Chief Development
Officer
David L. Castellini................... 56 Senior Vice President and Chief
Marketing Officer
Bernard G. Dvorak..................... 39 Senior Vice President, Chief Financial
Officer and Secretary
David L. Jones........................ 36 Vice President, Engineering Technical
Operations
John F. Knoeckel...................... 44 Senior Vice President, General Counsel
and Assistant Secretary
Raymond W. Nettleton.................. 54 Senior Vice President and Chief
Technology Officer
Derek S. Van Keuren................... 44 Senior Vice President of Human
Resources
</TABLE>
William J. Elsner is our Chairman of the Board. Since November 1997, Mr.
Elsner has been a managing member of Telecom Management II, L.L.C., an affiliate
of Telecom Partners. From October 1995 until November 1997, Mr. Elsner was a
private investor. From July 1991 until September 1995, Mr. Elsner was the chief
executive officer of United International Holdings (now UnitedGlobalCom, Inc.),
an international cable television operator he co-founded. Mr. Elsner is
currently Chairman of the board of directors of WLL America, Inc. and a director
of VIA NET.WORKS, Inc., VeloCom Inc., Allied Riser Communications Corporation
and Home Network, Inc.
Osmo A. Hautanen joined us as Chief Executive Officer in July 1998. From
July, 1996 until June, 1998, Mr. Hautanen was President-Americas of Philips
Consumer Communications, a Fortune 50 company, and also a member of the Philips'
Americas Board of Presidents. Prior to Philips, Mr. Hautanen held several
executive positions over an 18-year period with Nokia, a $15 billion global
leader in wireless communications. He currently serves as our designee on the
board of directors of VeloCom Inc.
Steven C. Halstedt has served as one of our directors since our inception
in November 1996. He is a General Partner of Centennial Fund IV, L.P. and
Centennial Fund V, L.P. and Managing Principal of Centennial Fund VI, LLC, each
a part of The Centennial Funds, a group of firms he co-founded in 1981.
Centennial is a venture capital firm that focuses its investment activities on
electronic communications industries. Mr. Halstedt is a member of the board of
directors of VeloCom Inc., and Gabriel Communications, Inc., and is Chairman of
the board of directors of Verio, Inc. and Centennial Communications Corp. Mr.
Halstedt was formerly Chairman of the board of directors of OneComm
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<PAGE> 56
Corporation, PageAmerica Group, Inc. and Orion Network Systems, Inc., all of
which became publicly traded telecommunications companies.
Michael R. Hannon has served as one of our directors since April 1997. He
is a General Partner of Chase Capital Partners ("CCP"), a general partnership
with approximately $7.5 billion under management. CCP invests in a wide variety
of international private equity opportunities including management buyouts,
growth equity, and venture capital situations. CCP's chief limited partner is
The Chase Manhattan Corporation, one of the largest bank holding companies in
the United States. He worked at Morgan Stanley & Co. Incorporated prior to
joining CCP in 1988. Mr. Hannon chiefly focuses on the media/telecom and
financial services industries at CCP. He is currently on the boards of TeleCorp
PCS, Inc., Entercom Communications and Financial Equity Partners.
Dr. Michael R.A. Honig has served as one of our directors since September
1999. During the past five years, Dr. Honig has been a senior partner of Honig
Rechtsanwalte, a Munich, Germany-based law firm representing clients in mergers
and acquisitions and financial transactions in Germany, several other European
countries and the United States. He joined our board in connection with our
acquisition of the remaining equity interests of Callino GmbH. Dr. Honig
formerly owned a minority equity interest in Callino, which he sold to us in
September 1999.
William A. Johnston has served as one of our directors since September
1998. Since January 1997, he has served as managing director of both Hancock
Venture Partners and its affiliate, HarbourVest Partners, LLC. He joined Hancock
Venture Partners, Inc. as a vice president in 1983 after working in the
corporate finance department of John Hancock from 1981. Prior to 1981, he was
assistant vice president for State Street Bank in Boston. He serves on the
advisory council of The Centennial Funds and the advisory committee of Highland
Capital Partners. Additionally, he is a member of the board of directors of the
following companies: Adesemi Communications International, Inc., Benchmark
Media, Inc., Epoch Networks, Inc., Golden Sky Systems, Inc., The Marks Group,
Inc., Pangea, Ltd. and VIA NET.WORKS, Inc.
Ian Kidson has served as one of our directors since November, 1997. He is a
Managing Director of CIBC Capital Partners. Prior to joining CIBC Capital
Partners in 1994, he was Vice President and Director at CIBC Wood Gundy
Securities in Investment Banking, Capital Markets and Private Placements, and
Debt Syndications.
Kevin J. Maroni has served as one of our directors since March 1997. Mr.
Maroni is a General Partner of Spectrum Equity Investors. Spectrum is a leading
private equity firm which manages over $1 billion of capital for investment in
telecommunications companies. Prior to joining Spectrum in 1994, Mr. Maroni
worked at Time Warner, Inc. and Harvard Management Company. Mr. Maroni is a
director of CTC Communications Corp., American Cellular Corp, Pathnet, Inc., and
GlobeNet Communications, Ltd. He is also a member of the Finance Committee at
the Park School in Brookline, MA.
Trygve E. Myhren has served as one of our directors since November, 1998.
He is president of Myhren Media, Inc., a private investment firm concentrating
in media, telecommunications, software, and Internet-related companies. From
1990 to 1996, he served as president of The Providence Journal Company, which
owned and managed the Journal-Bulletin newspapers, broadcast stations, cable
television systems, a number of programming networks for multichannel delivery
systems, and significant positions in other programming, interactive and
multimedia ventures. From 1975 to 1988, he was employed by American Television
and Communications Corporation ("ATCC"), the publicly-traded cable television
subsidiary of Time, Inc. and served as chairman and Chief Executive Officer of
ATCC from 1980 to 1988. He also serves on the boards of J.D. Edwards, Inc.,
Verio, Inc., Advanced Marketing Services Inc., CableLabs, Inc., Peapod, Inc. and
Dreyfus Founders Fund, Inc. and is also a trustee and executive committee member
of the University of Denver.
Frederick A. Vierra has served as one of our directors since March 1998.
Since 1998, he has served as a consultant to Liberty Media. From October 1994 to
1997, he served as the Chief Executive Officer of Tele-Communications
International, Inc. and served as Chairman of its Board of Directors from
October
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<PAGE> 57
1994 to May 1995, and Vice Chairman of its Board from May 1995 to November 1998.
Mr. Vierra has served as an Executive Vice President of Tele-Communications,
Inc. from January 1994 to October 1994, and as an Executive Vice President of
TCI from December 1991 to October 1994. Prior to joining TCI, he was President
and Chief Operating Officer of United Artists Entertainment Company, where he
directed the activities of both the cable television and theater division
presidents. Mr. Vierra is also Chairman of the Board of VeloCom Inc. and
eVentures and a director of Flextech p.l.c., Jones International Networks, Ltd.
and AboveNet Communications, Inc.
James F. Wade has served as one of our directors since November 1997. He is
the Managing Partner of M/C Venture Partners, a $250 million private equity
fund, and has been a General Partner in a series of predecessor funds since
1987. M/C Venture Partners invests solely in the telecommunications and
information technology sectors. Mr. Wade serves on the boards of directors of
TeleCorp, ACME Paging, Cavalier Telephone and Trumper Communications.
Vernon F. Kenley has been our President since December 1996 and, since
August 1999, he has also served as our Chief Development Officer. Before joining
us, he was President of Global Telecom Associates, a telecommunications
consulting company, from September 1996 to December 1996. From March 1994 until
August 1996, Mr. Kenley was Executive Vice President-Telecommunications &
Technology of UnitedGlobalCom, Inc. Prior to joining UnitedGlobalCom, Mr. Kenley
was employed by U S WEST from October 1985 to March 1994. At U S WEST, Mr.
Kenley served in various business development capacities in the company's
international operations, and as President and Chief Executive Officer of U S
WEST Knowledge-Engineering, Inc., a company co-founded by Mr. Kenley and
subsequently sold to U S WEST.
David L. Castellini joined the company in August 1999 as Senior Vice
President and Chief Marketing Officer. Prior to joining us, he served as
Chairman and Chief Marketing Officer of Internet & Web Services Corporation, a
private, large scale e-commerce software developer, integrator and Internet
services provider, from August 1997 to March 1999. Before IWSC, he was Senior
Partner and a founder of International Solutions Group, an information systems
developer and integrator, from January 1993 to August 1997. He had held the
positions of Chairman, Chief Executive Officer, Chief Operating Officer and
Chief Marketing Officer in various high tech companies.
Bernard G. Dvorak joined us in April 1999. He serves as Senior Vice
President, Chief Financial Officer and Secretary. From February 1998 through
March 1999, Mr. Dvorak served as President and Chief Executive Officer of
Centennial Communications Corp., a company providing wireless communications
services to businesses in Latin America. He also served as Chief Financial
Officer of Centennial Communications from February 1997 to January 1998. He
currently serves as a member of the board of directors of Centennial
Communications. Mr. Dvorak served as Chief Financial Officer and a member of the
office of the chairman as well as a co-founder of UnitedGlobalCom, Inc., a
publicly traded telecommunications company, from May 1989 to December 1996.
David L. Jones joined us as a consultant in March 1998 and accepted a
permanent position as Vice President, Engineering/Technical Operations in August
1998. In his current role as Regional Vice President of Engineering at Formus
Communications-Europe, Mr. Jones has responsibility for the engineering and
implementation of broadband networks in Formus' new European markets, as well as
providing technical support to our existing European operations. Prior to
joining us, from April 1995 to March 1998, Mr. Jones was Director of Engineering
and Network Operations at Sprint PCS where he directed the design,
implementation, optimization, launch and ongoing operations of the Colorado
Sprint PCS network. From September 1994 to April 1995, Mr. Jones was Director of
Network Implementation for PCS PrimeCo, as an employee of U S WEST, where he
established the network implementation, microwave relocation and product
development functions for PCS PrimeCo.
John F. Knoeckel joined us in September 1997. He serves as Senior Vice
President, General Counsel and Assistant Secretary. Prior to joining us, Mr.
Knoeckel was in the private practice of law for fifteen years. From June 1987 to
September 1997, Mr. Knoeckel practiced law with Holme Roberts & Owen LLP where
he was a partner from January 1990 and focused primarily on overseas
acquisitions and
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dispositions of telecommunications-related businesses and related strategic
relationships, securities law and mergers and acquisitions.
Raymond W. Nettleton is our Senior Vice President and Chief Technology
Officer, a position he has held since July 1997. He also served as a consultant
to us from December 1996 to July 1997. Before joining us, from February 1994 to
July 1997, Dr. Nettleton was President of NettWork Consulting, which provided
strategic technical consulting services to major telecommunications entities
worldwide. From 1991 until founding NettWork Consulting in 1994, Dr. Nettleton
was Director and Distinguished Member, Technical Staff, at US WEST, where his
responsibilities included the evaluation of broadband wireless technology. Prior
to that, from 1988 to 1991, he worked with Booz, Allen and Hamilton, where he
was consulted by various national and international cellular and PCS commercial
clients.
Derek S. Van Keuren joined us in August 1998 and is our Senior Vice
President of Human Resources. From October 1996 to July 1998 he was Vice
President of Human Resources for Philips Consumer Communications, a global
company that designs, manufactures and sells a full line of consumer
telecommunications equipment. Prior to that, from September 1993 to October
1996, he was Director, Human Resources at FoxMeyer Drug Company. Mr. Van Keuren
has over nineteen years of human resources generalist experience in a range of
industries, such as telecommunications, pharmaceuticals, manufacturing, and
consumer products.
COMPENSATION OF DIRECTORS
Our directors who are not also our employees are reimbursed for the
expenses they incur in attending meetings of our board or our board committees.
In addition, Messrs. Vierra and Myhren each receive $1,500 for attending each
board meeting. All directors who are not also our employees are eligible to
participate in our Equity Incentive Plan. In 1998, two of our non-employee
directors, Messrs. Vierra and Myhren, each received a stock option to purchase
75,000 shares of our common stock pursuant to the terms of this plan that will
vest in equal increments on each of the first four anniversaries of the date of
grant.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a number of standing committees of the Board, including the
following:
Audit Committee. The audit committee consists of two directors. Currently
the members of our Audit Committee include Messrs. Kidson and Vierra. The audit
committee is responsible for recommending annually to the board of directors the
independent auditors to be retained, reviewing with our independent auditors the
scope and results of the audit engagement, reviewing our system of internal
accounting controls and directing investigations into matters within the scope
of its functions.
Compensation Committee. The compensation committee consists of three
directors. Currently the members of our compensation committee include Messrs.
Johnston, Myhren and Wade. The compensation committee is responsible for
determining executive compensation policies and guidelines. It also administers
our Equity Incentive Plan and establishes the terms and conditions of all stock
option grants.
Executive Committee. The executive committee consists of five directors.
Currently the members of the executive committee include Messrs. Elsner,
Halstedt, Hannon, Hautanen and Myhren. The executive committee is authorized to
exercise all of the powers and authority of our full board of directors, except
as otherwise required by law, when the full board is not in session.
Finance Committee. The finance committee consists of five directors.
Currently the members of the finance committee include Messrs. Halstedt, Elsner,
Hannon, Hautanen and Maroni. Our finance committee reviews our budgets and
approves acquisitions and capital raising activities.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by our chief executive officer and by each of our four most highly
compensated executive officers for the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION:
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Osmo A. Hautanen(1)............................. $195,458 $50,000 $70,637
Chief Executive Officer
Vernon F. Kenley................................ $200,000 -- --
President and Chief Development Officer
Raymond W. Nettleton............................ $180,000 -- --
Senior Vice President and Chief Technology
Officer
James R. Downs(2)............................... $180,000 -- --
Former Chief Financial Officer
John F. Knoeckel................................ $140,000 -- --
Senior Vice President, General Counsel and
Assistant Secretary
</TABLE>
- ------------------------------
(1) Mr. Hautanen was appointed Chief Executive Officer in July 1998. The salary
amount shown consisted of base salary paid to Mr. Hautanen from July through
December 1998. All other compensation includes a relocation allowance of
$70,637.
(2) Mr. Downs resigned his employment with us in April 1999.
STOCK OPTION INFORMATION
The following table discloses information regarding stock options granted
to our executive officers that are named in the Summary Compensation Table
during 1998. See "-- Equity Incentive Plan" below.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS AWARDS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS SHARE PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE OR FOR OPTION TERM(2)
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- ---- --------------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Osmo A. Hautanen..... 33.28% $ July, 2008 $4,070,000 $6,480,000
Vernon F. Kenley..... 15.82% $ July, 2008 1,933,250 3,078,000
Raymond W.
Nettleton.......... 10.00% $ July, 2008 1,221,000 1,944,000
James R. Downs(1).... 10.00% $ July, 2008 1,221,000 1,944,000
John F. Knoeckel..... 2.00% $ July, 2008 244,200 388,800
</TABLE>
- ------------------------------
(1) As a result of Mr. Downs' resignation in April 1999, all of the options
granted to him in 1999 were forfeited.
(2) Represents the potential value of options granted at assumed 5% and 10%
rates of compounded annual stock appreciation for ten years from the date
the options were granted.
The following table provides, for our executive officers listed in the
Summary Compensation Table, information on the number of shares represented by
unexercised options owned by them at December 31,
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<PAGE> 60
1998 and the value of those options as of the same date. None of the executive
officers exercised any options in 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Osmo A. Hautanen............................. $ $
Vernon F. Kenley.............................
Raymond W. Nettleton.........................
James R. Downs(1)............................
John F. Knoeckel.............................
</TABLE>
- ------------------------------
(1) Mr. Downs resigned his employment with us in April 1999 and forfeited his
interest in all of his unvested options.
(2) The value of the unexercised in-the-money options represents the difference
between $ , the assumed initial offering price in this offering, and
the exercise price of the options, which is $ per share for each of the
options included in the table.
EQUITY INCENTIVE PLAN
The Formus Communications, Inc. Equity Incentive Plan effective April 15,
1997, as currently amended, permits the grant of non-qualified stock options,
incentive stock options, restricted stock and other stock grants to our key
employees, key consultants and non-employee directors (including those of our
affiliated companies), except that incentive options may be granted only to
employees. We have reserved for issuance shares of common stock which
may be subject to awards under the plan. The number of shares is subject to
adjustment on account of stock splits, stock dividends and other dilutive
changes in the number of outstanding shares of our common stock. We can re-grant
shares of common stock covered by unexercised non-qualified or incentive stock
options that expire, terminate or are forfeited, together with shares of common
stock that are used to pay withholding taxes or the option exercise price.
The plan is administered by our compensation committee. The compensation
committee must be structured at all times so as to permit the plan to comply
with Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act")
and Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code").
Our compensation committee has the sole discretion to determine the
employees, consultants and non-employee directors to whom awards will be granted
and the terms and conditions of such awards, although all awards granted to
non-employee directors must first be approved by our board of directors. In
addition, the maximum aggregate fair market value (determined on the date of
grant) of stock that may become exercisable by any one employee under incentive
stock options during any calendar year is $100,000.
Our compensation committee determines the exercise price for each option;
however, incentive stock options must have an exercise price that is at least
equal to the fair market value of our common stock on the date the incentive
stock option is granted (at least equal to 110% of fair market value in the case
of an incentive stock option granted to an employee who owns 10% or more of the
outstanding common stock). Option holders who are subject to the withholding of
federal and state income tax as a result of exercising an option may satisfy the
income tax withholding obligation through the withholding of a portion of the
common stock to be received upon exercise of the option. Options and restricted
stock awards granted under the plan are not transferable other than by will or
by the laws of descent and distribution.
Options granted under the plan may immediately vest upon any "change in
control" as defined by the Compensation Committee if so provided in the
individual agreement with the option holder.
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<PAGE> 61
Upon the occurrence of (i) a reorganization (other than a bankruptcy
reorganization), merger or consolidation (other than a reorganization, merger or
consolidation in which we are the continuing corporation and that does not
result in any reclassification or change of outstanding shares of our common
stock), (ii) the sale of all or substantially all of our assets (other than a
sale in which we continue as a holding company of an entity that conducts the
business formerly conducted by us), or (iii) our dissolution or liquidation, all
outstanding options will terminate automatically upon 30 days' written notice,
or options and awards may be assumed in a merger or consolidation on terms
comparable to the outstanding options or awards. When the notice is given, all
outstanding options fully vest and can be exercised prior to the event requiring
such notice and other awards become exercisable and payable. All payments made
in such event are subject to reduction in the event Section 280G of the Code
would be triggered.
Our board of directors may amend the plan in any respect at any time
provided shareholder approval is obtained when necessary or desirable, but no
amendment can impair any option or award previously granted or deprive an option
holder, without his or her consent, of any common stock previously acquired.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We have entered into the following agreements with several members of our
senior management group:
- On July 1, 1998, we entered into a letter agreement with Osmo A.
Hautanen, relating to his employment. This letter agreement provides for:
- an annual base salary of $400,000;
- an annual cash bonus of up to $50,000;
- the continuation of his salary and benefits for nine months if his
employment is terminated without cause;
- agreements not to compete with us or solicit our employees or customers
during the term of the agreement and for a period of 12 months following
his termination; and
- an agreement to keep information regarding our business and operations
confidential.
In addition, we have agreed to enter into a five-year note with Mr.
Hautanen in the principal amount of $200,000. The interest rate due on the
principal amount is 5.96% per annum and is payable once per year. Mr. Hautanen's
obligations under the note will be secured by shares of our common stock held by
Mr. Hautanen.
- On May 1, 1999, we entered into a letter agreement with Vernon F. Kenley,
relating to his severance benefits. This letter agreement provides for:
- the continuation of his salary and benefits for 12 months if his
employment is terminated by us without cause or by him for good reason
(as defined in the agreement);
- the acceleration of unvested stock options upon a change of control (as
defined in the agreement) occurring within one year of his termination;
- indemnification in connection with litigation arising after his
termination in which he is named as a result of his position as a former
officer;
- agreements not to compete with us or solicit our employees or customers
during the term of the agreement and for a period of 12 months following
his termination; and
- an agreement to keep information regarding our business and operations
confidential.
In addition, all of our employees and consultants, including the members of
our senior management group, have signed letter agreements. These agreements
obligate our employees and consultants (1) not to
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<PAGE> 62
disclose confidential information concerning Formus and (2) not to compete with
us or solicit our employees or customers during the term of employment and for
12 months following termination. The agreements also give us all of the
ownership rights to the work produced by our employees and consultants.
CERTAIN TRANSACTIONS
THE VELOCOM TRANSACTION
In September 1999, we completed a transaction with VeloCom Inc., a Delaware
corporation which provides telecommunications services in Latin American
countries. VeloCom's stockholders include three of our stockholders, and three
of our directors (plus a director designated by us, who currently also serves on
our board) also serve on the board of VeloCom. A special committee of our board
evaluated and approved the transaction with VeloCom. See "Business -- Equity
Investment in VeloCom Inc."
Under the purchase agreement among VeloCom, Formus and one of our
subsidiaries, we transferred the following assets to VeloCom in exchange for a
22.5% ownership interest in VeloCom:
- our subsidiaries in Argentina, Bolivia, Chile, Colombia, Peru, and
Venezuela (which were all of our Latin American subsidiaries other than
our Ecuadoran subsidiary);
- the Colorado limited liability holding companies for the Latin American
subsidiaries;
- our rights and obligations under memoranda of understanding with local
partners in Colombia and Uruguay; and
- approximately U.S. $20.8 million in cash.
In separate transactions, VeloCom acquired some of the Latin American
assets of SLI Wireless S.A. and PCN do Brasil S.A., our former partners in
Argentina, and Taquari Participacoes S.A., one of VeloCom's partners in Brazil.
VeloCom now owns 100% of Telelatina Management Company LLC, in which we formerly
owned a minority interest, and has consolidated its ownership interests in its
Brazilian operating companies with those of SLI and Taquari.
The Amended and Restated Investors Agreement. Under an Amended and Restated
Investors Agreement, the stockholders of VeloCom have demand registration rights
after January 26, 2002 (holders of 33% of VeloCom's stock may request
registration of their securities four times on a Form S-1, and an unlimited
number of times on a Form S-3) and piggyback registration rights, which in both
cases expire in 2005.
The Amended and Restated Investors Agreement also provides stockholders
preemptive rights with respect to their respective proportional share of 80% of
any proposed securities issuance, subject to limitations and transfer
restrictions, including a right of first refusal. VeloCom is currently
contemplating an equity offering, and we may exercise our preemptive rights or
assign them to an affiliate.
We are entitled to appoint one member of VeloCom's 12-member board of
directors and to have a non-voting observer as long as we own at least a 5%
equity interest. Two beneficial owners of 5% or more of our shares, including
Telecom Partners II, L.P. and The Centennial Funds, are also significant
shareholders of VeloCom and are entitled to designate some of VeloCom's
directors.
THE CALLINO TRANSACTION
In September 1999, we acquired our minority partners' direct and indirect
equity interests in Callino GmbH. The direct and indirect selling shareholders
of Callino included two affiliates of Chase Capital Partners, one of our
shareholders, Dr. Michael R.A. Honig, who currently serves as one of our
directors, and Matthias Weber, who currently serves as chief executive officer
of Callino. We issued preferred stock
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valued at $163.7 million, convertible into shares of common stock, and
paid $100,000 in cash to acquire these equity interests.
In connection with our acquisition of the remaining shares of Callino, the
individual selling shareholders entered into non-competition agreements with
Callino. Callino also renegotiated and extended its consulting and other
agreements with Matthias Weber, the chief executive officer of Callino and one
of the selling shareholders.
Callino's direct and indirect selling shareholders have entered into the
Fourth Amended and Restated Investors' Rights Agreement. See "Description of Our
Capital Stock -- Registration Rights."
THE INTEL AGREEMENTS
On September 9, 1999, we entered into a marketing activities agreement with
Intel Corporation pursuant to which Intel will provide non-exclusive marketing
assistance to us in certain reseller channels in specific cities in Poland in
exchange for a warrant to purchase shares of preferred stock convertible into
shares of common stock at an exercise price of $ per share, which
vests incrementally: 25% has vested and the remaining 75% will vest in three
equal increments upon achievement of certain performance milestones. In addition
to Poland, the parties will select a second country in which Intel will provide
similar marketing assistance.
INVESTOR AGREEMENTS
We have entered into a Fourth Amended and Restated Investors' Rights
Agreement with all of our stockholders except stockholders who are parties to an
Employee Stockholders Agreement. Each of these agreements provides for demand
registration rights. See "Description of Our Capital Stock -- Registration
rights." Certain other rights and obligations under these agreements will
terminate upon the closing of this offering.
OTHER
Many of our directors are also officers of some of our significant
stockholders.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of September 30, 1999 by:
- each stockholder known to us to own beneficially more than 5% of our
outstanding common stock;
- each of our directors;
- each of our named executive officers; and
- all directors and executive officers as a group.
The amounts and percentage of common stock beneficially owned are reported
on the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the SEC's rules, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be deemed
a beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which such person has no economic interest.
Because Class B common stock is convertible into Class A common stock, holders
of Class B are deemed to beneficially own Class A common stock. The information
set forth in the following table excludes any shares purchased in the offering
by the respective beneficial owner:
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<PAGE> 64
<TABLE>
<CAPTION>
PERCENTAGE
NO. OF SHARES -------------------
OF CLASS A PRIOR TO AFTER
BENEFICIAL OWNER(1) COMMON STOCK OFFERING OFFERING
- ------------------- ------------- -------- --------
<S> <C> <C> <C>
Chase Capital Partners and affiliates(2).................... 19.7%
Centennial Funds V, L.P. and affiliates(3).................. 11.8
Telecom Partners II, L.P. and affiliates(4)................. 10.3
Spectrum Equity Investors II, L.P. and affiliates(5)........ 7.7
Media/Communications Partners III Limited Partnership and
affiliates(6)............................................. 6.2
William J. Elsner(7)........................................ * *
Osmo A. Hautanen(8)......................................... * *
Steven C. Halstedt.......................................... * *
Michael R. Hannon........................................... * *
Michael R.A. Honig.......................................... 3.3
William A. Johnston......................................... * *
Ian Kidson.................................................. * *
Kevin J. Maroni............................................. * *
Trygve E. Myhren(9)......................................... * *
Frederick A. Vierra(10)..................................... * *
James Wade.................................................. * *
Vernon F. Kenley(11)........................................ * *
John F. Knoeckel(12)........................................ * *
Raymond W. Nettleton(13).................................... * *
James R. Downs(14).......................................... * *
All directors and executive officers as a group (18
persons)(15).............................................. 5.9
</TABLE>
- ------------------------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each person named in the table
is Formus Communications, Inc., 720 South Colorado Blvd., Suite 600 North,
Denver, Colorado, 80246.
(2) Represents shares of Class B common stock owned by investment funds
affiliated with Chase Capital Partners, including:
- shares of common stock owned by Chase Equity Associates, L.P.
- shares of common stock owned by Chase European Equity
Associates II LLC.
- shares of common stock owned by Chase Capital Partners (CCP)
Germany B.V.
The address for Chase Equity Associates, L.P. and its affiliates is 380 Madison
Avenue 12th Floor, New York, New York 10017.
(3) Represents shares of common stock owned by investment funds affiliated with
Centennial Fund V, L.P., including:
- shares of common stock owned by Centennial Fund V, L.P.
- shares of common stock owned by Centennial Entrepreneurs Fund
V, L.P.
- shares of common stock owned by Centennial Fund VI, L.P.
- shares of common stock owned by Centennial Entrepreneurs Fund
VI, L.P.
- shares of common stock owned by Centennial Holdings I, LLC.
The address for Centennial Fund V, L.P. and its affiliates is 1428 Fifteenth
Street, Denver, Colorado 80202.
(4) Represents shares of common stock owned by investment funds affiliated with
Telecom Partners II, L.P., including:
- shares of common stock owned by Telecom Partners II, L.P.
- shares of common stock owned by Telecom Partners, L.P.
The address for Telecom Partners II, L.P. and its affiliates is 4600 South
Syracuse, Suite 1000, Denver, Colorado 80237.
(5) Represents shares of common stock owned by investment funds affiliated with
Spectrum Equity Investors II, L.P., including:
- shares of common stock owned by Spectrum Equity Investors II, L.P.
- shares of common stock owned by Spectrum Equity Investors, L.P.
The address for Spectrum Equity Investors II, L.P. and its affiliates is 1
International Place, 29th Floor, Boston, Massachusetts 02110.
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<PAGE> 65
(6) Represents shares of common stock owned by investment funds affiliated with
Media/Communications Partners III Limited Partnership, including:
- shares of common stock owned by Media/Communications Partners III
Limited Partnership.
- shares of common stock owned by M/C Investors L.L.C.
The address for Media/Communications Partners III Limited Partnership and
its affiliates is 75 State Street, Boston, Massachusetts 02109.
(7) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(8) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(9) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(10) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(11) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(12) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(13) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(14) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
(15) Includes shares of common stock issuable under options granted pursuant
to the terms of our equity incentive plan, which are exercisable within 60
days after the closing of this offering.
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<PAGE> 66
DESCRIPTION OF OUR CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of our Fourth Restated Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to the registration statement of
which this prospectus is part. See "Additional Information."
Our authorized capital stock consists of shares, including
shares of common stock, par value $0.001 per share, and
shares of preferred stock, par value $0.001 per share. Our common stock is
divided into two classes consisting of authorized shares of Class A
common stock and authorized shares of Class B common stock.
After this offering and the conversion of our preferred stock into common
stock, we will have outstanding:
- shares of Class A common stock if the underwriters do not
exercise their over-allotment option, or shares of Class A
common stock if the underwriters exercise their over-allotment option in
full;
- shares of Class B common stock; and
- no shares of preferred stock.
COMMON STOCK
Our Class A common stock and Class B common stock are identical except that
Class B common stock has no voting rights. We are issuing only Class A common
stock in this offering. The holders of Class B common stock are prohibited by
law from owning more than a specified percentage of our voting stock. Class B
common stock automatically converts to common stock if sold to a buyer who is
not prohibited from owning more than a specified percentage of our voting Class
A stock or if restrictions on the holder are lifted.
Each holder of record of Class A common stock is entitled to one vote for
each outstanding share owned on every matter properly submitted to the
stockholders for their vote. Class B common stock has no voting rights except as
required by law. After satisfaction of the dividend rights of holders of
preferred stock, holders of Class A common stock and Class B common stock are
entitled to any dividend declared by the board of directors out of funds legally
available for this purpose. After the payment of liquidation preferences to
holders of any outstanding preferred stock, holders of our Class A common stock
and Class B common stock are entitled to receive, on a pro rata basis, all our
remaining assets available for distribution to the stockholders in the event of
our liquidation, dissolution, or winding up. Holders of our Class A common stock
and Class B common stock do not have any preemptive rights. The rights,
preferences and privileges of holders of our Class A common stock and Class B
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
PREFERRED STOCK
Our certificate of incorporation allows the board of directors to issue,
without stockholder approval, one or more series of preferred stock having such
rights, including voting rights, dividend rights, redemption rights, and such
preferences, including liquidation preferences, as our board of directors may
determine.
Our issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to the holders of our Class A common stock or
Class B common stock or could adversely affect the rights and powers, including
voting rights, of the holders of our Class A common stock or Class B common
stock. The issuance of preferred stock could have a negative effect on the
market price of our common stock.
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<PAGE> 67
REGISTRATION RIGHTS
We have entered into a fourth amended and restated investors' rights
agreement with most of our shareholders and an employee stockholders agreement
with our employee stockholders. Under these agreements, on the earlier of August
1, 2003 or this offering, holders of substantially all of our common stock can
require us to register the sale of their shares up to four times, or include
their shares in other registrations, subject to customary conditions under the
Securities Act. Subject to limitations and the lock-up agreements with the
underwriters, we must register the sale of these shares if at any time after
this offering, the holders of 25% or more of these shares request registration.
Subject to limitations, these holders may require us to file an unlimited number
of registration statements on Form S-3 when we are eligible to use Form S-3,
generally one year after this offering. The other provisions of the investors'
rights agreement and employee stockholders agreement terminate when we complete
this offering.
LIMITATION OF LIABILITY; INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation limits our directors' liability for breach of fiduciary duty,
except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
- for any transaction from which the director derives an improper personal
benefit.
In the event the Delaware law is amended to allow more extensive
limitations on directors personal liability, our certificate of incorporation
provides that we will exculpate our directors to the fullest extent permitted by
law. Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, as amended.
Under our certificate of incorporation and bylaws, we have the power to
purchase and maintain insurance on behalf of any director, officer, employee or
agent, or anyone serving, at our request, as a director, officer, employee or
agent of another entity against any liability as a result of serving in such
capacities, and related expenses, whether or not we would have the power to
indemnify the person against the claim under our certificate of incorporation.
POSSIBLE ANTI-TAKEOVER EFFECTS
Classified board. Our bylaws provide for a classified board of directors.
One-third of the directors will be elected at each annual meeting of
stockholders to serve for three-year terms. Because the stockholders never elect
a majority of the board members at one time, the classified board could delay or
prevent the change in control or make removal of our management more difficult.
Preferred stock issuances. Our certificate of incorporation allows our
board to issue, without stockholder approval, preferred stock with terms set by
the board. The preferred stock could be issued quickly with terms that delay or
prevent the change in control or make removal of our management more difficult.
Also, the issuance of preferred stock may cause the market price of our common
stock to decrease. See "Description of Capital Stock" for more information.
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<PAGE> 68
Special stockholders' meetings. Our bylaws provide that special meetings of
stockholders, unless otherwise prescribed by statute, may be called only:
- by the board of directors or by our chairman; or
- by the holders of at least 30% of our securities outstanding and entitled
to vote generally in the election of directors.
Upon the consummation of this offering, special meetings of the stockholders may
only be called by a majority vote of the board of directors.
Section 203 of Delaware law. We are subject to the provisions of Section
203 of the Delaware General Corporation Law which generally prohibits publicly
held Delaware corporations 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. A "business
combination" includes mergers, asset sales and other similar transactions
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of a corporation's
voting stock.
These provisions and the provisions of our certificate of incorporation and
bylaws described above could have the effect of delaying, deferring or
preventing a proxy contest or an acquisition of control of our company by a
holder of a substantial block of our stock, or the removal of the incumbent
board of directors. Such provisions could also have the effect of discouraging
an outsider from making a tender offer or otherwise attempting to obtain control
of us, even though such an attempt might be beneficial to us and our
stockholders. The existence of these provisions may reduce the price that
certain investors might be willing to pay in the future for shares of our common
stock.
TRANSFER AGENT AND REGISTRAR
serves as the transfer agent and registrar for our
common stock.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. INVESTORS
The following summary sets forth the U.S. federal tax consequences that are
anticipated to be material in the acquisition, ownership, and disposition of our
common stock by a holder that, for U.S. federal income tax purposes, is not a
"United States person" (as defined below) (a "Non-U.S. Holder"). This summary
does not address every aspect of U.S. federal income taxation that may be
relevant to a particular Non-U.S. Holder under special circumstances or who is
subject to special treatment under applicable law (e.g., financial institutions,
insurance companies, broker-dealers, and tax-exempt organizations), and does not
address any tax consequences arising under the laws of any state, local, or
foreign jurisdiction. This summary is based upon the U.S. federal tax law now in
effect, which is subject to change, perhaps with retroactive effect. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THEIR PARTICULAR TAX
CONSEQUENCES OF ACQUIRING, OWNING, AND DISPOSING OF OUR COMMON STOCK.
For purposes of this summary, a "United States person" means:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or organized under
the laws of the United States or any State or political subdivision
thereof;
- an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
- a trust (A) the administration of which is subject to the primary
supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial
decisions of the trust, or (B) that was in existence on August 20, 1996,
was treated as a United States person on that date, and elected to
continue to be so treated.
DIVIDENDS
Dividends received by a Non-U.S. Holder with respect to our common stock
will generally be subject to withholding of U.S. federal income tax at the rate
of 30%. If the distribution received by a Non-U.S. Holder with respect to our
common stock is effectively connected with the conduct of a trade or business in
the United States by the Non-U.S. Holder, the dividend will not be subject to
withholding but instead will be subject to U.S. federal income tax imposed on
net income on the same basis that applies to U.S. persons generally. In
addition, a corporate Non-U.S. Holder receiving effectively connected dividends
may be subject to a branch profits tax of 30% on the corporation's effectively
connected earnings and profits, subject to certain adjustments.
Non-U.S. Holders should consult any applicable income tax treaties that may
provide for a reduction of or exemption from U.S. withholding tax or, in the
case of a corporate Non-U.S. Holder, the branch profits tax. A Non-U.S. Holder
may be required to satisfy certain certification requirements in order to claim
such treaty benefits.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax on gain recognized on a sale or other disposition of our common
stock, unless the gain is:
- effectively connected with the conduct of a trade or business in the
United States by the Non-U.S. Holder, or
- in the case of Non-U.S. Holder who is a nonresident alien individual and
holds our common stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the
disposition, and certain other requirements are met.
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<PAGE> 70
Gain that is effectively connected with the conduct of trade or business in
the United States by the Non-U.S. Holder will be subject to U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax). Non-U.S. Holders should consult any
applicable income tax treaties that may provide for different rules.
UNITED STATES FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in our common stock at the time of
death will be required to include the value thereof in his gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty applies.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the United States Internal Revenue
Service and to each Non-U.S. Holder the amount of dividends paid to such holder,
and the tax withheld on such dividends, regardless of whether any tax has been
actually withheld. This information may also be made available to the tax
authorities of a country in which the Non-U.S. Holder resides.
Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax will generally not apply to
dividends paid on our common stock to a Non-U.S. Holder at an address outside
the United States. Payments by a United States office of a broker of the
proceeds of a sale of our common stock are subject to both backup withholding at
a rate of 31% and information reporting unless the holder certifies as to its
Non-U.S. Holder status under penalties of perjury or otherwise establishes an
exemption.
Payments of the proceeds from the disposition of our common stock by
foreign offices of United States brokers, or foreign brokers with certain types
of relationships to the United States, will not be subject to backup
withholding, but will be subject to information reporting, unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of tax, a refund may
be obtained, provided that certain required information is furnished to the
Internal Revenue Service.
The United States Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, such regulations do not significantly alter the substantive withholding
and information reporting requirements but unify current certification
procedures and forms and clarify reliance standards. The final regulations are
anticipated to become effective for payments made after December 31, 2000,
subject to certain transition rules.
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<PAGE> 71
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation and DLJdirect Inc., have
severally and not jointly agreed to purchase from us the number of shares of
common stock shown opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
DLJdirect Inc...............................................
-------
Total.............................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in the offering are subject to approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
The underwriters propose to initially offer some of our shares directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the representatives may change the public offering price
and such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with the offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY FORMUS
COMMUNICATIONS, INC.
----------------------
FULL
NO EXERCISE EXERCISE
----------- --------
<S> <C> <C>
Per share................................................... $ $
Total............................................. $ $
</TABLE>
We will pay the offering expenses, estimated to be $1.0 million.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares at
the initial public offering price less the underwriting fees. The underwriters
may exercise such option solely to cover over-allotments, if any, made in
connection with the offering. To the extent that the underwriters exercise their
option, each underwriter will become obligated, subject to certain conditions,
to purchase a number of additional shares approximately proportionate to that
underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act or to contribute to
payments that the underwriters may be required to make in respect of any of
those liabilities.
We, our executive officers and directors, and certain of our stockholders
have agreed that, for a period of 180 days from the date of this prospectus,
neither we nor they will, without prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
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<PAGE> 72
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into our
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. Either of the foregoing
transaction restrictions will apply regardless of whether any of these
transactions is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise. The lock-up agreements by persons other than
us cover an aggregate of shares, and an additional shares
issuable upon exercise of outstanding options and warrants.
Prior to the offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock has been determined by negotiation between us and the representatives of
the underwriters. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which we compete; our past and present operations; our historical results of
operations; our prospects for future earnings; the recent market prices of
securities of generally comparable companies and the general condition of the
securities market at the time of the offering.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares included in the offering,
to be sold to certain of our directors, officers, employees and other
individuals associated with us and related persons. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares that are not
confirmed for purchase within one day of the consummation of the offering will
be offered by the underwriters to the general public on the same terms as the
other shares offered hereby. An electronic prospectus is being made available on
web sites maintained by DLJdirect. Other than the prospectus in electronic
format, any information on those web sites relating to this offering is not part
of the prospectus and has not been approved or endorsed by us or any underwriter
and should not be relied upon by prospective investors.
Application has been made to list the common stock on the Nasdaq National
Market under the symbol "FMUS." In order to meet the requirements for listing
the common stock on the Nasdaq National Market, the underwriters have undertaken
to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of the
common stock and the distribution of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any shares of common stock
included in the offering in any jurisdiction where that would not be permitted
or legal.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot the offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of our common stock in the open market to cover such syndicate short
position or to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of our common stock above independent
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<PAGE> 73
market levels. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members if Donaldson, Lufkin & Jenrette Securities
Corporation repurchases previously distributed common stock in syndicate
covering transactions, in stabilizing transactions or otherwise if Donaldson,
Lufkin & Jenrette Securities Corporation receives a report that indicates that
the clients of such syndicate members have "flipped" the common stock. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock issued and outstanding, or shares if the underwriters exercise
their over-allotment option in full. We will have shares of common
stock issuable on exercise of outstanding options, and shares of
common stock issuable upon exercise of outstanding warrants. All of the shares
we sell in this offering will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by our
"affiliates," as that term is defined in Rule 144, may generally only be sold in
compliance with the limitations of Rule 144 described below.
Of the remaining shares of common stock outstanding after this offering,
shares also will be freely tradeable without restriction in the public
market, and shares may be sold publicly only if registered under the
Securities Act or sold in accordance with an exemption from the Securities Act,
such as Rule 144.
Prior to this offering, there has been no public market for our common
stock. We are unable to estimate the number of shares that may be sold in the
future by our existing stockholders or the effect, if any, that sales of shares
by such stockholders, or the availability of the shares for sale, will have on
the market price of the common stock prevailing from time to time. Sales of
substantial amounts of our common stock in the public market could adversely
affect prevailing market prices.
For purposes of Rule 144, an "affiliate" of an issuer is a person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, such issuer. In general, under
Rule 144, a stockholder including an "affiliate," who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period,
a number of "restricted" shares that does not exceed the greater of:
- one percent of the then outstanding shares of common stock, or
approximately shares expected to be outstanding
immediately after this offering; or
- the average weekly trading volume during the four calendar weeks
preceding the sale.
Sales under Rule 144 are subject to manner of sale limitations, notice
requirements and the availability of current public information about the
issuer. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above. We estimate that outstanding shares fall in this
category. Of the shares outstanding before this offering, affiliates
beneficially own over % of such shares. See "Risk Factors -- Future sales
of our Class A common stock in the public market could depress our stock price."
Any employee, officer, director, advisor or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract is entitled to
rely on the resale provisions of Rule 701, which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
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 we
become subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934.
68
<PAGE> 74
As of June 30, 1999, there were outstanding stock options to purchase an
aggregate of shares of common stock, of which are presently
exercisable or exercisable without 60 days. These outstanding stock options are
held by our executive officers or employees. Following the offering, we intend
to file a registration statement on Form S-8 covering the shares of
common stock issuable under our stock option plan, including shares subject to
outstanding options, thus permitting the resale of such shares in the public
market without restriction under the Securities Act, other than restrictions
applicable to affiliates.
As of September 30, 1999, there was an outstanding warrant to purchase an
aggregate of shares of common stock.
We have granted registration rights to substantially all of our
stockholders. See "Description of Our Capital Stock -- Registration Rights."
We and our officers, directors, certain of our other stockholders have
entered into lock-up agreements relating to the transfer of shares of our
capital stock for a period of 180 days after this date of the prospectus. See
"Underwriting."
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into or exercisable
or exchange for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Of the outstanding shares
and shares issuable upon exercise of outstanding options and warrants not
subject to lock-up agreement, only of such shares will be freely
tradable immediately following the offering under Rule 144 as discussed above.
Under Rule 144, the remaining shares will be available for resale
subject to the limitations of Rule 144 beginning 90 days following the offering.
Donaldson, Lufkin & Jenrette Securities Corporation has advised us that
they have no intention of waiving any of the agreement described in the
immediately preceding paragraph. Donaldson, Lufkin & Jenrette Securities
Corporation has further advised us that in determining whether to grant any
requested waiver, they would consider the market prices and trading volumes of
our common stock at that time, market conditions generally, the size and timing
of the requested waiver and any special circumstances of the requesting person.
LEGAL MATTERS
Holme Roberts & Owen LLP, Denver, Colorado, will pass upon the validity of
the shares of common stock on our behalf. Skadden, Arps, Slate, Meagher & Flom
LLP, Los Angeles, California, will pass upon certain legal matters for the
underwriters.
EXPERTS
The consolidated financial statements of Formus Communications, Inc. and
subsidiaries as of December 31, 1997 and 1998, and for the period from October
22, 1996 (inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 included in this prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report. In their report, that firm states
that with respect to Callino GmbH ("Callino") (formerly ARCIS MEDIACOM
Management GmbH), its opinion as of and for the year ended December 31, 1998 is
based on the reports of other independent public accountants, Haarmann,
Hemmelrath & Partner GMBH. The financial statements referred to above have been
included herein in reliance upon the authority of those firms as experts in
giving said reports.
The consolidated financial statements of Callino GmbH and subsidiaries as
of June 30, 1999, December 31, 1998, and 1997 and for the period from inception
on July 7, 1997 to December 31, 1997, for the year ended December 31, 1998, and
for the six months ended June 30, 1999 included in this
69
<PAGE> 75
prospectus and elsewhere in the registration statement, have been audited by
Haarmann, Hemmelrath & Partner GMBH, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The consolidated financial statements of VeloCom Inc. as of December 31,
1998 and for the period from inception on April 29, 1998 to December 31, 1998,
included in this prospectus and elsewhere in the Registration Statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the SEC.
For further information about us and the shares offered by this prospectus,
you should refer to the registration statement, including the exhibits and
schedules filed with the registration statement. You may obtain copies of the
registration statement, of which this prospectus is a part, together with such
exhibits and schedules, upon payment of the fee prescribed by the SEC, or you
may examine these documents without charge at the offices of the SEC.
After the offering is completed, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will be required to file
annual and quarterly reports, proxy statements and other information with the
SEC. You can inspect and copy reports and other information filed by us with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0300. The SEC also maintains an
Internet site at http://www.sec.gov that contains reports, proxy and information
statements regarding issuers, including us, that file electronically with the
SEC.
70
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
FORMUS COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, and June 30, 1999 (unaudited).................... F-3
Consolidated Statements of Operations for the period from
October 22, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998 and for
the six months ended June 30, 1998 (unaudited) and 1999
(unaudited) and for the periods from October 22, 1996
(inception) to December 31, 1998 and June 30, 1999
(unaudited)............................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from October 22, 1996 (inception) to
December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the six months ended June 30,
1999 (unaudited) and for the periods from October 22,
1996 (inception) to December 31, 1998 and June 30, 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the period from
October 22, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998 and for
the six months ended June 30, 1998 (unaudited) and 1999
(unaudited) and for the periods from October 22, 1996
(inception) to December 31, 1998 and June 30, 1999
(unaudited)............................................ F-6
Notes to Consolidated Financial Statements................ F-7
CALLINO GMBH (FORMERLY KNOWN AS ARCIS MEDIACOM MANAGEMENT
GMBH)
Report of Independent Accountants......................... F-23
Balance Sheets as of December 31, 1997, December 31, 1998,
and June 30, 1999...................................... F-24
Statements of Income and Accumulated Deficit for the
period July 7 -- December 31, 1997, period January
1 -- June 30, 1998, period January 1 -- December 31,
1998................................................... F-25
Statements of Cash Flows for the period July 7 -- December
31, 1997, period January 1 -- June 30, 1998, period
January 1 -- December 31, 1998......................... F-26
Statements of Stockholders' Equity for the period July
7 -- December 31, 1997, period January 1 -- June 30,
1998, period January 1 -- December 31, 1998............ F-27
Notes to The Financial Statements......................... F-28
VELOCOM INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-41
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999 (unaudited).............................. F-42
Consolidated Statements of Operations for the period from
April 29, 1998 (inception) to December 31, 1998 and for
the six months ended June 30, 1999 (unaudited) and for
the period from April 29, 1998 (inception) to June 30,
1999 (unaudited)....................................... F-43
Consolidated Statements of Stockholders' Equity for the
period from April 29, 1998 (inception) to December 31,
1998 and for the six months ended June 30, 1999
(unaudited) and for the period from April 29, 1998
(inception) to June 30, 1999 (unaudited)............... F-44
Consolidated Statements of Cash Flows for the period from
April 29, 1998 (inception) to December 31, 1998 and for
the six months ended June 30, 1999 (unaudited) and for
the period from April 29, 1998 (inception) to June 30,
1999 (unaudited)....................................... F-45
Notes to Consolidated Financial Statements................ F-46
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Formus Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Formus
Communications, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
period from inception (October 22, 1996) through December 31, 1996 and for the
years ended December 31, 1997 and 1998. 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. With respect to the
year ended December 31, 1998, we did not audit the financial statements of
Callino GmbH ("Callino") (formerly ARCIS MEDIACOM Management GmbH) which
statements reflect total assets of 37,825,047 Deutsche Marks ("DM") at December
31, 1998 and a net loss of 2,005,608 DM for the period from September 1, 1998
(acquisition date) through December 31, 1998, before adjustments for the effects
of purchase accounting. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Callino in the accompanying consolidated financial
statements and related footnotes, is based solely on the report of the other
auditors.
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, based upon our audits and the report of other auditors, the
accompanying financial statements present fairly, in all material respects, the
financial position of Formus Communications, Inc. and subsidiaries as of
December 31, 1997 and 1998, and the results of their operations and their cash
flows for the period from inception (October 22, 1996) through December 31, 1996
and for the years ended December 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
July 8, 1999.
F-2
<PAGE> 78
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- JUNE 30,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $21,528 $ 22,887 $ 52,389
Marketable equity securities.............................. -- -- 7,842
Stock subscription receivable............................. -- 2,228 --
Other receivables......................................... 103 508 1,562
Prepaid expenses and other current assets................. 270 176 441
------- -------- --------
Total current assets............................... 21,901 25,799 62,234
Telecommunications licenses, net of accumulated amortization
of $94, $752 and $1,065, respectively..................... 2,422 11,424 11,880
Property and equipment, net of accumulated depreciation of
$34, $413 and $909, respectively.......................... 491 4,391 6,986
Investment in WNP Communications, Inc. ..................... -- 11,756 --
Investment in affiliates.................................... -- -- 3,024
Other assets................................................ 20 24 1,074
------- -------- --------
Total assets....................................... $24,834 $ 53,394 $ 85,198
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 310 $ 2,053 $ 2,415
Accrued liabilities....................................... 43 2,101 4,520
Purchase price payable.................................... 899 -- --
------- -------- --------
Total current liabilities.......................... 1,252 4,154 6,935
Minority interests in subsidiaries.......................... 230 10,564 6,403
Preferred stock, mandatorily redeemable, $.001 par value:
Series A, 23,280,000 shares authorized; and 8,688,000,
18,576,000 and 18,576,000 shares issued and outstanding,
respectively............................................ 21,111 45,381 45,490
Series B, 4,704,000 shares authorized; and 2,352,000,
4,704,000 and 4,704,000 shares issued and outstanding,
respectively............................................ 5,719 11,489 11,516
Series C, 7,142,858 shares authorized; zero, zero and
6,424,528 shares issued and outstanding, respectively... -- -- 22,486
Series D, 718,330 shares authorized; zero, zero and
718,330 shares issued and outstanding, respectively..... -- -- 2,514
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Preferred stock, undesignated, 5,000,000 shares
authorized; zero shares issued and outstanding.......... -- -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 2,743,180, 2,743,180 and 2,866,513 shares
issued and outstanding, respectively.................... 3 3 3
Class B common stock, $.001 par value; 6,000,000 shares
authorized; 200,000, 200,000 and 200,000 shares issued
and outstanding, respectively........................... -- -- --
Additional paid-in capital................................ 2,940 3,053 3,362
Other cumulative comprehensive income (loss).............. (185) (362) (1,271)
Deficit accumulated during the development stage.......... (6,236) (20,888) (12,240)
------- -------- --------
Total stockholders' equity (deficit)............... (3,478) (18,194) (10,146)
------- -------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $24,834 $ 53,394 $ 85,198
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 79
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM FOR THE SIX
OCTOBER 22, 1996 FOR THE YEARS ENDED OCTOBER 22, 1996 MONTHS ENDED
(INCEPTION) TO DECEMBER 31, (INCEPTION) TO JUNE 30,
DECEMBER 31, ----------------------- DECEMBER 31, ------------------------
1996 1997 1998 1998 1998 1999
---------------- ---------- ---------- ---------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Costs of services................ $ -- $ -- $ 1,168 $ 1,168 $ 14 $ 2,260
Provision on impaired assets..... -- -- -- -- -- 1,214
Selling, general and
administrative................. 96 6,266 14,461 20,823 5,535 17,471
Depreciation and amortization.... -- 128 1,070 1,198 313 1,045
-------- ---------- ---------- ---------- ---------- -----------
Total costs and expenses... 96 6,394 16,699 23,189 5,862 21,990
-------- ---------- ---------- ---------- ---------- -----------
Loss from operations....... (96) (6,394) (16,699) (23,189) (5,862) (21,990)
Other income (expense):
Interest expense................. -- -- (17) (17) -- (8)
Interest income.................. 7 328 751 1,086 220 665
Gain on sale of investments in
WNP Communications, Inc. and
NEXTLINK ...................... -- -- -- -- -- 24,527
Other income (expense), net...... -- (101) 303 202 150 (339)
-------- ---------- ---------- ---------- ---------- -----------
Net (loss) income before
other items.............. (89) (6,167) (15,662) (21,918) (5,492) 2,855
-------- ---------- ---------- ---------- ---------- -----------
Minority interests in
subsidiaries..................... -- 20 1,192 1,212 231 6,213
Share in results of affiliated
companies, net................... -- -- -- -- -- (283)
-------- ---------- ---------- ---------- ---------- -----------
Net (loss) income.......... (89) (6,147) (14,470) (20,706) (5,261) 8,785
-------- ---------- ---------- ---------- ---------- -----------
Accretion of mandatorily redeemable
preferred stock.................. -- -- (182) (182) (65) (137)
-------- ---------- ---------- ---------- ---------- -----------
Net (loss) income
attributable to common
stock.................... $ (89) $ (6,147) $ (14,652) $ (20,888) $ (5,326) $ 8,648
======== ========== ========== ========== ========== ===========
Net (loss) income per common share:
Basic net (loss) income.......... $ (.13) $ (2.66) $ (4.98) $ (8.50) $ (1.81) $ 2.90
======== ========== ========== ========== ========== ===========
Diluted net (loss) income........ $ (.13) $ (2.66) $ (4.98) $ (8.50) $ (1.81) $ .27
======== ========== ========== ========== ========== ===========
Weighted-average number of common
shares outstanding:
Basic............................ 685,070 2,314,548 2,943,180 2,456,568 2,943,180 2,984,745
======== ========== ========== ========== ========== ===========
Diluted.......................... 685,070 2,314,548 2,943,180 2,456,568 2,943,180 33,116,245
======== ========== ========== ========== ========== ===========
<CAPTION>
CUMULATIVE FROM
OCTOBER 22, 1996
(INCEPTION) TO
JUNE 30,
1999
----------------
(UNAUDITED)
<S> <C>
Costs and expenses:
Costs of services................ $ 3,428
Provision on impaired assets..... 1,214
Selling, general and
administrative................. 38,294
Depreciation and amortization.... 2,243
----------
Total costs and expenses... 45,179
----------
Loss from operations....... (45,179)
Other income (expense):
Interest expense................. (25)
Interest income.................. 1,751
Gain on sale of investments in
WNP Communications, Inc. and
NEXTLINK ...................... 24,527
Other income (expense), net...... (137)
----------
Net (loss) income before
other items.............. (19,063)
----------
Minority interests in
subsidiaries..................... 7,425
Share in results of affiliated
companies, net................... (283)
----------
Net (loss) income.......... (11,921)
----------
Accretion of mandatorily redeemable
preferred stock.................. (319)
----------
Net (loss) income
attributable to common
stock.................... $ (12,240)
==========
Net (loss) income per common share:
Basic net (loss) income.......... $ (4.78)
==========
Diluted net (loss) income........ $ (4.78)
==========
Weighted-average number of common
shares outstanding:
Basic............................ 2,561,330
==========
Diluted.......................... 2,561,330
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 80
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(STATED IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER DEFICIT
CLASS B CUMULATIVE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL COMPREHENSIVE DURING THE
------------------ ---------------- PAID-IN INCOME (LOSS) DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL (1) STAGE
--------- ------ ------- ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances accumulated from October 22,
1996 (inception) through December 31,
1996................................... 1,235,000 $1 -- $-- $1,234 $ -- $ (89)
Issuance of common stock at April 7,
1997................................... 947,000 1 -- -- 946 -- --
Issuance of Class B Common Stock at
April 7, 1997.......................... -- -- 200,000 -- 200 -- --
Issuance of Common Stock at August 1,
1997................................... 527,680 1 -- -- 527 -- --
Issuance of Common Stock at August 12,
1997................................... 33,500 -- -- -- 33 -- --
Change in cumulative translation
adjustments............................ -- -- -- -- -- (185) --
Net loss................................ -- -- -- -- -- -- (6,147)
--------- -- ------- --- ------ ------- --------
Balances, December 31, 1997............. 2,743,180 3 200,000 -- 2,940 (185) (6,236)
Issuance of stock options for services
to non-employees....................... -- -- -- -- 113 -- --
Accretion of mandatorily redeemable
preferred stock........................ -- -- -- -- -- -- (182)
Change in cumulative translation
adjustments............................ -- -- -- -- -- (177) --
Net loss................................ -- -- -- -- -- -- (14,470)
--------- -- ------- --- ------ ------- --------
Balances, December 31, 1998............. 2,743,180 3 200,000 -- 3,053 (362) (20,888)
Issuance of Common Stock in connection
with Company's stock option plan
(unaudited)............................ 123,333 -- -- -- 309 -- --
Accretion of mandatorily redeemable
preferred stock (unaudited)............ -- -- -- -- -- -- (137)
Change in cumulative translation
adjustments (unaudited)................ -- -- -- -- -- (998) --
Change in unrealized gain on investment
(unaudited)............................ -- -- -- -- -- 89 --
Net income (unaudited).................. -- -- -- -- -- -- 8,785
--------- -- ------- --- ------ ------- --------
Balances, June 30, 1999 (unaudited)..... 2,866,513 $3 200,000 $-- $3,362 $(1,271) $(12,240)
========= == ======= === ====== ======= ========
<CAPTION>
TOTAL
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- --------
<S> <C> <C>
Balances accumulated from October 22,
1996 (inception) through December 31,
1996................................... $ -- $ 1,146
Issuance of common stock at April 7,
1997................................... -- 947
Issuance of Class B Common Stock at
April 7, 1997.......................... -- 200
Issuance of Common Stock at August 1,
1997................................... -- 528
Issuance of Common Stock at August 12,
1997................................... -- 33
Change in cumulative translation
adjustments............................ (185) (185)
Net loss................................ (6,147) (6,147)
-------- --------
Balances, December 31, 1997............. (6,332) (3,478)
========
Issuance of stock options for services
to non-employees....................... -- 113
Accretion of mandatorily redeemable
preferred stock........................ -- (182)
Change in cumulative translation
adjustments............................ (177) (177)
Net loss................................ (14,470) (14,470)
-------- --------
Balances, December 31, 1998............. (14,647) (18,194)
========
Issuance of Common Stock in connection
with Company's stock option plan
(unaudited)............................ -- 309
Accretion of mandatorily redeemable
preferred stock (unaudited)............ -- (137)
Change in cumulative translation
adjustments (unaudited)................ (998) (998)
Change in unrealized gain on investment
(unaudited)............................ 89 89
Net income (unaudited).................. 8,785 8,785
-------- --------
Balances, June 30, 1999 (unaudited)..... $ 7,876 $(10,146)
======== ========
</TABLE>
- ------------------------------
(1) Other Cumulative Comprehensive Income (Loss) at the end of each reporting
period consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
------------- AS OF JUNE 30,
1997 1998 1999
----- ----- --------------
(UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments.................... $(185) $(362) $(1,360)
Unrealized gain on investment............................... -- -- 89
----- ----- -------
Total other cumulative comprehensive income
(loss)............................................ $(185) $(362) $(1,271)
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 81
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FROM FOR THE YEARS CUMULATIVE FROM
OCTOBER 22, 1996 ENDED OCTOBER 22, 1996
(INCEPTION) TO DECEMBER 31, (INCEPTION) TO
DECEMBER 31, ------------------ DECEMBER 31,
1996 1997 1998 1998
---------------- ------- -------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $ (89) $(6,147) $(14,470) $(20,706)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................ -- 128 1,070 1,198
Provision on impaired assets......................... -- -- -- --
Minority interest in net loss........................ -- (20) (1,192) (1,212)
Capital contribution made on behalf of minority
interest........................................... -- -- 185 185
Issuance of stock options to non-employees........... -- -- 113 113
Gain on sale of investments in WNP Communications,
Inc. and NEXTLINK.................................. -- -- -- --
Share in results of affiliated companies............. -- -- -- --
Other................................................ -- -- 9 9
Changes in assets and liabilities, net of effects of
acquisitions --
Prepaid expenses and other assets.................. -- (293) 967 674
Accounts payable and accrued liabilities........... 77 235 55 367
Other assets....................................... -- (20) (4) (24)
------ ------- -------- --------
Net cash from operating activities............... (12) (6,117) (13,267) (19,396)
------ ------- -------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired....... -- (1,390) 471 (919)
Cash paid for investment in affiliate.................. -- -- -- --
Purchase of spectrum licenses.......................... -- (478) (4,948) (5,426)
Purchase of investment in WNP Communications, Inc. .... -- -- (11,756) (11,756)
Acquisition of property and equipment.................. (46) (267) (3,829) (4,142)
Proceeds from sale of investments in WNP
Communications, Inc. and NEXTLINK.................... -- -- -- --
Proceeds from sale of property and equipment........... -- -- 7 7
------ ------- -------- --------
Net cash from investing activities............... (46) (2,135) (20,055) (22,236)
------ ------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable
preferred stock, net of issuance costs............... -- 26,830 29,858 56,688
Payment on purchase money note payable................. -- -- (899) (899)
Proceeds from issuance of common stock................. 1,235 1,708 -- 2,943
Minority interest contributions to subsidiaries,
including payments on stock subscription
receivables.......................................... -- 250 5,954 6,204
------ ------- -------- --------
Net cash from financing activities............... 1,235 28,788 34,913 64,936
------ ------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................ -- (185) (232) (417)
------ ------- -------- --------
Net increase in cash and cash equivalents............... 1,177 20,351 1,359 22,887
Cash and cash equivalents, beginning of period.......... -- 1,177 21,528 --
------ ------- -------- --------
Cash and cash equivalents, end of period................ $1,177 $21,528 $ 22,887 $ 22,887
====== ======= ======== ========
Non-cash financing activities:
Purchase money note payable............................ $ -- $ 899 $ -- $ --
====== ======= ======== ========
Contribution from minority interest in the form of
subscription receivable.............................. $ -- $ -- $ 2,228 $ 2,228
====== ======= ======== ========
Supplemental cashflow disclosure:
Cash paid for interest................................. $ -- $ -- $ 17 $ 17
====== ======= ======== ========
Cash received for interest............................. $ 7 $ 328 $ 739 $ 1,074
====== ======= ======== ========
<CAPTION>
FOR THE SIX MONTHS CUMULATIVE FROM
ENDED JUNE 30, OCTOBER 22, 1996
------------------------- (INCEPTION) TO
1998 1999 JUNE 30, 1999
----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $ (5,261) $ 8,785 $(11,921)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................ 313 1,045 2,243
Provision on impaired assets......................... -- 1,214 1,214
Minority interest in net loss........................ (231) (6,213) (7,425)
Capital contribution made on behalf of minority
interest........................................... -- 185 370
Issuance of stock options to non-employees........... -- -- 113
Gain on sale of investments in WNP Communications,
Inc. and NEXTLINK.................................. -- (24,527) (24,527)
Share in results of affiliated companies............. -- 283 283
Other................................................ -- -- 9
Changes in assets and liabilities, net of effects of
acquisitions --
Prepaid expenses and other assets.................. (165) (895) (221)
Accounts payable and accrued liabilities........... 148 3,333 3,700
Other assets....................................... -- (1,053) (1,077)
-------- -------- --------
Net cash from operating activities............... (5,196) (17,843) (37,239)
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired....... -- (343) (1,262)
Cash paid for investment in affiliate.................. -- (3,306) (3,306)
Purchase of spectrum licenses.......................... (1,567) (3,626) (9,052)
Purchase of investment in WNP Communications, Inc. .... (6,205) -- (11,756)
Acquisition of property and equipment.................. (1,584) (3,347) (7,489)
Proceeds from sale of investments in WNP
Communications, Inc. and NEXTLINK.................... -- 28,530 28,530
Proceeds from sale of property and equipment........... -- -- 7
-------- -------- --------
Net cash from investing activities............... (9,356) 17,908 (4,328)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable
preferred stock, net of issuance costs............... 250 25,000 81,688
Payment on purchase money note payable................. (899) -- (899)
Proceeds from issuance of common stock................. -- 308 3,251
Minority interest contributions to subsidiaries,
including payments on stock subscription
receivables.......................................... 486 4,884 11,088
-------- -------- --------
Net cash from financing activities............... (163) 30,192 95,128
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................ (247) (755) (1,172)
-------- -------- --------
Net increase in cash and cash equivalents............... (14,962) 29,502 52,389
Cash and cash equivalents, beginning of period.......... 21,528 22,887 --
-------- -------- --------
Cash and cash equivalents, end of period................ $ 6,566 $ 52,389 $ 52,389
======== ======== ========
Non-cash financing activities:
Purchase money note payable............................ $ -- $ -- $ --
======== ======== ========
Contribution from minority interest in the form of
subscription receivable.............................. $ -- $ -- $ --
======== ======== ========
Supplemental cashflow disclosure:
Cash paid for interest................................. $ -- $ 8 $ 25
======== ======== ========
Cash received for interest............................. $ 220 $ 678 $ 1,752
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 82
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(ALL REFERENCES TO JUNE 30, 1999 AMOUNTS ARE UNAUDITED)
(1) ORGANIZATION AND NATURE OF OPERATIONS
Formus Communications, Inc. ("Formus" or the "Company") was formed to
acquire broadband frequency and operating licenses in emerging and established
markets, principally in Europe. The objective of the Company is to become a
leading service provider of broadband data services using fixed wireless
technologies. The Company is headquartered in the United States with operations
principally in Germany and Poland. As our principal revenue generating
operations had not yet commenced as of June 30, 1999, the Company's financial
statements are presented on the basis of a company in the developmental stage.
The effect on the Company's financial statements is to report cumulative results
of operations and cash flows since inception (October 22, 1996).
As more fully discussed in Note 3, during 1998, the Company acquired an
85.4% interest in Formus Communications-Germany B.V. ("Germany B.V.") which, in
turn, acquired a 55.1% interest in Callino GmbH ("Callino") (formerly "ARCIS
MEDIACOM Management GmbH") resulting in an effective 47.1% interest held in
Callino by the Company. The Company controls Germany B.V. due to its majority
voting interest and Germany B.V. controls Callino through its majority voting
interest and rights granted to Germany B.V. by a shareholders agreement. The
Company acquired its interest in Callino to obtain telecommunication licenses in
order to pursue telecommunications services in Germany.
On August 12, 1997, the Company co-founded Formus Polska Sp. z o.o.
("Polska") to acquire telecommunications licenses and provide data transmission
and private telecommunications networks for selected cities in Poland. In
November 1997, Polska acquired radio spectrum licenses for the ten largest
cities in Poland. Polska is owned by the Company and Elmedia Sp. z o.o.
("Elmedia"), a company organized under the laws of the Republic of Poland. In
connection with the formation of Polska, the Company received 49% of the voting
capital stock and 85% of the economic interest. The Company has a contractual
right to appoint the majority of Polska's supervisory and management boards and
such boards are currently constituted in accordance with such agreements.
The Company is in the development stage and has generated no revenues to
date. Since commencement of operations (October 22, 1996), the Company has
incurred cumulative net losses totaling approximately $20.7 million through
December 31, 1998. As a result of its development stage activities, the Company
has experienced significant operating losses and negative cash flows from
operations. The Company expects to continue to generate negative cash flows from
operations in each market while it emphasizes development, construction, and
expansion of its business and until the Company establishes a sufficient revenue
generating customer base in that market. The Company also expects to experience
increasing operating losses and negative cash flows from operations as it
expands its operations and enters new markets, even if and after it achieves
positive cash flow from operations in its initial markets.
The Company's ultimate success will be affected by the problems, expenses
and delays encountered in connection with the formation of any new business and
by the competitive environment in which the Company intends to operate. Delays
or failure in receiving required regulatory approvals or the enactment of new
regulations or regulatory requirements may have a material adverse effect upon
the Company. Although management believes that the Company will be able to
successfully mitigate these risks, there is no assurance that the Company will
be able to do so or that the Company will ever operate profitably.
F-7
<PAGE> 83
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Formus and
its majority owned or controlled subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Subsidiaries are consolidated,
as of the acquisition date, if the Company has control of the subsidiary either
through ownership of a majority of the subsidiary's voting stock or through
control of the Board of Directors or management of the subsidiary.
The Company controls the Board of Directors and management of Callino and
has contractual arrangements, which give the Company voting control over 75% of
Callino's outstanding shares of voting stock. Accordingly, the Company has
consolidated the accounts of Callino in its financial statements.
The Company has the contractual right to appoint a majority of both the
supervisory and management boards of Polska and such boards are currently
constituted in accordance with such agreements. Accordingly, the Company
consolidates the accounts of Polska in its financial statements.
In management's opinion, all adjustments (of a normal recurring nature)
have been made which are necessary to present fairly the financial position of
the Company as of June 30, 1999 and the results of operations for the six months
ended June 30, 1998 and 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents. As of December 31, 1998 and
1997, cash equivalents principally consisted of money market funds.
STOCK SUBSCRIPTION RECEIVABLE
Represents a subscription receivable from a minority shareholder of
Callino, which was paid in January 1999.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the economic life of the asset. Repair and
maintenance costs are charged to expense when incurred. The economic lives of
property and equipment at acquisition are as follows:
<TABLE>
<S> <C>
Furniture and office equipment.............................. 2-8 years
Computer equipment.......................................... 3 years
Communications equipment.................................... 5 years
Computer software........................................... 3 years
</TABLE>
F-8
<PAGE> 84
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TELECOMMUNICATIONS LICENSES
Telecommunications licenses are stated at cost and are amortized using the
straight-line method over their economic lives of ten to twenty years based upon
the respective license terms and conditions. The economic lives can vary
significantly between markets. Amortization expense related to
telecommunications licenses was approximately $0, $94, $641 and $735 for the
years ended December 31, 1996, 1997, 1998 and for the period from October 22,
1996 (inception) through December 31, 1998, respectively. Additionally,
amortization expense related to telecommunications licenses was approximately
$187, $533 and $1,268 for the six months ended June 30, 1998, 1999 and for the
period from October 22, 1996 (inception) through June 30, 1999, respectively.
LONG-LIVED ASSETS
The Company continually evaluates long-lived assets, based on fair values
or undiscounted cash flows, whichever is more readily determinable, whenever
significant events or changes in circumstances occur which indicate the carrying
amounts may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts payable and accrued liabilities. The carrying
amounts of financial instruments, other than the short-term investment
approximate fair value due to their short maturities.
The short-term investment is a publicly traded equity security with a
readily determinable fair value. The Company records the investment at the
current market value of the security. Any unrealized holding gains and losses
are reported as other cumulative comprehensive income (loss) as the security is
classified as available-for-sale at June 30, 1999.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
which requires recognition of, deferred tax assets and liabilities for the
expected future income tax consequences of transactions, which have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and income tax basis of assets, liabilities, and loss
carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are then reduced by
a valuation allowance if management believes it more likely than not they will
not be realized.
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
"Basic (loss) income per share" is determined by dividing net (loss) income
available to common stockholders by the weighted-average number of common shares
outstanding during each period. "Diluted net (loss) income per share" includes
the effects of potentially issuable common stock, but only if dilutive. The
Company's stock option plans and convertible securities are excluded from the
Company's diluted (loss) income per share for all periods presented, except for
the six months ended June 30, 1999, because their effect would be anti-dilutive.
FOREIGN OPERATIONS AND FOREIGN EXCHANGE RATE RISK
The functional currency of the Company's foreign subsidiaries is either the
applicable local currency or the U.S. dollar, as determined based on the
operations of each subsidiary. Assets and liabilities of foreign subsidiaries
for which the functional currency is the local currency are translated at
exchange rates
F-9
<PAGE> 85
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in effect at period-end, and the statements of operations are translated at the
average exchange rates during the period. Exchange rate fluctuations on
translating foreign currency financial statements into U.S. dollars that result
in unrealized gains or losses are referred to as translation adjustments.
Cumulative translation adjustments are recorded as a separate component of
stockholders' equity (deficit) and are included in Other Cumulative
Comprehensive Income (Loss).
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions. Foreign currency transaction losses were
approximately $0, $0, $226 and $226 for the years ended December 31, 1996, 1997,
1998 and for the period from October 22, 1996 (inception) through December 31,
1998, respectively. Additionally, foreign currency transaction losses were
approximately $0, $209 and $435 for the six months ended June 30, 1998, 1999 and
for the period from October 22, 1996 (inception) through June 30, 1999,
respectively.
Cash flows from the Company's operations in foreign countries are
translated based on their functional currencies. As a result, amounts related to
assets and liabilities reported in the consolidated statements of cash flows
will not agree to changes in the corresponding balances in the consolidated
balance sheets. The effects of exchange rate changes on cash balances held in
foreign currencies are reported as a separate line below cash flows from
financing activities.
STOCK OPTIONS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan and, accordingly, does not recognize
compensation cost for options granted to employees whose exercise price is equal
to or exceeds the fair value of the underlying stock as of the grant date.
OTHER COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which requires that an
enterprise (i) classify items of other comprehensive income (loss) by their
nature in a financial statement and (ii) display the accumulated balance of
other comprehensive income (loss) separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires that a public
business enterprise report certain financial and descriptive information about
its reportable operating segments. The Company adopted SFAS 131 for the year
ended December 31, 1998.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," which amends SFAS 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company is currently assessing the
F-10
<PAGE> 86
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effect of this new standard but believes it will not have a material impact on
its consolidated results of operations.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 identifies the characteristics of internal-use software and
provides examples to assist in determining when computer software is for
internal use. SOP 98-1 identifies the characteristics of internal-use software
and provides examples to assist in determining when computer software is for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998, for projects in progress and prospectively,
with earlier application encouraged. The Company adopted SOP 98-1 effective
January 1, 1999 with no material effect on its financial statements.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up organization
costs, which must be expensed as incurred. In addition, all deferred start-up
and organization costs existing as of January 1, 1999 must be written off and
accounted for as a cumulative effect of an accounting change. The adoption of
SOP 98-5 did not have a material effect on the Company's financial position or
results of operation as the company's historical accounting policy was to
expense start-up costs as incurred.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(3) ACQUISITIONS AND INVESTMENTS
GERMANY
Effective September 1, 1998, the Company acquired a 85.4% interest in
Germany B.V. which, in turn, acquired, through the purchase of newly issued
shares, a 55.1% interest in Callino resulting in an effective 47.1% interest
held in Callino by the Company. The Company controls and consolidates Germany
B.V. due to its majority voting interest and Germany B.V. controls and
consolidates Callino through its majority voting interest and rights granted to
Germany B.V. by a shareholders agreement.
In connection with this acquisition, the Company acquired certain licenses
allowing for the operation of telecommunications facilities and permitting the
resale of telecommunications services in Germany. The aggregate total
consideration paid for this acquisition (through the acquisition of newly issued
preferred shares) was approximately $12.1 million in cash. The total purchase
price was paid over a five-month period ending January 1999. The acquisition has
been accounted for as a purchase, with the purchase price allocated among the
purchased assets and liabilities at the date of acquisition according to their
relative fair values, as follows.
<TABLE>
<S> <C>
Cash, cash equivalents and stock subscriptions receivable... $ 19,749
Prepaid expenses and other current assets................... 1,263
Property and equipment...................................... 330
Spectrum licenses........................................... 4,462
Current liabilities......................................... (3,109)
Minority interest........................................... (10,595)
--------
Formus investment (cash and stock subscription
receivable)...................................... $ 12,100(1)
========
</TABLE>
F-11
<PAGE> 87
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------------
(1) Approximately $8.7 million in cash was paid on stock subscription
receivables through December 31, 1998 and approximately $3.7 million was
paid on stock subscription receivables in January 1999.
The telecommunication licenses acquired are being amortized on the
straight-line method over their estimated useful lives of ten years.
The results of operations of Callino have been consolidated from the
acquisition date forward. The following unaudited pro forma information presents
certain results of operations data of the Company and Callino on a combined
basis assuming the companies were combined as of the beginning of each fiscal
period presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Loss from operations........................................ $ (7,557) $ (18,463)
========== ==========
Net loss.................................................... $ (7,313) $ (15,881)
========== ==========
Net loss per common share --
Basic and diluted net loss................................ $ (3.16) $ (5.40)
========== ==========
Weighted-average number of common shares outstanding...... 2,314,548 2,943,180
========== ==========
</TABLE>
On March 8, 1999, the Company sold an approximately 12.4% interest in
Germany B.V. to TCB Beteiligungs GmbH, for approximately $1.8 million in cash
realizing an immaterial gain. Following the transaction, the Company's effective
ownership interest in Callino was approximately 40.2%. The Company continues to
consolidate Callino, as this transaction did not affect the Company's majority
voting control over its investment in Callino.
On April 22, 1999, Germany B.V. purchased, for approximately $343 in cash,
an additional approximately 2.5% interest in Callino from certain existing
shareholders. This resulted in the Company's effective ownership interest in
Callino increasing to approximately 42.7%. See Note 12 regarding the Company's
acquisition of the remaining equity interest in Callino in September 1999.
ARGENTINA
On September 3, 1998 Formus S.A., a corporation duly incorporated and
organized under the laws of Argentina, and a wholly-owned subsidiary of the
Company, was granted competitive services licenses in Argentina. No license fees
were paid nor any other consideration for the granting of the licenses. The
services licenses are granted for an unlimited period of time, and grants Formus
S.A. the right to provide data transmission and various value added services.
On November 6, 1998, Formus S.A. was awarded a license for the use of radio
spectrum in Argentina for the purpose of providing the data transmission and
value-added services. No license fees were paid nor any other consideration for
the granting of the license. The radio spectrum license does not have a stated
term. The spectrum license is subject to certain build-out requirements. The
Company anticipates that it will be able to fulfill the stated requirements.
On January 28,1999, the Company purchased a 21% interest in Telelatina
Management Company LLC ("Telelatina"), a Delaware limited liability company, for
approximately $1.6 million in cash. Telelatina was organized to provide certain
technical and administrative services to the telecommunications market in
Argentina. See Note 12 for discussion regarding sale of the Company's Latin
America assets.
F-12
<PAGE> 88
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COLOMBIA
On August 5, 1998, Formus Colombia S.A. ("Formus Colombia"), an
organization duly incorporated under the laws of Colombia and a wholly owned
subsidiary of the Company, obtained a Value Added Services license for
approximately $8 in cash. The license has a term of ten years and grants the
right for Formus Colombia to provide certain telecommunications services in
Colombia.
On November 26, 1998, Formus Colombia, was awarded a license for the use of
radio spectrum in Colombia. The term of the license is for ten years with annual
payments of license fees of approximately $235 per year. The spectrum license is
subject to certain build-out requirements. The Company anticipates that it will
be able to fulfill the stated requirements. See Note 12 for discussion regarding
sale of the Company's Latin American assets.
NEW ZEALAND
On February 10, 1998, the Company acquired radio spectrum licenses in New
Zealand. The total purchase price for the radio spectrum licenses was
approximately $1.4 million in cash.
ECUADOR
On September 9, 1997, Formus entered into a purchase agreement whereby it
purchased, in a single transaction, 51% of the equity of Formus
Communications -- Ecuador L.L.C. ("FCE"), a Colorado limited liability
corporation, and a 25% ownership of Nexsatel, a company organized and existing
under the laws of the Republic of Ecuador. In connection with this acquisition,
the Company acquired telecommunications licenses and the rights to provide video
services in selected cities in Ecuador. Effectively, this acquisition
constituted an acquisition of non-operating assets as FCE and Nexsatel did not
constitute a business at the acquisition date. The aggregate total consideration
paid for this acquisition was approximately $2.3 million payable in cash. Of the
total purchase price, approximately $1.4 million was paid in 1997 and the
remaining $899 was paid in March 1998. The purchase price was allocated
primarily to property and equipment and telecommunications licenses. The results
of operations of FCE and Nexsatel, that were acquired, were not significant in
relation to the Company's results from October 22, 1996 (inception) through
December 31, 1997.
The Company had been negotiating to modify its license rights to be able to
provide integrated voice and data in addition to the video services. In early
1999, the Company determined that the negotiations to modify the
telecommunications licenses would not be successful. Without the necessary
modifications to the licenses, the Company decided to cease pursuing operations
in Ecuador and commenced negotiations to dispose of its holdings in Ecuador.
Based on the terms of such negotiations, the Company determined that the maximum
proceeds from the disposal of the assets held in Ecuador would not be sufficient
to realize the total value of its investment. Accordingly, the Company recorded
an impairment related to its telecommunications licenses held in Ecuador
totaling approximately $1.2 million which is included in loss from operations in
the accompanying consolidated statements of operations. The net assets held in
Ecuador had a carrying value as of June 30, 1999 of approximately $1.1 million
($818 in property and equipment, $633 in telecommunications licenses, and $136
in other current assets net of current liabilities and minority interest of
$502.
(4) INVESTMENT IN WNP COMMUNICATIONS, INC.
During 1998, the Company purchased a 6% interest in WNP Communications,
Inc. ("WNP") (a Delaware corporation), for cash consideration of approximately
$11.8 million. The Company's investment in WNP is accounted for using the cost
method. WNP was organized in January 1998 to participate in the
F-13
<PAGE> 89
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
United States LMDS auctions conducted by the Federal Communications Commission.
WNP was the winning bidder on numerous licenses in the United States.
On January 14, 1999, a merger agreement was reached between NEXTLINK
Communications, Inc. ("NEXTLINK") and WNP, whereby NEXTLINK agreed to acquire
WNP, resulting in WNP becoming a wholly-owned subsidiary of NEXTLINK.
Prior to the merger between NEXTLINK and WNP, Formus owned 71,368 shares
(approximately 6%) of WNP common stock. The merger between NEXTLINK and WNP
resulted in NEXTLINK serving as the "survivor corporation." In connection with
the NEXTLINK/WNP merger, NEXTLINK issued 329,114 shares of its common stock,
valued at approximately $73.50 per share, as well as cash consideration of
approximately $12.1 million to Formus in exchange for Formus' 6% interest in
WNP.
Formus recognized a gain of approximately $24.5 million associated with the
shares and cash received. Subsequent to the merger between NEXTLINK and WNP, the
Company sold 223,667 of the 329,114 shares received from NEXTLINK resulting in
net proceeds to the Company of approximately $16.5 million.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and office equipment........................... $142 $ 687 $1,272
Computer equipment....................................... 144 333 340
Communications equipment................................. 213 3,727 5,615
Computer software........................................ 26 57 159
Construction in progress................................. -- -- 509
---- ------ ------
525 4,804 7,895
Less accumulated depreciation............................ (34) (413) (909)
---- ------ ------
$491 $4,391 $6,986
==== ====== ======
</TABLE>
(6) EQUITY INCENTIVE PLAN
The Company maintains an equity incentive plan (the "Plan") which provides
for the grant of stock options, restricted stock awards and other stock grants
to directors, key employees, and consultants to purchase common stock of the
Company. The Plan was amended in 1998 to increase the number of options
available for grant under the plan by 1,000,000 shares to 5,000,000 shares.
Under the Plan, incentive stock options are granted at an exercise price not
less than the fair market value of the common stock on the date of the grant, as
determined by the Company's Board of Directors.
F-14
<PAGE> 90
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996.......................... -- $ --
Granted................................................. 747,500 2.50
Exercised............................................... -- --
Forfeited............................................... -- --
--------- ------
Outstanding at December 31, 1997.......................... 747,500 2.50
Granted................................................. 3,321,367 2.58
Exercised............................................... -- --
Forfeited............................................... (94,125) (2.54)
--------- ------
Outstanding at December 31, 1998.......................... 3,974,742 2.57
Granted (unaudited)..................................... 744,000 3.55
Exercised (unaudited)................................... (123,333) 2.50
Forfeited (unaudited)................................... (376,042) 2.50
--------- ------
Outstanding at June 30, 1999 (unaudited).................. 4,219,367 $ 2.77
========= ======
</TABLE>
At December 31, 1998 there were 1,025,258 options available for grant under
the Plan. Outstanding options typically vest over four years and expire ten
years from the date of grant. The weighted-average grant date fair value during
1997, 1998 and June 30, 1999 (unaudited) was $.76, $.74 and $.93 per option,
respectively. All options granted during 1997, 1998 and 1999 were granted with
an exercise price equal to the fair value of common stock as established by the
Company's Board of Directors.
The following table summarizes information about stock options as of
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
- ---------------- ----------- -----------
<S> <C> <C>
$2.50 3,693,075 467,617
3.00 14,167 14,167
3.50 267,500 --
----- --------- -------
$2.57 3,974,742 481,784
===== ========= =======
</TABLE>
The following table summarizes information about stock options as of June
30, 1999 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
- ---------------- ----------- -----------
<S> <C> <C>
$2.50 3,195,700 685,231
3.00 14,167 14,167
3.50 999,500 --
7.00 10,000 --
----- --------- -------
2.77.$..... 4,219,367 699,398
===== ========= =======
</TABLE>
F-15
<PAGE> 91
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair values of employee options are estimated on the date of grant using
the Black-Scholes single-option-pricing model. The fair value of each option
granted to employees was estimated on the date of grant using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1998 1997 JUNE 30, 1999
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Estimated dividends................... None None None
Risk-free interest rate............... 4.22% to 5.64% 5.82% to 6.22% 4.84% to 5.48%
Expected life......................... 6.0 years 6.0 years 6.0 years
Expected volatility................... 0% 0% 0%
</TABLE>
The fair value of each option granted to non-employees is estimated on the
date of grant using the Black-Scholes single option-pricing model, including a
volatility assumption of 50%.
The Company applies APB 25 in accounting for its Plan, and accordingly no
compensation expense has been recognized in the financial statements for options
granted to employees at or above fair value.
Had the Company recognized compensation cost for options granted to
employees based on the fair value of the options granted as of the grant date as
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation", net loss would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
CUMULATIVE FROM
OCTOBER 22, 1996
YEAR ENDED DECEMBER 31, (INCEPTION)
------------------------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
---------------- ------------------- -------------------- --------------------
BASIC AND BASIC AND BASIC AND BASIC AND
DILUTED DILUTED DILUTED DILUTED
NET NET LOSS NET NET LOSS NET NET LOSS NET NET LOSS
LOSS PER SHARE LOSS PER SHARE LOSS PER SHARE LOSS PER SHARE
---- --------- ------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As reported..................... $(89) $(.13) $(6,147) $ (2.66) $(14,470) $(4.92) $(20,706) $(8.43)
Pro forma....................... $(89) $(.13) $(6,192) $ (2.68) $(14,854) $(5.05) $(21,135) $(8.60)
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE FROM
SIX MONTHS ENDED JUNE 30, OCTOBER 22, 1996
-------------------------------------------------------------------- (INCEPTION)
1998 1999 JUNE 30, 1999
--------------------------------- -------------------------------- ----------------------------------
(UNAUDITED) (UNAUDITED)
BASIC DILUTED (UNAUDITED) BASIC DILUTED
NET NET BASIC DILUTED NET NET
NET LOSS LOSS NET NET INCOME NET INCOME NET LOSS LOSS
LOSS PER SHARE PER SHARE INCOME PER SHARE PER SHARE LOSS PER SHARE PER SHARE
------- ---------- ---------- ------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported.......... $(5,261) $(1.79) $(1.79) $8,785 $2.94 $0.27 $(12,240) $(4.78) $(4.78)
Pro forma............ (5,353) (1.82) (1.82) 8,414 2.82 0.25 (13,040) (5.09) (5.09)
</TABLE>
(7) CAPITAL STOCK
COMMON STOCK
The Company has two classes of common stock: common stock ("Common Stock")
and Class B common stock. As of December 31, 1998 and 1997, the Company had a
total of 2,743,180 and 200,000 shares of Common Stock and Class B common stock
issued and outstanding, respectively, resulting in net proceeds to the Company
of approximately $2.9 million. Both classes have a stated par value of $.001 per
share. Each share of Common Stock constitutes one vote at any annual or special
F-16
<PAGE> 92
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
meeting, or action by written consent. The Class B common stock is identical in
all respects to the Common Stock except that it is non-voting.
MANDATORILY REDEEMABLE PREFERRED STOCK
During 1997, the Company issued Series A mandatorily redeemable preferred
stock ("Series A preferred stock") and Series B mandatorily redeemable preferred
stock ("Series B preferred stock"). Total net proceeds to the Company from these
issuances was approximately $56.7 million. Of the total net proceeds
approximately $29.9 million and $26.8 million was received during 1998 and 1997,
respectively. The Series A preferred stock votes with, and in the same manner as
the shares of Common Stock of the Company, not as a special class. The Series B
preferred stock shares are non-voting. Holders of the Series A preferred stock
and Series B preferred stock participate equally with the holders of the Common
Stock and Class B common stock in any dividends, when and as declared by the
Board of Directors, on an as converted basis. The number of votes for each
Series A preferred stock is equal to the whole number of shares of common stock
into which such holder's aggregate number of shares are convertible.
The Series A preferred stock and Series B preferred stock are mandatorily
redeemable by the Company in three equal annual installments beginning September
2, 2003. Such redemptions shall be made at a price equal to the original issue
price of $2.50 per share, plus any declared and unpaid dividends. Accordingly,
the Company is accreting the carrying value of the preferred stock to its future
redemption value. The accretion is recorded each period as an increase in the
balance of the preferred stock outstanding and as a non-cash increase in the net
loss applicable to common stock. As of December 31, 1998 and 1997, the value of
the preferred stock has accreted approximately $180 and $0, respectively.
Each share of Series A preferred stock and Series B preferred stock is
convertible, at the option of the holder, into that amount of Common Stock and
Class B common stock, respectively, determined by multiplying the applicable
"Conversion Rate" by the number of shares being converted. The Conversion Rate
is the quotient of (a) the sum of (i) the original issue price per preferred
share plus (ii) all declared but unpaid dividends divided by (b) the original
issue price per preferred share. In addition, each share of the Series A
preferred stock and Series B preferred stock is automatically convertible into
Common Stock and Class B common stock, respectively, upon closing of a public
offering that results in at least $50 million of gross proceeds to the Company
at a share price of at least $12.25.
During 1999, the Company received net proceeds of approximately $25.0
million from the issuance of its Series C mandatorily redeemable preferred stock
("Series C preferred stock") and Series D mandatorily redeemable preferred stock
("Series D preferred stock"). The Series C preferred stock votes with, and in
the same manner as the shares of Common Stock of the Company, not as a special
class. Holders of the Series C preferred stock and Series D preferred stock
participate equally with the holders of the Common Stock and Class B Common
Stock in any dividends, when and as declared by the Board of Directors, on an as
converted basis. The Series D preferred stock shares are non-voting. The number
of votes for each Series C preferred stock is equal to the whole number of
shares of common stock into which such holder's aggregate number of shares are
convertible.
The Series C preferred stock and Series D preferred stock are mandatorily
redeemable by the Company in three equal annual installments beginning September
2, 2003. Such redemptions shall be made at a price equal to the original issue
price of $3.50 per share, plus any declared and unpaid dividends.
Each share of Series C preferred stock and Series D preferred stock is
convertible, at the option of the holder in the same manner described as related
to the Series A and Series B preferred stock.
F-17
<PAGE> 93
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The mandatorily redeemable preferred stock future redemption requirements
as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999....................................................... $ --
2000....................................................... --
2001....................................................... --
2002....................................................... --
2003....................................................... 19,400
Thereafter................................................. 38,800
-------
Total redemption requirements.............................. $58,200
=======
</TABLE>
(8) OPERATING LEASES
The Company maintains non-cancelable operating lease arrangements
principally for office space. Future minimum annual lease payments under
operating leases are as follows at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,048
2000........................................................ 1,071
2001........................................................ 1,062
2002........................................................ 987
2003........................................................ 811
Thereafter.................................................. 1,680
------
Long-term operating lease obligations....................... $6,659
======
</TABLE>
Rent expense related to these operating leases approximated $14, $79, $473,
and $566 for the years ended December 31, 1996, 1997, 1998 and the period from
October 22, 1996 (inception) through December 31, 1998, respectively.
(9) INCOME TAXES
In general, a United States corporation may claim a foreign tax credit
against its federal income tax expense for foreign income taxes paid or accrued.
Because the Company must calculate its foreign tax credit separately for
dividends received from each foreign corporation in which the Company owns 10.0%
to 50.0% of the voting stock, and because of certain other limitations, the
Company's ability to claim a foreign tax credit may be limited, particularly
with respect to dividends paid out of earnings subject to a high rate of foreign
income tax.
Generally, the Company's ability to claim a foreign tax credit is limited
to the amount of U.S. taxes the Company pays with respect to its foreign source
income. In calculating its foreign source income, the Company is required to
allocate interest expense and overhead incurred in the United States between its
United States and foreign activities. Accordingly, to the extent United States
borrowings are used to finance equity contributions to its foreign subsidiaries,
the Company's ability to claim a foreign tax credit may be significantly
reduced. These limitations and the inability of the Company to offset losses in
one foreign jurisdiction against income earned in another foreign jurisdiction
could result in a higher effective tax rate on the Company's earnings.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $17.7 million (U.S.), which may be used to offset future taxable
income. These carryforwards expire
F-18
<PAGE> 94
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning in 2011. The U.S. Internal Revenue Code places certain limitations on
the annual amount of net operating loss carryforwards, which can be utilized if
certain changes in the Company's ownership occur.
The Company's net deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------
1997 1998
------- -------
<S> <C> <C>
Company's U.S. tax net operating loss carryforwards......... $ 2,310 $ 6,592
Tax net operating loss carryforwards of consolidated foreign
subsidiaries.............................................. -- 1,315
Start-up costs.............................................. 23 726
Accrued foreign interest.................................... -- 73
Unrealized foreign exchange loss............................ -- 56
Accelerated tax depreciation................................ (14) 65
------- -------
2,319 8,827
Less: valuation allowance......................... (2,319) (8,827)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
The gross deferred tax assets have been reduced by a valuation allowance
because management believes it is currently more likely than not that such
benefits will not be realized. The difference between the zero provision for
income taxes in 1997 and 1998 and the expected amount determined by applying the
federal statutory rate to loss before income tax results primarily from an
increase in the valuation allowance against net deferred tax assets and foreign
tax effects for each year.
The difference between income tax expense provided in the financial
statements and the expected income tax benefit at statutory rates is reconciled
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------
1997 1998
-------- --------
<S> <C> <C>
Expected income tax benefit at the U.S. statutory rate of
34%....................................................... $(2,090) $(4,920)
Tax effect of permanent and other differences:
Foreign loss.............................................. -- 791
Non-deductible expenses................................... 6 28
Increase of valuation allowance........................... 2,286 4,860
State benefit, net of federal benefit..................... (205) (437)
Minority interest......................................... -- (405)
Other..................................................... 3 83
------- -------
Total income tax benefit.......................... $ -- $ --
======= =======
</TABLE>
(10) SEGMENT AND GEOGRAPHIC REPORTING
The Company adopted SFAS 131 for the year ended December 31, 1998. The new
rules establish revised standards for public companies relating to the reporting
of financial information about operating segments. The adoption of SFAS 131 did
not have an effect on the Company's consolidated financial statements but did
effect the Company's segment information disclosures. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
F-19
<PAGE> 95
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is currently in the development stage. Through June 30, 1999,
the Company's expenditures were primarily associated with its network deployment
in Germany and Poland, business development costs and corporate administrative
costs. The Company expects to incur significant expenses as it expands its
network deployment efforts into other selected European markets.
Management currently evaluates the Company's development efforts according
to the geographic location of its markets. Certain financial information
reflecting the Company's development efforts is presented below. Segment
disclosures as of and for the years ended December 31, 1997 and June 30, 1998
have been omitted since the results of the German and Polish markets for those
periods are not significant to the consolidated financial statements.
The Company's segment information is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
NET (LOSS) DEPRECIATION & CAPITAL
TOTAL ASSETS INCOME AMORTIZATION EXPENDITURES
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Germany........................... $18,822 $ (1,203) $ 185 $ 6,977
Poland............................ 673 (831) 68 175
Corporate & other................. 33,899(1) (12,436) 817 1,625
------- -------- ------ -------
Total Company........... $53,394 $(14,470) $1,070 $ 8,777
======= ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------------
NET (LOSS) DEPRECIATION & CAPITAL
TOTAL ASSETS INCOME AMORTIZATION EXPENDITURES
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Germany........................... $15,833 $(10,274) $ 554 $ 5,659
Poland............................ 1,217 (638) 59 453
Corporate & other................. 68,148(1) 19,697 432 861
------- -------- ------ -------
Total Company........... $85,198 $ 8,785 $1,045 $ 6,973
======= ======== ====== =======
</TABLE>
- ---------------
(1) Includes approximately $11.1 million and $46.5 million of corporate cash and
cash equivalents at December 31, 1998 and June 30, 1999, respectively. In
addition, the December 31, 1998 asset account includes an approximate $11.8
million investment which was sold in April 1999.
(11) COMMITMENTS AND CONTINGENCIES
Many countries in which we have licenses or plan to seek licenses have
relatively new telecommunications regulatory systems. Many legal and regulatory
issues have not been fully addressed. Future administrative or judicial
interpretations may expand the scope of regulations or significantly change the
interpretation of current laws and regulations. For example, Poland's regulatory
system is relatively new and many legal and regulatory issues have not been
interpreted or reviewed by the courts or administrative bodies. We believe our
ownership structure of Formus Polska complies with the current law and terms of
Formus Polska's licenses. A change in the law or its legal interpretation could
materially adversely affect us if we were not able to change our ownership
structure in a manner required.
(12) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORTS (UNAUDITED)
In July 1999, the Company agreed to purchase from Telecom Polska 100% of
CEL Polska Sp. z o.o., a Polish company which provides intra-provincial
transmission services for approximately $5.4 million. The Company hopes to
finalize the acquisition of CEL Polska during the second quarter of 2000. In
addition, the Company has agreed to advance up to $175 per month through closing
to fund Telecom Polska's current operations.
F-20
<PAGE> 96
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During July and August 1999, the Company sold its remaining 105,447 shares
of NEXTLINK common stock for net cash proceeds totaling approximately $10.2
million. The Company will recognize a gain of approximately $2.5 million related
to the sale of these shares in the third quarter of 1999.
In September 1999, the Company completed a transaction with VeloCom Inc.
("VeloCom"), a Delaware corporation formerly known as WLL International, Inc.,
which provides telecommunications services in Latin American countries.
VeloCom's stockholders include three of the Company's stockholders, and three of
the Company's directors (plus a director designated by the Company, who
currently also serves on Formus' board) also serve on the board of VeloCom.
Under a purchase agreement entered into by and among VeloCom, Formus and a
wholly-owned subsidiary of the Company, Formus International, Inc., the Company
transferred cash totaling approximately $20.8 million and the following assets,
valued at approximately $7.5 million, to VeloCom in exchange for a 22.5%
ownership interest in VeloCom: the Company's subsidiaries in Argentina, Bolivia,
Chile, Colombia, Peru, and Venezuela; the Colorado limited liability holding
companies for the Latin American subsidiaries; the Company's rights and
obligations under Memoranda of Understanding with local partners in Colombia and
Uruguay. The Company will recognize a pre-tax gain of approximately $724 in the
third quarter in connection with the VeloCom transaction.
On September 3, 1999, the Company issued an aggregate 9,075,772 shares of
Series E mandatorily redeemable preferred stock ("Series E preferred stock") and
an aggregate 7,295,780 shares of Series F mandatorily redeemable preferred stock
("Series F preferred stock") and cash of $100 to acquire the remaining equity
interest in Callino. The shares issued were valued at $10 per share or
approximately $163.7 million in the aggregate. Callino is now a wholly owned
subsidiary of the Company.
On September 3, 1999, the Company entered into a Preferred Stock Purchase
Agreement and closed the sale of an aggregate 10,369,266 shares of Series E
preferred stock and an aggregate 1,215,551 shares of Series F preferred stock at
$10.00 per share for an aggregate purchase price of approximately $115.8
million. The Company increases its authorized number of preferred shares to
accommodate issuance of Series E and F preferred stock subsequent to June 30,
1999.
On September 9, 1999, the Company entered into a marketing activities
agreement with Intel Corporation pursuant to which Intel will provide
non-exclusive marketing assistance in exchange for a warrant to purchase
1,250,000 shares of Series E Preferred Stock at an exercise price of $13.50 per
share. The warrant vested 25% upon signing of the marketing activities agreement
and the remaining portion of the warrant will vest upon achievement of various
performance based milestones.
In May 1999, the Company entered into an agreement with Alcatel Polska S.A.
("Alcatel") for the purchase, supply and installation of equipment. The
agreement also provides that Alcatel will furnish support, maintenance and
training services. Under this agreement, the Company has agreed to purchase 80%
of its base station and terminal station equipment requirements in Poland from
Alcatel at specified rates, subject to customary terms and conditions. The
agreement terminates in June 2003. The agreement provided for equipment
purchases in several stages. The Company may decide at any time not to proceed
with further stages. We have agreed to contribute up to E50 million of capital
to Polska by the end of 2000, in accordance with Polska's business plan.
In addition, in September 1999, through Polska, the Company entered into a
senior secured facility agreement with a group of banks that enables the Company
to borrow up to a total principal amount of E120 million in four staggered
installments. The Company is allowed to use advances under this facility solely
to pay invoices from an equipment vendor, Alcatel, related to the purchase of
equipment for the deployment of its broadband wireless network in Poland. The
Company is allowed to pay Alcatel invoices with its own funds, in which event
the available amount of the current phase installment will be reduced
F-21
<PAGE> 97
FORMUS COMMUNICATIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordingly. The loans under this facility will be secured by a pledge of the
Company's and Elmedia's shares in Polska and the Elmedia shareholders' shares in
Elmedia. Polska will also pledge its assets and assign its contracts and bank
accounts. Interest on the loan is payable quarterly at an interest rate based on
EURIBOR, plus 5%, p.a. or the European Overnight Interest Rate plus 5% p.a.,
depending on the type of advance. Under the facility Polska is subject to
various restrictions and covenants, including limitations on acquisitions of
assets, incurrence of debt, encumbrances on assets, raising public debt, etc.
In connection with the supply and financing arrangements, the Company has
granted Alcatel an option to purchase a 2.0% voting and economic interest in
Polska. The option may be exercised after October 2000, and it expires, if not
previously exercised, on the earlier of October 2005 or the listing of Polska's
shares on a national exchange.
In September 1999, the Board of Directors of the Company approved an
increase from 5,000,000 options available for grant under the Company's stock
option plan to 7,000,000 options available for grant.
Upon consummation of the Company's contemplated initial public offering,
the Common Stock will be redesignated as Class A common stock with all the same
rights and privileges as the existing Common Stock.
F-22
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying balance sheets of Callino GmbH (referred
to as "the Company"; formerly ARCIS MEDIACOM Management GmbH) as of June 30,
1999, December 31, 1998 and December 31, 1997, the related statements of income
and accumulated deficit, the statements of cash flows and the statements of
stockholders' equity for the period July 7 -- December 31, 1997, the period
January 1 -- June 30, 1998, the period January 1 -- December 31, 1998 and the
period January 1 -- June 30, 1999 as well as the related notes to the financial
statements. The above mentioned balance sheets, statements of income and
accumulated deficit, cash flows, stockholders' equity and notes are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these documents based on our audit.
We conducted our audit 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, on a test basis, the examination of evidence
supporting the amounts and disclosures in the documents mentioned above. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation in the documentation mentioned above. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Callino GmbH as of June 30,
1999, December 31, 1998 and December 31, 1997 as well as the results of its
operations and cash flows for the period July 7 -- December 31, 1997, the period
January 1 -- June 30, 1998, the period January 1 -- December 31, 1998 and the
period January 1 -- June 30, 1999 in conformity with generally accepted
accounting principles in the US.
Haarmann, Hemmelrath & Partner GmbH
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft
Zelger ppa. Gobel
Wirtschaftsprufer Wirtschaftsprufer
Munich, July 27, 1999
F-23
<PAGE> 99
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
BALANCE SHEETS
AS OF DECEMBER 31, 1997, DECEMBER 31, 1998 AND JUNE 30, 1999
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... 26.503 15.294.504 7.212.381
Shareholder receivables (note 3)................... 52.500 10.000.000 41.938
Other current assets (note 4)...................... 994 601.667 933.245
-------- ----------- ------------
Total current assets....................... 79.997 25.896.171 8.187.564
-------- ----------- ------------
Property, plant and equipment, net (note 5)
Land and buildings, at cost........................ 0 0 259.691
Plant and machinery, at cost....................... 0 0 4.354.483
Other equipment, at cost........................... 0 351.768 700.270
Advance payments on equipment, at cost............. 0 2.758.388 1.851.853
Less accumulated depreciation and amortization..... 0 (73.394) (502.842)
-------- ----------- ------------
Net property, plant and equipment.......... 0 3.036.762 6.663.455
Intangible assets, at cost (note 6).................. 0 9.150.071 15.247.517
Less accumulated depreciation and amortization..... 0 (257.957) (1.036.317)
-------- ----------- ------------
Net intangible assets...................... 0 8.892.114 14.211.200
Financial assets (note 7)............................ 0 0 71.068
-------- ----------- ------------
0 11.928.876 20.945.723
-------- ----------- ------------
Total assets............................... 79.997 37.825.047 29.133.287
======== =========== ============
LIABILITIES
Current liabilities:
Bank overdrafts.................................... 0 250.492 0
Accounts payable, trade............................ 1.135 3.146.644 3.663.816
Accrued expenses (note 8).......................... 2.360 2.048.074 7.414.669
Other current liabilities.......................... 0 167.624 196.849
-------- ----------- ------------
Total current liabilities/total
liabilities.............................. 3.495 5.612.834 11.275.334
-------- ----------- ------------
STOCKHOLDERS' EQUITY
Common stock (note 9)................................ 90.000 4.000.000 33.600.000
Additional paid-in capital (note 9).................. 0 31.600.000 2.000.000
thereof not paid-in: DM 52.500, DM 10.000.000 and
DM zero as of December 31, 1997 and 1998, and
June 30, 1999
Capital contributions of stockholders to common stock
and additional paid-in capital not yet
registrated........................................ 0 0 4.087.631
Deficit accumulated during the development stage..... (13.498) (3.387.787) (21.829.678)
-------- ----------- ------------
Total stockholders' equity................. 76.502 32.212.213 17.857.953
-------- ----------- ------------
Total liabilities and stockholders'
equity................................... 79.997 37.825.047 29.133.287
======== =========== ============
</TABLE>
F-24
<PAGE> 100
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
FOR THE PERIOD JULY 7-DECEMBER 31, 1997
PERIOD JANUARY 1-JUNE 30, 1998
PERIOD JANUARY 1-DECEMBER 31, 1998
AND
PERIOD JANUARY 1-JUNE 30, 1999
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FROM FOR THE FROM
FOR THE YEARS ENDED JULY 7, 1997 SIX MONTHS ENDED JULY 7, 1997
DECEMBER 31, (INCEPTION) TO JUNE 30, (INCEPTION) TO
-------------------- DECEMBER 31, ---------------------- JUNE 30,
1997 1998 1998 1998 1999 1999
DM DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Costs of services (Note 15)....... 0 0 0 0 (2.113.725) (2.113.725)
Selling, general and
administrative expenses (Note
14)............................. (12.647) (3.085.556) (3.098.203) (816.477) (15.328.023) (18.426.226)
Depreciation expenses............. (851) (332.176) (333.027) 0 (1.207.808) (1.540.835)
Interest income................... 0 64.419 64.419 63 174.440 238.859
Interest expenses................. 0 (20.150) (20.150) 0 (11.666) (31.816)
Other income...................... 0 0 0 0 97.009 97.009
Other expenses.................... 0 (826) (826) 0 (52.118) (52.944)
------- ---------- ---------- -------- ----------- -----------
Operating costs and
expenses.................. (13.498) (3.374.289) (3.387.787) (816.414) (18.441.891) (21.829.678)
------- ---------- ---------- -------- ----------- -----------
Total costs and expenses.... (13.498) (3.374.289) (3.387.787) (816.414) (18.441.891) (21.829.678)
------- ---------- ---------- -------- ----------- -----------
Net loss.................... (13.498) (3.374.289) (3.387.787) (816.414) (18.441.891) (21.829.678)
------- ---------- ---------- -------- ----------- -----------
Deficit accumulated during the
development stage -- beginning of
year.............................. 0 (13.498) 0 (13.498) (3.387.787) 0
------- ---------- ---------- -------- ----------- -----------
Deficit accumulated during the
development stage -- end of
year.............................. (13.498) (3.387.787) (3.387.787) (829.912) (21.829.678) (21.829.678)
------- ---------- ---------- -------- ----------- -----------
</TABLE>
F-25
<PAGE> 101
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM
FOR THE YEARS ENDED JULY 7, 1997 FOR THE SIX MONTHS JULY 7, 1997
DECEMBER 31, (INCEPTION) TO ENDED JUNE 30, (INCEPTION) TO
--------------------- DECEMBER 31, ------------------------ JUNE 30,
1997 1998 1998 1998 1999 1999
DM DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. (13.498) (3.374.289) (3.387.787) (816.414) (18.441.891) (21.829.678)
------- ----------- ----------- ---------- ----------- -----------
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation of property, plant
and equipment and intangible
assets.......................... 851 332.176 333.027 0 1.207.808 1.540.835
Changes in current assets and
liabilities:
Increase/(Decrease) in other
current assets.................. (994) (600.673) (601.667) (40.745) (331.578) (933.245)
Increase/(Decrease) in trade
accounts payable................ 1.135 3.145.508 3.146.643 155.186 517.172 3.663.815
Increase/(Decrease) in bank
overdrafts...................... 0 250.492 250.492 0 (250.492) 0
Increase/(Decrease) in other
current liabilities............. 0 167.623 167.623 46.924 29.225 196.848
Increase/(Decrease) in accrued
expenses........................ 2.360 2.045.716 2.048.076 449.500 5.366.595 7.414.671
------- ----------- ----------- ---------- ----------- -----------
Total adjustments............... 3.352 5.340.842 5.344.194 610.865 6.538.730 11.882.924
------- ----------- ----------- ---------- ----------- -----------
Net cash used in operating
activities...................... (10.146) 1.966.553 1.956.407 (205.549) (11.903.161) (9.946.754)
------- ----------- ----------- ---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment....................... 0 825 825 0 0 825
Increase/(Decrease) in intangible
assets.............................. 0 (3.111.806) (3.111.806) (44.850) (6.097.447) (9.209.253)
Increase/(Decrease) in financial
assets.............................. 0 0 0 0 (71.068) (71.068)
Increase/(Decrease) in fixed assets... (851) (9.150.071) (9.150.922) (26.604) (4.056.140) (13.207.062)
------- ----------- ----------- ---------- ----------- -----------
Net cash used in investing
activities...................... (851) (12.261.052) (12.261.903) (71.454) (10.224.655) (22.486.558)
------- ----------- ----------- ---------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock............................... 90.000 3.910.000 4.000.000 910.000 0 4.000.000
Proceeds from additional paid-in
capital............................. 0 33.100.000 33.100.000 3.100.000 0 33.100.000
Syndication expenses related to the
issuance of common stocks........... 0 (1.500.000) (1.500.000) 0 0 (1.500.000)
Capital contributions of shareholders
to common stock and additional
paid-in capital not yet
registrated......................... 0 0 0 0 4.087.631 4.087.631
Decrease/(Increase) in shareholders
receivables......................... (52.500) (9.947.500) (10.000.000) (3.380.000) 9.958.062 (41.938)
------- ----------- ----------- ---------- ----------- -----------
Net cash provided by financing
activities...................... 37.500 25.562.500 25.600.000 630.000 14.045.693 39.645.693
------- ----------- ----------- ---------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents........................... 26.503 15.268.001 15.294.504 352.997 (8.082.123) 7.212.381
======= =========== =========== ========== =========== ===========
Cash and cash equivalents at beginning
of period............................. 0 26.503 0 26.503 15.294.504 0
------- ----------- ----------- ---------- ----------- -----------
Cash and cash equivalents at end of
period................................ 26.503 15.294.504 15.294.504 379.500 7.212.381 7.212.381
======= =========== =========== ========== =========== ===========
Additional cash flow information
Cash paid for interest................ 0 20.150 20.150 0 11.666 31.816
------- ----------- ----------- ---------- ----------- -----------
Cash paid for income taxes............ 0 0 0 0 0 0
------- ----------- ----------- ---------- ----------- -----------
</TABLE>
F-26
<PAGE> 102
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL CONTRIBUTIONS
OF STOCKHOLDERS TO DEFICIT
COMMON STOCK AND ACCUMULATED
ADDITIONAL PAID-IN DURING TOTAL
COMMON ADDITIONAL CAPITAL NOT YET DEVELOPMENT STOCKHOLDERS'
STOCK PAID-IN CAPITAL REGISTRATED STAGE EQUITY
DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
Balances as of July 7, 1997... 90.000 0 0 0 90.000
Net loss July 7, 1997 --
December 31, 1997........... 0 0 0 (13.498) (13.498)
---------- ----------- --------- ----------- -----------
Balances as of December 31,
1997........................ 90.000 0 0 (13.498) 76.502
---------- ----------- --------- ----------- -----------
Net loss January 1, 1998 --
December 31, 1998........... 0 0 0 (3.374.289) (3.374.289)
Issuance of new common stock
-- March 19, 1998........... 1) 410.000 0 0 0 410.000
-- May 8, 1998.............. 2) 100.000 0 0 0 100.000
-- May 8, 1998.............. 3) 400.000 3.100.000 0 0 3.500.000
-- September 10, 1998....... 4) 3.000.000 30.000.000 0 0 33.000.000
Syndication expenses related
to the issuance of common
stock....................... 0 (1.500.000) 0 0 (1.500.000)
---------- ----------- --------- ----------- -----------
Balances as of December 31,
1998........................ 4.000.000 31.600.000 0 (3.387.787) 32.212.213
---------- ----------- --------- ----------- -----------
Net loss January 1, 1999 --
June 30, 1999............... 0 0 0 (18.441.891) (18.441.891)
Issuance of common stock by
application of additional
paid-in capital as of June
8, 1999..................... 5) 29.600.000 (29.600.000) 0 0 0
Issuance of new common
stock....................... 6)
DM 1.250.000 and additional
paid-in capital DM
3.750.000 (June 8,
1999).................... 0 0 4.087.631 0 4.087.631
---------- ----------- --------- ----------- -----------
Balances as of June 30,
1999........................ 33.600.000 2.000.000 4.087.631 (21.829.678) 17.857.953
========== =========== ========= =========== ===========
</TABLE>
- ------------------------------
1) Issuance of 4 shares at DM 135.000, DM 50.000, DM 187.000 and DM 38.000
2) Issuance of 3 shares at DM 50.000, DM 25.000 and DM 25.000
3) Issuance of 4 shares at DM 100.000 each
4) Issuance of 3 shares at DM 1.883.000, DM 796.000 and DM 321.000
5) Takeover of the additional common stock by the existing shareholders. The
increase was performed by funds resulting from prior capital contributions of
shareholders which have been shown so far as additional paid-in capital.
6) Issuance of 8 shares at DM 32.800, DM 32.800, DM 32.600, DM 32.600, DM
86.600, DM 52.200, DM 260.100 and DM 720.300; not yet registered
F-27
<PAGE> 103
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS
1. COMPANY'S STRUCTURE AND BUSINESS ACTIVITY
Callino GmbH (in the following also referred to as "Company"), was
established as limited liability company at July 7, 1997. The Company is
registered in the trade register of the local court of Munich under the
registration number HRB117285. The Company's seat is Munich, Germany. The
company name was changed from ARCIS MEDIACOM Management GmbH into Callino GmbH
by shareholder resolution as of March 24, 1999. The shareholder agreement was
concluded on July 7, 1997 and the latest amendments were made on June 15, 1999.
Company's share capital was held by a number of shareholders. Formus
Communications, Inc. as main shareholder held a share of 47,10 % as of December
31, 1998 and 57,62 % as of June 30, 1999.
During the period since inception until June 30, 1999, the Company was a
development stage enterprise and was devoting most of its effort to activities
such as financial planning, raising capital, acquiring telecom licences for the
Federal Republic of Germany, acquiring property plant and equipment and
recruiting and training personnel. During this period the planned principle
operations have not yet commenced. The Company started its network services at
the beginning of July 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
BASIS OF PRESENTATION
The financial statements include the accounts of Callino GmbH as of June
30, 1999, December 31, 1998 and December 31, 1997 and for the period January
1, -- June 30, 1999, period January 1, -- December 31, 1998, period January
1, -- June 30, 1998 and period July 7, -- December 31, 1997.
The financial year of the Company is the calendar year.
BUSINESS ACTIVITY AND BASIS OF REVENUE RECOGNITION
The Company's primary business activities are the development and
provisioning of networks and network services in the areas telecommunications
and digital media, furthermore the rendering of consultancy services in
connection with such networks and network services. From the inception of the
Company until balance sheet date the main focus of the Company was the start up
of the business.
CASH AND CASH EQUIVALENTS
The Company places its cash deposits with high credit quality financial
institutions. Time deposits held with Chase Manhattan Bank AG in the amount of
DM 1.500.000 and time deposits held with HypoVereinsbank AG in the amount of DM
3.442.000 are pledged. The pledge serves as security of bank guarantees which
were created for the benefit of Deutsche Telekom AG.
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
amounts to DM 30.428 as of June 30, 1999 and DM 35.290 as of December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash, accounts
receivable and accounts payable approximate their fair value based on the short
term maturities of these instruments.
F-28
<PAGE> 104
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
DEPRECIATION
In accordance with tax regulations, depreciations for the individual items
of the fixed assets are made according to the usual useful life as follows:
<TABLE>
<CAPTION>
ITEM METHOD OF DEPRECIATION USEFUL LIFE
<S> <C> <C>
Intangible Assets
Licences............................................. straight line 10 years
Name rights.......................................... straight line 3 years
Software............................................. straight line 3 years
Tangible Assets
Other equipment, office equipment
Office equipment..................................... straight line 2-8 years
Motor vehicles (used)................................ straight line 2 years
</TABLE>
If a mobile asset is purchased in the first half of the financial year the
depreciation expense amounts to the full annual rate according to an option
granted in the German commercial law. Purchases in the second half of the
financial year enable a depreciation expense amounting to the half annual rate.
Low-value assets are depreciated in full in the year of acquisition and are
treated as disposals. The Company's threshold for capitalisation is DM 800.
3. SHAREHOLDER RECEIVABLES
In the course of the capital increase of May 8, 1998 from DM 600.000 by DM
400.000 to DM 1.000.000 as well as in the course of the capital increase of
September 10, 1998 from DM 1.000.000 by DM 3.000.000 to DM 4.000.000, the new
shareholders entering at these points of time committed to pay premiums in the
amounts of DM 33.100.000 which were as of December 31, 1998 paid in the amount
of DM 23.100.000. The payments on the premium outstanding as of December 31,
1998 in the amount of DM 10.000.000 were paid to the Company in January 1999.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Receivables from the Tax Office
-- VAT................................................... 994 566.687 847.172
-- other refund claims................................... 0 13.647 53.423
Interest demarcation time deposits......................... 0 21.200 0
Miscellaneous.............................................. 0 133 32.650
--- ------- -------
994 601.667 933.245
=== ======= =======
</TABLE>
F-29
<PAGE> 105
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
AT COST
-------------------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998 ADDITIONS
DM DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land and buildings.......... 0 0 0 0 0 0 0 259.691
Plant and machinery......... 0 0 0 0 0 0 0 322.611
Other equipment............. 0 851 (851) 0 352.566 (798) 351.768 526.986
Advance payments on
equipment................. 0 0 0 0 2.758.388 0 2.758.388 3.125.337
-- --- ---- -- --------- ---- --------- ---------
0 851 (851) 0 3.110.954 (798) 3.110.156 4.234.625
== === ==== == ========= ==== ========= =========
<CAPTION>
AT COST
----------------------
JUNE 30,
DISPOSALS 1999
DM DM
---------- ---------
<S> <C> <C>
Land and buildings.......... 0 259.691
Plant and machinery......... 4.031.872 4.354.483
Other equipment............. (178.484) 700.270
Advance payments on
equipment................. (4.031.872 1.851.853
---------- ---------
(178.484) 7.166.297
========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
-------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998
DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Land and buildings........... 0 0 0 0 0 0 0
Plant and machinery.......... 0 0 0 0 0 0 0
Other equipment.............. 0 851 (851) 0 73.394 0 73.394
Advance payments on
equipment.................. 0 0 0 0 0 0 0
-- --- ---- -- ------ -- ------
0 851 (851) 0 73.394 0 73.394
== === ==== == ====== == ======
<CAPTION>
ACCUMULATED DEPRECIATION
--------------------------------
JUNE 30,
ADDITIONS DISPOSALS 1999
DM DM DM
--------- --------- --------
<S> <C> <C> <C>
Land and buildings........... 8.766 0 8.766
Plant and machinery.......... 168.499 0 168.499
Other equipment.............. 200.102 (178.484) 95.012
Advance payments on
equipment.................. 230.565 0 230.565
------- -------- -------
607.932 (178.484) 502.842
======= ======== =======
</TABLE>
F-30
<PAGE> 106
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NET BOOK VALUE
---------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Land and buildings....................................... 0 0 250.925
Plant and machinery...................................... 0 0 4.185.984
Other equipment.......................................... 0 278.374 605.258
Advance payments on equipment............................ 0 2.758.388 1.621.288
-- --------- ---------
0 3.036.762 6.663.455
== ========= =========
</TABLE>
F-31
<PAGE> 107
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
AT COST
-------------------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998 ADDITIONS
DM DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telecom licences......... 0 0 0 0 9.081.870 0 9.081.870 4.538.039
Name right "ARCIS"....... 0 0 0 0 50.000 0 50.000 8.000
Software licences........ 0 0 0 0 18.201 0 18.201 1.551.407
-- -- -- -- --------- -- --------- ---------
0 0 0 0 9.150.071 0 9.150.071 6.097.446
== == == == ========= == ========= =========
<CAPTION>
AT COST
----------------------
JUNE 30,
DISPOSALS 1999
DM DM
--------- ----------
<S> <C> <C>
Telecom licences......... 0 13.619.909
Name right "ARCIS"....... 0 58.000
Software licences........ 0 1.569.608
-- ----------
0 15.247.517
== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
-------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998
DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Telecom licences.......... 0 0 0 0 253.542 0 253.542
Name right "ARCIS"........ 0 0 0 0 1.667 0 1.667
Software licences......... 0 0 0 0 2.748 0 2.748
-- -- -- -- --------- -- ---------
0 0 0 0 257.957 0 257.957
== == == == ========= == =========
<CAPTION>
ACCUMULATED DEPRECIATION
----------------------------------
JUNE 30,
ADDITIONS DISPOSALS 1999
DM DM DM
--------- --------- ----------
<S> <C> <C> <C>
Telecom licences.......... 573.821 0 827.363
Name right "ARCIS"........ 56.333 0 58.000
Software licences......... 148.206 0 150.954
--------- -- ----------
778.360 0 1.036.317
========= == ==========
</TABLE>
F-32
<PAGE> 108
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NET BOOK VALUE
----------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Telecom licences........................................ 0 8.828.328 12.792.546
Name rights "ARCIS"..................................... 0 48.333 0
Software licences....................................... 0 15.453 1.418.654
-- --------- ----------
0 8.892.114 14.211.200
== ========= ==========
</TABLE>
F-33
<PAGE> 109
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Information on the telecom licences can be gained from the following
schedule:
<TABLE>
<CAPTION>
AT COST
-------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998
DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Licence -- class 3................. 0 0 0 0 6.081.860 0 6.081.860
Licence -- class 4................. 0 0 0 0 3.000.010 0 3.000.010
Licence Austria.................... 0 0 0 0 0 0 0
-- -- -- -- --------- -- ---------
0 0 0 0 9.081.870 0 9.081.870
== == == == ========= == =========
<CAPTION>
AT COST
----------------------------------
JUNE 30,
ADDITIONS DISPOSALS 1999
DM DM DM
--------- --------- ----------
<S> <C> <C> <C>
Licence -- class 3................. 4.518.140 0 10.600.000
Licence -- class 4................. 0 0 3.000.010
Licence Austria.................... 19.899 0 19.899
--------- -- ----------
4.538.039 0 13.619.909
========= == ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
-------------------------------------------------------------------------------------
JULY 7, DECEMBER 31, DECEMBER 31,
1997 ADDITIONS DISPOSALS 1997 ADDITIONS DISPOSALS 1998
DM DM DM DM DM DM DM
------- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Licence -- class 3................. 0 0 0 0 152.047 0 152.047
Licence -- class 4................. 0 0 0 0 101.495 0 101.495
Licence Austria.................... 0 0 0 0 0 0 0
-- -- -- -- --------- -- ---------
0 0 0 0 253.542 0 253.542
== == == == ========= == =========
<CAPTION>
ACCUMULATED DEPRECIATION
----------------------------------
JUNE 30,
ADDITIONS DISPOSALS 1999
DM DM DM
--------- --------- ----------
<S> <C> <C> <C>
Licence -- class 3................. 422.991 0 575.038
Licence -- class 4................. 150.000 0 251.495
Licence Austria.................... 830 0 830
--------- -- ----------
573.821 0 827.363
========= == ==========
</TABLE>
F-34
<PAGE> 110
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NET BOOK VALUE
----------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Licence -- class 3...................................... 0 5.929.813 10.024.962
Licence -- class 4...................................... 0 2.898.515 2.748.515
Licence Austria......................................... 0 0 19.069
-- --------- ----------
0 8.828.328 12.792.546
== ========= ==========
</TABLE>
LICENCE CLASS 3:
By way of notice dated August 28, 1998, the regulation authorities for
telecommunications and postal services ("Regulierungsbehorde fur
Telekommunikation und Post" -- "RegTP") granted the licence for the operation of
transmission paths for offering telecommunications services for the public
(licence class 3) to the Company for the states Bavaria, Baden-Wurttemberg as
well as for parts of the states Hesse, Rhineland Palatinate, Lower Saxony,
Northrhinne Westphalia, Schleswig Holstein, Saxony and Brandenburg as well as
for the City of Berlin. In this connection a notice of charges was issued in an
amount of DM 6.081.860 which has been classified as costs of acquisition of the
licence of licence class 3 for the licence territory stated in the notice dated
August 28, 1998 and is being depreciated since. By way of amended notice dated
March 24, 1999, the licence of class 3 was extended to the entire territory of
the Federal Republic of Germany. A notice of charges in this connection had not
yet been issued by the point of time of preparation of the interim statements as
per June 30, 1999. According to the schedule of charges for telecommunications
services, the maximum charge for licence class 3 amounts to DM 10.6 million.
After granting of the nation-wide licence, the maximum charge is to be assumed.
Therefore, in the statements as per June 30, 1999, the costs of acquisition of
the licence for the partial territory of the Federal republic of Germany in the
amount of DM 6.081.860 were increased to the maximum amount of DM 10.600.000 and
are -- also starting from August 28, 1998 -- being depreciated over a period of
time of ten years. The difference between the charge for the partial territory
of the Federal Republic of Germany and the maximum licence for the entire
territory of the Federal Republic of Germany was shown in the balance sheet as
of June 30, 1999 under the accruals for outstanding invoices.
The Administrative Court of Cologne has determined by way of decision dated
March 25, 1999 (file no. 11L2914/98) in individual proceedings pursued by
another communications company that the telecommunications schedule of charges
on which the notices are based is not in accordance with higher ranking law
(i.a. Art. 3 GG (German Grundgesetz) as well as Art. 11 para. 1 of the Guideline
97/13/EG) and is therefore not binding. At present, the proceedings are on
appeal and have therefore no effect for the prosecuting telecommunications
company or for other telecommunications companies.
By way of letter dated July 14, 1999, the Company requested the
RegTB -- referring to the decision of the Administrative Court of Cologne -- to
refund the previously levied licence charges and declared its willingness in
this connection to pay reasonable charges for the granted licences accruing on
the basis of a new schedule of charges. In preparing the statements as per June
30, 1999, the Company assumed the currently applicable legal situation and
schedule of charges for telecommunications services and has assessed the charge
resulting therefrom as costs of acquisition of the licence as well as the
charges still outstanding according to this as a debt under the accruals.
F-35
<PAGE> 111
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
LICENCE CLASS 4:
By way of notice dated March 31, 1998 as well as amended notice dated July
22, 1998, the RegTB has granted to the Company the licence of class 4 for the
voice telephone service on the basis of operating own telecommunications
networks for the territory of the Federal Republic of Germany. The licence fee
amounted to DM 3 million and is being depreciated linear over ten years since
mid-1998.
LICENCE AUSTRIA:
By way of notices, each dated February 9, 1999, of
Telekom-Control-Kommission in Austria, the Company was granted licences for
- the rendering of the public voice telephone service by way of operating
an own fixed telecommunications network as well as for
- the public offering of leased lines by way of own fixed
telecommunications networks.
The licence fees amounted to ATS 70.000 each, which were classified as
costs of acquisition in the amount of DM 19.899 as licence and are being
depreciated over a period of ten years since February 1999.
ALLOCATION OF FREQUENCIES FOR POINT-TO-MULTIPOINT RADIO RELAY INSTALLATIONS:
Under the date of July 15, 1999, DirektTB served the Company with a total
of 8 notices on the allocation of frequencies for the use of point-to-multipoint
radio relay installations (PMP-radio relay installations). The notices of
charges were still outstanding during preparation of the statements as per June
30, 1999. They will be assessed in the third quarter as costs of acquisition for
the aforementioned allocations of frequencies and will be depreciated starting
from that point of time.
7. FINANCIAL ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 ADDITIONS 1999
DM DM DM DM
<S> <C> <C> <C> <C>
Shares in subsidiaries
- -- Callino Gesellschaft fur Telekommunikation
GmbH, Vienna/Austria........................... 0 0 71.068 71.068
== == ====== ======
</TABLE>
The shareholder agreement was concluded on Mai 21, 1999 in Vienna, Austria.
The wholly owned subsidiary is registered under the company name "Callino
Gesellschaft fur Telekommunikationsdienste GmbH" in the Trade Register of the
Local Court of Vienna, Austria. The common stock amounts to EURO 35.000.
F-36
<PAGE> 112
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
DM DM DM
<S> <C> <C> <C>
Outstanding invoices..................................... 0 30.410 5.915.669
Compensation advertising-agency.......................... 0 0 728.000
Bonuses.................................................. 0 115.434 361.000
Vacation................................................. 0 162.230 200.000
Costs of financial expenses and legal and consultancy
expenses............................................... 2.360 100.000 75.000
Risk of litigation "Alcatel"............................. 0 125.000 125.000
Workmen's Compensation................................... 0 15.000 10.000
Success Fee Financial Adviser............................ 0 1.500.000 0
----- --------- ---------
2.360 2.048.074 7.414.669
===== ========= =========
</TABLE>
With "letter agreement" dated March 4, 1998 the Company assigned Chase
Manhattan Bank AG with the procurement of equity capital for the purpose of
financing its future development. Due to the participation of the shareholders
Formus, Chase I and Chase II in the Company within the course of the capital
increase of September 10, 1998 the preconditions defined in the letter agreement
dated March 4, 1998 for an agreed "success fee" in the amount of DM 1.500.000
have been met. Chase Manhattan has invoiced the fee in the amount of DM
1.500.000 to the Company under the date of October 14, 1998 which was fully
accrued as of December 31, 1998. The amount was paid in 1999.
The reserve of outstanding invoices of TDM 5.916 as of June 30, 1999
concerns essentially outstanding amounts for the procurement of the licenses of
the class 3 (TDM 4.518). For further information, reference is made to Section
6.
9. COMMON STOCK/ADDITIONAL PAID-IN CAPITAL
By stockholders' resolution dated June 8, 1999 the common stock of the
Company was increased from DM 4.000.000 by an amount of DM 29.600.000 to DM
33.600.000. The additional common stock was taken over by the existing
shareholders. The increase of the common stock was performed by funds resulting
from prior capital contributions of shareholders (May 8, 1998 and September 10,
1998) which have been shown so far as additional paid-in capital in
stockholder's equity.
10. INCOME TAXES
For federal income tax purposes the Company has incurred net operating
losses which are available as carry forwards to offset future taxes payable. As
of June 30, 1999, such accumulated losses brought forward amount to TDM 23.330,
as of December 31, 1998 TDM 4.888 for federal income taxes and for trade taxes
on income. The tax credits do not expire.
Especially considering the present development in the telecommunication
sector it is not beyond reasonable doubt that the Company will be in a net loss
position in the following years. A deferred tax asset was not recorded as a
corresponding valuation allowance would have been required.
F-37
<PAGE> 113
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. LEASES
The Company has no leasing obligations under the term of operating or
capital leases.
Rent expense for the six month period ended June 30, 1999 totalled
approximately TDM 2.607 (January 1, -- December 31, 1998 : TDM 248).
For future minimum rent expenses refer to note 12.
12. GEOGRAPHIC INFORMATION
The financial assets (Callino Gesellschaft fur Telekommunikation GmbH,
Vienna) are maintained in Austria.
13. COMMITMENTS AND CONTINGENCIES
Future financial obligations are as follows:
<TABLE>
<CAPTION>
2004
TOTAL 1999 2000 2001 2002 2003 AND LATER
TDM TDM TDM TDM TDM TDM TDM
<S> <C> <C> <C> <C> <C> <C> <C>
Rent obligations............... 7.369 885 926 926 926 926 2.780
Consultancy contracts.......... 792 207 180 180 180 45 --
----- ----- ----- ----- ----- ----- -----
8.161 1.092 1.106 1.106 1.106 971 2.780
===== ===== ===== ===== ===== ===== =====
</TABLE>
14. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The selling, general and administrative expenses shown for the 6-months
period ended June 30, 1999 in the amount of TDM 15.328 contain termination
payments of TDM 2.505 to the former management for the repeal of employment
contracts and payments to a consultant for the repeal of an adviser contract.
15. COSTS OF SERVICES
The costs of services shown for the 6-months period ended June 30, 1999 in
the amount of TDM 2.114 include operational expenses such as network operations
and interconnection costs.
16. BALANCE SHEET AS OF AUGUST 31, 1998 AND INCOME STATEMENTS FOR THE PERIODS
FROM JANUARY 1, 1998 TO AUGUST 31, 1998, FROM SEPTEMBER 1, 1998 TO DECEMBER
31, 1998 AND FROM JANUARY 1, 1998 TO DECEMBER 31, 1998
The following balance sheet and income statements have been derived from
the audited financial statements as of August 31, 1998 (and December 31, 1998).
The financial statements as of August 31, 1998 represent the Company's financial
statements as of and prior to the purchase of the Company by Formus
Communications, Inc. in September 1998.
F-38
<PAGE> 114
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
16.1 BALANCE SHEET
The audited balance sheet as of August 31, 1998 is presented below:
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
1998
DM
<S> <C>
Current assets:
Cash and cash equivalents................................. 806.870
Stockholder receivables................................... 1.982.250
Other current assets...................................... 179.874
----------
Total current assets.............................. 2.968.994
----------
Property, plant and equipment
Other equipment, office equipment, at cost................ 124.761
Advance payments on equipment, at cost.................... 461.789
Less accumulated depreciation and amortization............ (22.422)
----------
Net property, plant and equipment......................... 564.128
----------
Intangible assets, at cost.................................. 3.007.534
Less accumulated depreciation and amortization............ (320)
----------
Net intangible assets..................................... 3.007.214
----------
6.540.336
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade.................................... 3.139.851
Accrued expenses.......................................... 554.680
Other current liabilities................................. 127.984
----------
Total current liabilities/total liabilities....... 3.822.515
----------
Stockholders' equity:
Common stock................................................ 1.000.000
thereof not paid-in: DM 382.250
Additional paid-in capital.................................. 3.100.000
thereof not paid-in: DM 1.600.000
Deficit accumulated during the development stage............ (1.382.179)
----------
Total shareholders' equity........................ 2.717.821
----------
6.540.336
==========
</TABLE>
F-39
<PAGE> 115
CALLINO GMBH
(FORMERLY ARCIS MEDIACOM MANAGEMENT GMBH)
MUNICH
-- A DEVELOPMENT STAGE ENTERPRISE --
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
16.2 INCOME STATEMENTS
The audited income statements for the periods January 1 -- August 31, 1998,
September 1 -- December 31, 1998 and January 1 -- December 31, 1998 are
presented below:
<TABLE>
<CAPTION>
JANUARY 1 -- SEPTEMBER 1 -- JANUARY 1 --
AUGUST 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998
--------------- ----------------- -----------------
DM DM DM
<S> <C> <C> <C>
Costs and expenses:
Selling, general and administrative
expenses......................... (1.345.144) (1.740.412) (3.085.556)
Depreciation expenses............... (23.594) (308.582) (332.176)
Interest income..................... 772 63.647 64.419
Interest expenses................... (715) (19.435) (20.150)
Other expenses...................... 0 (826) (826)
---------- ---------- ----------
Loss from operations........ (1.368.681) (2.005.608) (3.374.289)
---------- ---------- ----------
Net loss.................... (1.368.681) (2.005.608) (3.374.289)
========== ========== ==========
</TABLE>
F-40
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VeloCom Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of VELOCOM INC.
AND SUBSIDIARIES (a Delaware corporation) as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from inception (April 29, 1998) through December 31, 1998.
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VeloCom Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the period from inception (April 29, 1998) through December
31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
September 30, 1999.
F-41
<PAGE> 117
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $2,340,144 $29,388,749
Receivable from affiliates................................ 394,530 863,806
---------- -----------
Total current assets.............................. 2,734,674 30,252,555
Investment in affiliates.................................... -- 14,863,800
Property and equipment, net of accumulated depreciation of
$1,026 and $16,755, respectively.......................... 45,572 109,075
Stock subscription receivable............................... -- 493,000
Other noncurrent assets..................................... -- 33,843
---------- -----------
Total assets...................................... $2,780,246 $45,752,273
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 462,984 $ 472,336
Accrued liabilities.................................... 6,452 15,459
---------- -----------
Total current liabilities......................... 469,436 487,795
---------- -----------
Convertible preferred stock, mandatorily redeemable, $.01
par value;
Series A, 15,000,000 shares authorized; none and
15,000,000 shares issued and outstanding,
respectively.......................................... -- 44,982,605
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock; undesignated, 5,000,000 shares
authorized; zero shares issued and outstanding......... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 3,155,000 and 3,680,086 shares issued and
outstanding, respectively.............................. 31,550 36,801
Additional paid-in capital................................ 3,123,450 4,218,457
Other cumulative comprehensive income (loss).............. -- (404,498)
Deficit accumulated during development stage.............. (844,190) (3,568,887)
---------- -----------
Total stockholders' equity........................ 2,310,810 281,873
---------- -----------
Total liabilities and stockholders' equity........ $2,780,246 $45,752,273
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-42
<PAGE> 118
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM
APRIL 29, 1998 FOR THE SIX APRIL 29, 1998
(INCEPTION) TO MONTHS ENDED (INCEPTION) TO
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999
--------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating costs and expenses:
General and administrative...................... $ 914,272 $ 1,681,016 $ 2,595,288
--------- ----------- -----------
Operating loss.................................. (914,272) (1,681,016) (2,595,288)
--------- ----------- -----------
Other income:
Interest income................................. 70,082 385,772 455,854
--------- ----------- -----------
Net loss before other items..................... (844,190) (1,295,244) (2,139,434)
--------- ----------- -----------
Share in results of affiliated companies, net..... -- (1,428,585) (1,428,585)
--------- ----------- -----------
Net loss........................................ $(844,190) $(2,723,829) $(3,568,019)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE> 119
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
OTHER ACCUMULATED
ADDITIONAL CUMULATIVE DURING THE TOTAL
PAID-IN COMPREHENSIVE DEVELOPMENT COMPREHENSIVE
SHARES AMOUNTS CAPITAL LOSS(1) STAGE LOSS TOTAL
--------- ------- ---------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception (April 29,
1998)................ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock issued
for $1.00 per share
on May 5, 1998..... 200,000 2,000 198,000 -- -- -- 200,000
Common stock issued
for cash at $1.00
per share on June
30, 1998........... 2,955,000 29,550 2,925,450 -- -- -- 2,955,000
Net loss............. -- -- -- -- (844,190) (844,190) (844,190)
--------- ------- ---------- --------- ----------- ----------- -----------
Balances, December 31,
1998................. 3,155,000 31,550 3,123,450 -- (844,190) (844,190) 2,310,810
===========
Common stock issued
for cash at $1.00
per share on
January 6, 1999
(unaudited)........ 200,000 2,000 198,000 -- -- -- 200,000
Common stock issued
for cash at $2.25
per share on
February 12, 1999
(unaudited)........ 75,000 750 168,000 -- -- -- 168,750
Common stock issued
for cash at $2.25
per share on May 8,
1999 (unaudited)... 25,000 250 56,000 -- -- -- 56,250
Common stock issued
for cash at $3.00
per share on June
15, 1999
(unaudited)........ 123,615 1,236 369,609 -- -- -- 370,845
Common stock issued
for services on
June 15, 1999
(unaudited)........ 18,138 182 54,232 -- -- -- 54,414
Common stock issued
for cash at $3.00
per share on June
18, 1999
(unaudited)........ 83,333 833 249,166 -- -- -- 249,999
Accretion of
mandatorily
redeemable
preferred stock
(unaudited)........ -- -- -- -- (868) (868)
Cumulative
translation
adjustment......... -- -- -- (404,498) -- (404,498) (404,498)
Net loss
(unaudited)........ -- -- -- -- (2,723,829) (2,723,829) (2,723,829)
--------- ------- ---------- --------- ----------- ----------- -----------
Balances, June 30, 1999
(unaudited).......... 3,680,086 $36,801 $4,218,457 $(404,498) $(3,568,887) $(3,128,327) $ 281,873
========= ======= ========== ========= =========== =========== ===========
</TABLE>
- ---------------
(1) As of June 30, 1999, other cumulative comprehensive loss represents
cumulative translation adjustments.
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE> 120
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM
APRIL 29, 1998 FOR THE SIX APRIL 29, 1998
(INCEPTION) TO MONTHS ENDED (INCEPTION) TO
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999
--------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (844,190) $ (2,723,829) $ (3,568,019)
Adjustments to reconcile net loss to net cash
used in operating activities-
Share in results of affiliated companies.... -- 1,428,585 1,428,585
Depreciation and amortization............... 1,026 15,729 16,755
Issuance of common and preferred stock for
services.................................. -- 60,000 60,000
Changes in operating assets and liabilities-
Increase in receivable from affiliates.... (394,530) (469,276) (863,806)
Increase in other assets.................. -- (33,843) (33,843)
Increase in accounts payable, accrued
liabilities and other.................. 469,436 18,359 487,795
---------- ------------ ------------
Net cash used in operating
activities........................... (768,258) (1,704,275) (2,472,533)
---------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment............. (46,598) (79,232) (125,830)
Investments in affiliate....................... -- (16,696,883) (16,696,883)
---------- ------------ ------------
Net cash used in investing
activities........................... (46,598) (16,776,115) (16,822,713)
---------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 3,155,000 552,844 3,707,844
Proceeds from issuance of Series A preferred
stock, net.................................. -- 44,976,151 44,976,151
---------- ------------ ------------
Net cash provided by financing
activities........................... 3,155,000 45,528,995 48,683,995
---------- ------------ ------------
Net change in cash and cash equivalents.......... 2,340,144 27,048,605 29,388,749
Cash and cash equivalents, beginning of year..... -- 2,340,144 --
---------- ------------ ------------
Cash and cash equivalents, end of year........... $2,340,144 $ 29,388,749 $ 29,388,749
========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest......................... $ -- $ -- $ --
========== ============ ============
Cash paid for taxes............................ $ -- $ -- $ --
========== ============ ============
Non-cash financing activities Contribution of
stock subscription receivable............... -- 493,000 493,000
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE> 121
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL REFERENCES TO JUNE 30, 1999 AMOUNTS ARE UNAUDITED)
(1) ORGANIZATION AND OWNERSHIP
VeloCom Inc. and subsidiaries (collectively, the "Company", and formerly
known as WLL International, Inc.) is a Delaware corporation incorporated in
April 1998 with the intent to become a leading provider of competitive voice,
data and internet services in Latin America. As principal operations have not
yet commenced, the Company's financial statements are presented on the basis of
a company in the development stage. The effect on the Company's financial
statements is to report cumulative results of operations and cash flows since
inception (April 29, 1998).
The Company formed two joint ventures with four other parties which applied
for and won in a public auction, two Brazilian competitive local exchange
carrier licenses, one for the Sao Paulo, Brazil region and one for the northeast
region (which comprises 16 states) of Brazil (the "Brazilian Mirror Licenses").
The Company is one of the largest shareholders of Mirror Holding S.A. ("Mirror
Holding") with a 34.4% ownership interest. Mirror Holding owns a 99% interest in
Mirror S.A. which is the entity that was awarded the mirror license for the
northeast region (which comprises 16 states) of Brazil on February 4, 1999. The
Company is one of the largest shareholders of Megatel Holding S.A. ("Megatel
Holding") with a 35.3% ownership interest. Megatel Holding owns a 99% interest
in Megatel do Brasil S.A. which is the entity that was awarded the mirror
license for the Sao Paulo region on May 5, 1999. The licenses grant a two year
exclusive use of wireless local loop at 1.9 GHz (20 MHz) and at 3.4 GHz (50 MHz)
for a 20 year renewable period, providing all license conditions are satisfied.
The licenses also grant a duopoly with the incumbent provider or local service
provider until January 2002. On September 27, 1999, the Company completed a
series of transactions which increased its ownership in both Mirror Holding and
Megatel Holding to approximately 49%, (see Note 9).
The Company is in the development stage and has generated no revenues to
date. Since commencement of operations (April 29, 1998), the Company has
incurred net losses totaling approximately $844,000 through December 31, 1998.
As a result of its development stage activities, the Company has experienced
operating losses and negative cash flows from operations. The Company expects to
continue to generate negative cash flows from operations in each market while it
emphasizes development, construction, and expansion of its business and until
the Company establishes a sufficient revenue generating customer base in each
market. The Company also expects to experience increasing operating losses and
negative cash flows from operations as it expands its operations and enters new
markets, even if and after it achieves positive cash flow from operations in its
initial markets.
The Company's ultimate success could be affected by the problems, expenses
and delays encountered in connection with the formation of any new business and
by the competitive environment in which the Company intends to operate. Delays
or failure in receiving required regulatory approvals or the enactment of new
regulations or regulatory requirements may have a material adverse effect upon
the Company. Although management believes that the Company will be able to
successfully mitigate these risks, there is no assurance that the Company will
be able to do so or that the Company will ever operate profitably.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which were wholly owned as of year end. All
significant intercompany accounts and transactions have been eliminated in
consolidation. As of June 30, 1999, the Company held a 34.4% interest in Mirror
Holding and a 35.3% interest in Megatel Holding which are accounted for under
the equity method of accounting. Subsidiaries are consolidated as of the
acquisition date, if the company has control either through ownership of a
majority of the subsidiary's voting stock or through control of the board of
directors or management of the subsidiary.
F-46
<PAGE> 122
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In management's opinion, all adjustments (of a normal recurring nature)
have been made which are necessary to present fairly the financial position of
the Company as of June 30, 1999 and the results of its operations for the six
months ended June 30, 1999.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CREDIT RISK AND CONCENTRATION OF OPERATIONS
The Company has an investment in two companies in Brazil, which totals
approximately $14,900,000. Accordingly, the Company is exposed to credit risk
resulting from adverse general economic conditions which may affect Brazil and
Latin America. The Company has not entered into any foreign currency contract,
hedges or options.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less which are readily convertible into cash and are not subject to
significant risk from fluctuations in interest rates.
STOCK SUBSCRIPTION RECEIVABLE
Represents a subscription receivable from certain shareholders, which was
paid subsequent to June 30, 1999.
RECEIVABLE FROM AFFILIATES
The Company incurs costs on behalf of its affiliates such as salaries and
benefits of the Company's employee's, travel and professional services. These
costs include an administrative fee of 15% and are reimbursed by the affiliates.
As of June 30, 1999, the Company is in the process of negotiating a technical
services agreement with its affiliates in Brazil, whereby the affiliates will be
contractually required to reimburse the Company for such services.
INVESTMENTS IN AFFILIATES
For those investments in companies in which the Company's ownership
interest is 20% to 50%, and the Company exerts significant influence through
board representation and management authority, the equity method of accounting
is used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the Company's proportionate share of net earnings or
losses of the affiliates, limited to the extent of the Company's investment. As
of June 30, 1999 the Company held a 34.4% interest in Mirror Holding which holds
a 99% interest in Mirror S.A. the operating company. Additionally, the Company
had a 35.3% interest in Megatel Holding which holds a 99% interest in Megatel do
Brazil S.A., the operating company. The operating companies were awarded
licenses to operate fixed telephony services in Sao Paulo and the northeast
region of Brazil.
F-47
<PAGE> 123
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repair
expenditures are charged to expense as incurred and expenditures for
improvements which increase the expected useful lives of the assets are
capitalized. Depreciation expense is computed using the straight-line method
over the useful lives of the respective assets. The economic lives of property
and equipment at acquisition are as follows:
<TABLE>
<S> <C>
Furniture and office equipment.............................. 5 years
Computer equipment.......................................... 3 years
Computer software........................................... 3 years
</TABLE>
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryovers. The Company recognizes deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryovers and tax
credit carryovers. Net deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits to the
extent it is more likely than not, that some or all of the deferred tax assets
will not be realized.
LONG-LIVED ASSETS
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continually
evaluates the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated liquidation value of such long-lived assets,
and provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current amounts receivable and
payable approximate the carrying amount due to their short-term nature.
SEGMENT REPORTING
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company is currently in the development stage and has yet to commence
its planned principal operations. Through December 31, 1998, the significant
portion of the Company's expenditures were associated with its development
efforts in Latin America. The Company expects to incur significant costs
associated with the expansion of its development efforts. Thus, for 1998, the
Company has not disclosed segment information as it is not meaningful.
F-48
<PAGE> 124
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN OPERATIONS AND FOREIGN EXCHANGE RATE RISK
The functional currency of the Company's foreign subsidiaries is either the
applicable local currency or the U.S. dollar, as determined based on the
operations of each subsidiary. Assets and liabilities of foreign subsidiaries
for which the functional currency is the local currency are translated at
exchange rates in effect at period-end, and the statements of operations are
translated at the average exchange rates during the period. Exchange rate
fluctuations on translating foreign currency financial statements into U.S.
dollars that result in unrealized gains or losses are referred to as translation
adjustments. Cumulative translation adjustments are recorded as a separate
component of stockholders' deficit and are included in Other Cumulative
Comprehensive Income (Loss).
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions.
STOCK OPTIONS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan and, accordingly, does not recognize
compensation cost for options granted to employees whose exercise price is equal
to or exceeds the fair value of the underlying stock as of the grant date.
NEW ACCOUNTING PRINCIPLES
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under SFAS 133, accounting for
changes in fair value of a derivative depends on its intended use and
designation. SFAS 133 is effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which amends SFAS 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company is
currently assessing the effect of this new standard but believes it will not
have a material impact on its consolidated results of operations.
The American Institute of Certified Public Accountants ("AICPA") recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
is for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, for projects in progress and
prospectively, with earlier application encouraged. The Company adopted SOP 98-1
effective January 1, 1999 with no material impact to the consolidated financial
statements.
The AICPA recently issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"), which is required to be adopted by
affected companies for fiscal years beginning after December 15, 1998. SOP 98-5
defines start-up organization costs, which must be expensed as incurred. In
addition, all deferred start-up and organization costs existing as of January 1,
1999 must be written off and accounted for as a cumulative effect of an
accounting change. The adoption of SOP 98-5 did not have a material effect on
the Company's financial position or results of operation as the company's
historical accounting policy was to expense start-up costs as incurred.
F-49
<PAGE> 125
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INCOME TAXES
The Company is subject to federal and state income taxes but has incurred
no liability for such taxes due to losses it has incurred since inception. At
December 31, 1998, the Company had net operating loss carryforwards for U.S.
federal tax purposes of approximately $278,000 which expire through the year
2013. These carryforwards are available to offset future taxable income.
The Company's net deferred tax asset results primarily from the future
benefit of net operating loss carryforwards. The net deferred tax assets as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Net operating losses........................................ $ 89,213
Start up costs.............................................. 169,291
Accelerated depreciation.................................... (213)
Other....................................................... 11,850
Less: Valuation allowances................................ (270,141)
---------
Net deferred tax assets................................... $ --
=========
</TABLE>
The reconciliation of income taxes computed at the statutory rates to the
income tax benefit is as follows:
<TABLE>
<CAPTION>
INCEPTION
(APRIL 29, 1998) TO
DECEMBER 31,
1998
-------------------
<S> <C>
Income tax benefit at statutory rates....................... $(270,141)
Increase in valuation allowance............................. 270,141
---------
Total income tax benefit.................................... $ --
=========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
RECOVERY OF INVESTMENTS
Since its inception, the Company's efforts have been primarily directed
towards raising capital and developing and operating the competitive voice, data
and internet communications networks. The Company has made a significant
investment in pre-operating entities in Brazil whose primary assets are
competitive local exchange carrier licenses. The ability of the Company's
affiliate to recover its current investment and to generate positive cash flow
and operating profits is contingent upon a number of factors.
RECOVERABILITY OF LICENSES
The terms of the Company's affiliate's license agreements contain
provisions whereby the operating company must achieve certain levels of network
build out. If such commitments are not met, the Company's affiliate could be
subject to fines, and in certain circumstances the revocation of the applicable
licenses.
Compliance with the terms of these licenses and certain regulatory
requirements can be difficult to meet. In addition, there can be no assurance
that in the future all regulatory requirements will be met or that the Company's
affiliate will not lose any applicable licenses as a result of its failure to
meet such requirements.
F-50
<PAGE> 126
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS
The Company leases its office facility and certain office furniture under a
non-cancelable operating lease. The lease term expires July 14, 2000. Future
minimum rental payments under the lease for such office facility are as follows
as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 98,796
2000........................................................ 53,515
--------
$152,311
========
</TABLE>
LITIGATION
In the normal course of business, the Company is subject to, and may become
a party to, litigation. The Company is currently not party to any litigation.
(5) INVESTMENT IN AFFILIATE CONDENSED FINANCIAL INFORMATION
The Company formed two joint ventures with four other parties which applied
for and won in a public auction, two Brazilian competitive local exchange
carrier licenses, one for the Sao Paulo region and one for the northeast region
(which comprises 16 states) of Brazil. A description of the companies and their
condensed Financial Statements as of June 30, 1999 follow:
The Company holds a 34.4% interest in Mirror Holding S.A. Mirror Holding
owns a 99% interest in Mirror S.A. which is the entity that was awarded the
mirror license for the northeast region of Brazil on February 4, 1999. Condensed
financial information for Mirror S.A., stated in US dollars is as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1999
-------------
(UNAUDITED)
<S> <C>
Current assets.............................................. $10,397,000
Non-current assets.......................................... 39,702,000
-----------
Total assets...................................... $50,099,000
===========
Current liabilities......................................... 12,562,000
Non-current liabilities..................................... 11,382,000
Stockholders' equity........................................ 26,155,000
-----------
Total liabilities and stockholders' equity........ $50,099,000
===========
Revenue..................................................... 16,000
Expenses.................................................... 3,735,000
-----------
Net Loss.......................................... $(3,719,000)
===========
</TABLE>
F-51
<PAGE> 127
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company holds a 35.3% interest in Megatel Holding S.A. Megatel Holding
owns a 99% interest in Megatel do Brasil S.A. which is the entity that was
awarded the mirror license for the Sao Paulo region of Brazil on May 5, 1999.
Condensed financial information for Megatel do Brasil S.A. stated in US dollars
is as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1999
-------------
(UNAUDITED)
<S> <C>
Current assets.............................................. $ 1,940,000
Non-current assets.......................................... 40,761,000
-----------
Total assets...................................... $42,701,000
===========
Current liabilities......................................... 12,862,000
Non-current liabilities..................................... 12,187,000
Stockholders' equity........................................ 17,652,000
-----------
Total liabilities and Stockholders' equity........ $42,701,000
===========
Revenue..................................................... $ --
Expenses.................................................... 459,000
-----------
Net Loss.......................................... $ (459,000)
===========
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
Furniture and office equipment.............................. $20,863 $ 69,205
Computer equipment.......................................... 25,735 42,936
Leasehold improvements...................................... -- 13,689
------- --------
46,598 125,830
Less- accumulated depreciation.............................. (1,026) (16,755)
------- --------
$45,572 $109,075
======= ========
</TABLE>
(7) STOCK OPTIONS
The Company maintains a stock option plan (the "Plan") which provides for
the grant of stock options, restricted stock awards and other stock grants to
directors, key employees, and consultants to purchase common stock of the
Company. The Plan, amended May 7, 1999 allows for 3,300,000 options available
for grant. Under the Plan, incentive stock options are granted at an exercise
price not less than the fair market value of the common stock on the date of the
grant, as determined by the Company's Board of Directors.
F-52
<PAGE> 128
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at April 29, 1998............................... -- $ --
Granted................................................... 1,110,000 1.37
Exercised................................................. -- --
Forfeited................................................. -- --
--------- -----
Outstanding at December 31, 1998............................ 1,110,000 1.37
Granted (unaudited)....................................... 1,517,000 2.49
Exercised (unaudited)..................................... -- --
Forfeited (unaudited)..................................... -- --
--------- -----
Outstanding as of June 30, 1999 (unaudited)................. 2,627,000 $2.02
========= =====
</TABLE>
At December 31, 1998 there were 2,190,000 options available for grant under
the Plan. Outstanding options typically vest over four years and expire ten
years from the date of grant. The weighted-average grant date fair value during
1998 and through June 30, 1999 (unaudited) is $.22 and $.52 per option,
respectively. All options granted during 1998 and the six months ended June 30,
1999, were granted with an exercise price equal to the fair value of common
stock.
The following table summarizes information about stock options as of
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
-------------- ----------- -----------
<S> <C> <C> <C>
December 31, 1998................................. $1.37 1,110,000 56,927
----- --------- ------
$1.37 1,110,000 56,927
===== ========= ======
</TABLE>
The following table summarizes unaudited information about stock options as
of June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
-------------- ----------- -----------
<S> <C> <C> <C>
June 30, 1999 (unaudited)......................... $2.02 2,627,000 265,427
----- --------- -------
$2.02 2,627,000 265,427
===== ========= =======
</TABLE>
Fair values of employee options are estimated on the date of grant using
the Black-Scholes single-option pricing model. The fair value of each option
granted to employees was estimated on the date of grant using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 JUNE 30, 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Estimated dividends...................................... None None
Risk-free interest rate.................................. 4.25%-4.56% 4.56%-5.63%
Expected life............................................ 4 years 4 years
Expected volatility...................................... 0% 0%
</TABLE>
F-53
<PAGE> 129
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB 25 in accounting for its stock compensation plan,
and accordingly no compensation expense has been recognized in the financial
statements for options granted to employees at or above fair value.
Had the Company recognized compensation cost for options granted to
employees based on the fair value of the options granted as of the grant date as
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), net loss would have increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM CUMULATIVE
APRIL 29, 1998 FROM APRIL 29,
(INCEPTION) TO SIX MONTHS ENDED 1998 (INCEPTION)
DECEMBER 31, JUNE 30, 1999 TO JUNE 30, 1999
1998 (UNAUDITED) (UNAUDITED)
--------------------- ----------------------- -----------------------
BASIC AND BASIC AND BASIC AND
DILUTED DILUTED DILUTED
NET LOSS NET LOSS NET LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
--------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
As reported................................ $(844,190) $(.52) $(2,723,829) $(.79) $(3,568,019) $(1.04)
Pro forma.................................. $(854,580) $(.53) $(2,853,073) $(.83) $(3,707,653) $(1.08)
</TABLE>
(8) CAPITAL STOCK
COMMON STOCK
As of December 31, 1998, the Company had issued a total of 3,155,000 shares
of common stock, resulting in net proceeds to the Company of $3,155,000. The par
value is $.01 per share. Each share of common stock constitutes one vote at any
annual or special meeting, or action by written consent.
PREFERRED STOCK
The Company may issue from time to time shares of mandatorily stock in one
or more series with designations, rights, preferences and limitations
established by the Company's Board of Directors. The Company is authorized to
issue 20,000,000 shares of $0.01 par value of preferred stock as of June 30,
1999.
During 1999, the Company completed private placements of Series A
mandatorily redeemable preferred stock ("Series A preferred stock"). Total net
proceeds to the Company as a result of these private placements was
approximately $45,000,000. The Series A preferred stock votes with, and in the
same manner as, the shares of voting common stock of the Company, not as a
special class except in respect of certain matters.
Holders of preferred stock are entitled to dividends in amounts determined
by the Board of Directors. No distributions may be made to holders of common
stock until all dividends declared, if any, on the preferred stock have been
paid.
Each share of Series A preferred stock is convertible, at the option of the
holder, into shares of the Company's common stock at the rate currently of one
share of common stock for each share of Series A preferred stock. This
conversion rate is subject to adjustment based on a formula to prevent dilution.
Each share of Series A preferred stock is automatically convertible into common
stock immediately prior to the closing of a public offering which meets certain
conditions. The Company is obligated to redeem: (1) 33 1/3% of the
then-outstanding shares of Series A preferred stock on the sixth anniversary of
the first date of issuance, (2) 50% of the then-outstanding shares of Series A
preferred stock on the seventh anniversary of the first date of issuance, and
(3) all remaining shares of Series A preferred stock on the
F-54
<PAGE> 130
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eighth anniversary. The redemption price for the Series A preferred stock is
$3.00 per share as of June 30, 1999.
(9) SUBSEQUENT EVENTS
On September 27, 1999, the Company completed a number of transactions that
are in total referred to as the "Roll-Up Transactions."
The Company and SLI Wireless S.A. ("SLI") executed an agreement whereby the
Company acquired from SLI (a) the 12.5% interest and 12.8% interest in Mirror
Holding and Megatel Holding, respectively, (b) a 100% interest in and a 50%
interest in two Argentine license holding companies, (c) a 55% interest in a
Delaware operating company (operating in Argentina), Telelatina Management
Company ("Telelatina") and (d) a 10% indirect interest in a Colombian license
holding company. In addition, SLI paid approximately $13,838,000 to the Company.
In consideration for these assets and cash, the Company issued to SLI 4,330,709
shares of common stock and 7,840,000 shares of Series A preferred stock.
The Company and Formus Communications Inc. ("Formus") executed an agreement
whereby the Company acquired (a) license holding companies in Argentina,
Colombia and Peru, (b) companies with pending license applications in Chile,
Venezuela and Bolivia and (c) a 29.6% interest in Telelatina. In addition,
Formus paid approximately $20,834,000 to the Company. In consideration for these
assets and cash, the Company issued to an affiliate of Formus 1,574,803 shares
of common stock and 7,866,333 shares of Series A preferred stock.
The Company and Taquari Participacoes S.A. ("Taquari") executed an
agreement whereby the Company acquired (a) the 2.5% interest in Mirror Holding
and the right to purchase 1.25% of the outstanding shares in Megatel Holding. In
addition, Taquari will contribute cash of approximately $3,280,000. In
consideration for these assets and cash, the Company issued to Taquari and an
affiliate 1,673,228 shares of common stock.
The Company acquired from PCN do Brasil ("PCN") and Inepar S/A Industria e
Construcoes ("INEPAR") (a) Inepar's 15% interest in an Argentine license holding
company, (b) PCN's 15% interest in Telelatina, (c) PCN's 35% interest in an
Argentine license holding company and (d) PCN's 15% indirect interest in a
Colombian license holding company. In consideration for these assets, the
Company paid to INEPAR, approximately $657,000 and paid to PCN approximately
$1,718,000. In addition, the Company issued approximately $13,626,000 worth of
7% secured promissory notes payable due on November 10, 1999.
As a result of these Roll-Up Transactions, the Company increased its
ownership interest to approximately 49% in each Mirror Holding and Megatel
Holding and owns 100% of Telelatina, an operating company expecting to launch
commercial data and internet access services in 2000 and also acquired a number
of other licenses and license applications in the various countries noted above.
F-55
<PAGE> 131
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[FORMUS.NET LOGO]
SHARES OF CLASS A COMMON STOCK
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
DLJdirect INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is an addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in the offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $41,700
National Association of Securities Dealers, Inc. filing
fee....................................................... 15,500
Nasdaq National Market listing fee.......................... *
Transfer agent's and registrar's fees....................... *
Printing expenses........................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky filing fees and expenses........................... *
Miscellaneous expenses...................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ------------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance that
protects its officers, directors, employees and agents against any liabilities
incurred in connection with their service in such positions.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters of the
Registrant and its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities issued or sold by the
Registrant within the last three years. During that time, the Registrant has
issued unregistered securities in the transactions described below. Securities
issued in such transaction were offered and sold in reliance upon the exemption
from registration under Section 4(2) of the Securities Act, relating to sales by
an issuer not involving any public offering, or under Rule 701 under the
Securities Act. The sales of securities were made without the use of an
underwriter and the certificates evidencing the shares bear a restrictive legend
permitting the transfer thereof only upon registration of the shares or an
exemption under the Act.
(1) From April 1997 to the present, we have granted options to purchase an
aggregate of shares of common stock to employees, directors and
consultants pursuant to the Formus Communications, Inc. Equity Incentive Plan
dated April 15, 1997, as amended.
(2) On November 20, 1996, the Company entered into a Common Stock Purchase
Agreement for the sale of an aggregate shares of Common Stock to four
institutional investors and one other sophisticated investor for an aggregate
purchase price of $1,235,000.
II-1
<PAGE> 133
(3) On February 28, 1997, the Company entered into an Amended and Restated
Common Stock Purchase Agreement for the sale of an aggregate shares of
Common Stock to seven institutional investors and one sophisticated investor for
an aggregate purchase price of $1,147,000.
(4) On August [13], 1997, the Company entered into a Stock Purchase and
Accession Agreement for the sale of an aggregate shares of Common
Stock to three institutional investors for an aggregate purchase price of
$33,500.
(5) On August 13, 1997, the Company entered into a Preferred Stock Purchase
Agreement, as amended on November 7, 1997, for the sale of an aggregate
shares of Series A Preferred Stock and an aggregate 4,056,000 shares
of Series B Preferred Stock to 18 institutional investors and other
sophisticated investors for an aggregate purchase price of $52,625,000.
(6) On September 28, 1998, the Company entered into a Preferred Stock
Purchase Agreement for the sale of an aggregate 6,424,528 shares of Series C
Preferred Stock and an aggregate shares of Series D Preferred Stock to
19 institutional investors for an aggregate purchase price of $25,000,003.
(7) On September 3, 1999, the Company issued an aggregate shares
of Series E Preferred Stock and an aggregate shares of Series F
Preferred Stock, along with $100,000 in cash, in exchange for the remaining
equity interest in Callino GmbH and its Dutch holding company that the Company
did not own.
(8) On September 3, 1999, the Company entered into a Preferred Stock
Purchase Agreement for the sale of an aggregate shares of Series E
Preferred Stock and an aggregate shares of Series F Preferred Stock to
53 institutional investors and other sophisticated investors for an aggregate
purchase price of $115,848,170.
(9) On September 9, 1999, the Company issued to Intel Corporation a warrant
to purchase shares of Series E Preferred Stock in connection with
Intel's execution of a marketing assistance agreement.
The issuances described in paragraphs (2) through (9) above were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. The sales of securities described in paragraph (1) above were deemed
to be exempt from the registration requirements of the Securities Act in
reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as
transactions by an issuer pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to information about the Company.
II-2
<PAGE> 134
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Purchase Agreement among Formus Communications, Inc., Formus
International, Inc. and VeloCom Inc. dated as of August 20,
1999
2.2 Exchange Agreement among Formus Communications, Inc., Formus
International, Inc. and the Shareholders listed on Schedule
1 dated as of August 30, 1999
3.1* Form of Amended and Restated Certificate of Incorporation of
Formus
3.2* Bylaws of Formus
4.1* Specimen stock certificates for shares of Common Stock of
Formus Communications, Inc.
4.2 Employee Stockholders Agreement among Formus Communications,
Inc. and the individuals identified on the Exhibit dated as
of August 1, 1997
4.3 Fourth Amended and Restated Investors' Rights Agreement
among Formus Communications, Inc. and certain holders of
stock listed on Schedule A dated as of September 3, 1999
4.4* Warrant to Purchase Series E Preferred Stock of Formus
Communications, Inc. dated as of September 9, 1999
4.5* Formus Polska Sp. z o.o. Shareholders Agreement dated as of
November 1997 between Formus International-Poland, Inc. and
Elmedia Sp. z o.o.
5.1* Opinion of Holme Roberts & Owen LLP, regarding legality of
securities being registered
10.1 License of the License Category 3, Registration No.
98030188, dated September 8, 1998, as amended by Notice of
Change dated March 24, 1999
10.2 License of the License Category 4, Registration No.
98040578, dated March 31, 1998, as amended by Notice of
Change dated July 22, 1998
10.3 Certificate Provisional Frequency Allocation No. 98370188
dated July 21, 1999, and Allocation No. 98370059.
10.4 Concession and Permission No. 300/97/TI dated October 31,
1997, as amended by Decision Number T-585/k-300(1)/98
10.5 Formus Communications, Inc. Equity Incentive Plan effective
as of April 15, 1997, as amended
10.6 Form of Stock Option Agreement
10.7 Letter Agreement between Osmo A. Hautanen and Formus
Communications, Inc. dated July 1, 1998
10.8 Severance Agreement between Vernon F. Kenley and Formus
Communications, Inc. dated May 1, 1999
10.9 Form of Letter Agreement between Formus Communications, Inc.
and employees
10.10* E120 million Multi-Tranche Secured Senior Facility Agreement
among Formus Polska Sp. z o.o., as borrower, Westdeutsche
Landesbank (France) S.A., as facility agent, Westdeutsche
Landesbank Polska S.A., as security trustee, and each of the
financial institutions listed in Schedule 1, dated September
15, 1999
21.1 Subsidiaries of Formus Communications, Inc.
23.1 Consent of Arthur Andersen LLP (Formus Communications, Inc.)
23.2 Consent of Arthur Andersen LLP (VeloCom Inc.)
23.3 Consent of Haarmann, Hemmelrath & Partner GMBH (Callino
GmbH)
</TABLE>
II-3
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.4* Consent of Holme Roberts & Owen LLP(included as part of
Exhibit 5.1)
24.1 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Charter or Bylaws or the Delaware
General Corporation Law 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 that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of Denver,
Colorado, on the 6th day of October, 1999.
FORMUS COMMUNICATIONS, INC.
By: /s/ BERNARD G. DVORAK
----------------------------------
Bernard G. Dvorak
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Chief Executive Officer and October 6, 1999
- ----------------------------------------------------- Director (Principal
Osmo A. Hautanen Executive Officer)
/s/ BERNARD G. DVORAK Senior Vice President, Chief October 6, 1999
- ----------------------------------------------------- Financial Officer and
Bernard G. Dvorak Secretary (Principal
Financial Officer)
* Corporate Controller October 6, 1999
- ----------------------------------------------------- (Principal Accounting
Eric B. Alexander Officer)
* Chairman of the Board of October 6, 1999
- ----------------------------------------------------- Directors
William J. Elsner
* Director October 6, 1999
- -----------------------------------------------------
Steven C. Halstedt
* Director October 6, 1999
- -----------------------------------------------------
Michael R. Hannon
* Director October 6, 1999
- -----------------------------------------------------
Michael Honig
* Director October 6, 1999
- -----------------------------------------------------
William A. Johnston
* Director October 6, 1999
- -----------------------------------------------------
Ian Kidson
* Director October 6, 1999
- -----------------------------------------------------
Kevin J. Maroni
* Director October 6, 1999
- -----------------------------------------------------
Trygve E. Myhren
* Director October 6, 1999
- -----------------------------------------------------
Frederick A. Vierra
* Director October 6, 1999
- -----------------------------------------------------
James F. Wade
*By: /s/ BERNARD G. DVORAK
- -----------------------------------------------------
Bernard G. Dvorak
attorney-in-fact
</TABLE>
II-5
<PAGE> 137
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Purchase Agreement among Formus Communications, Inc., Formus
International, Inc. and VeloCom Inc. dated as of August 20,
1999
2.2 Exchange Agreement among Formus Communications, Inc., Formus
International, Inc. and the Shareholders listed on Schedule
1 dated as of August 30, 1999
3.1* Form of Amended and Restated Certificate of Incorporation of
Formus
3.2* Bylaws of Formus
4.1* Specimen stock certificates for shares of Common Stock of
Formus Communications, Inc.
4.2 Employee Stockholders Agreement among Formus Communications,
Inc. and the individuals identified on the Exhibit dated as
of August 1, 1997
4.3 Fourth Amended and Restated Investors' Rights Agreement
among Formus Communications, Inc. and certain holders of
stock listed on Schedule A dated as of September 3, 1999
4.4* Warrant to Purchase Series E Preferred Stock of Formus
Communications, Inc. dated as of September 9, 1999
4.5* Formus Polska Sp. z o.o. Shareholders Agreement dated as of
November 1997 between Formus International-Poland, Inc. and
Elmedia Sp. z o.o.
5.1* Opinion of Holme Roberts & Owen LLP, regarding legality of
securities being registered
10.1 License of the License Category 3, Registration No.
98030188, dated September 8, 1998, as amended by Notice of
Change dated March 24, 1999
10.2 License of the License Category 4, Registration No.
98040578, dated March 31, 1998, as amended by Notice of
Change dated July 22, 1998
10.3 Certificate Provisional Frequency Allocation No. 98370188
dated July 21, 1999, and Allocation No. 98370059.
10.4 Concession and Permission No. 300/97/TI dated October 31,
1997, as amended by Decision Number T-585/k-300(1)/98
10.5 Formus Communications, Inc. Equity Incentive Plan effective
as of April 15, 1997, as amended
10.6 Form of Stock Option Agreement
10.7 Letter Agreement between Osmo A. Hautanen and Formus
Communications, Inc. dated July 1, 1998
10.8 Severance Agreement between Vernon F. Kenley and Formus
Communications, Inc. dated May 1, 1999
10.9 Form of Letter Agreement between Formus Communications, Inc.
and employees
10.10* E120 million Multi-Tranche Secured Senior Facility Agreement
among Formus Polska Sp. z o.o., as borrower, Westdeutsche
Landesbank (France) S.A., as facility agent, Westdeutsche
Landesbank Polska S.A., as security trustee, and each of the
financial institutions listed in Schedule 1, dated September
15, 1999
21.1 Subsidiaries of Formus Communications, Inc.
23.1 Consent of Arthur Andersen LLP (Formus Communications, Inc.)
23.2 Consent of Arthur Andersen LLP (VeloCom Inc.)
</TABLE>
II-6
<PAGE> 138
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.3 Consent of Haarmann, Hemmelrath & Partner GMBH (Callino
GmbH)
23.4* Consent of Holme Roberts & Owen LLP(included as part of
Exhibit 5.1)
24.1 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
II-7
<PAGE> 1
EXHIBIT 2.1
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
BY AND AMONG
FORMUS COMMUNICATIONS, INC. AND FORMUS INTERNATIONAL, INC.
AND
VELOCOM INC.
DATED AS OF AUGUST 20, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. CERTAIN DEFINITIONS....................................................................................3
ARTICLE 2. PURCHASE AND SALE......................................................................................8
Section 2.1 Purchase and Sale. ................................................................................8
Section 2.2 Purchase Price ....................................................................................8
Section 2.3 Closing; Delivery and Payment. ....................................................................8
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT............................................8
Section 3.1 Organization and Standing. ........................................................................8
Section 3.2 Capitalization of the Companies ...................................................................9
Section 3.3 Ownership; Shareholder Agreements. ...............................................................10
Section 3.4 Authority ........................................................................................10
Section 3.5 Financial Statements. ............................................................................11
Section 3.6 Material Changes. ................................................................................11
Section 3.7 Title to Assets and Properties ...................................................................12
Section 3.8 Real Property and Leases .........................................................................12
Section 3.9 The Licenses .....................................................................................12
Section 3.10 The License Applications ........................................................................13
Section 3.11 Insurance .......................................................................................13
Section 3.12 Compliance with Law. ............................................................................14
Section 3.13 Liabilities .....................................................................................14
Section 3.14 Taxes ...........................................................................................15
Section 3.15 Disputes. .......................................................................................15
Section 3.16 Contracts. ......................................................................................15
Section 3.17 Debt Obligations and Commitments. ...............................................................16
Section 3.18 Brokers and Finders. ............................................................................17
Section 3.19 Collective Bargaining Agreements, Employment Agreements and Employee Relations ..................17
Section 3.20 Employee Benefits ...............................................................................17
Section 3.21 Trademarks, Patents, Trade Names, etc ...........................................................18
Section 3.22 Consents ........................................................................................18
Section 3.23 Recordkeeping Compliance ........................................................................18
Section 3.24 Condition of the Companies; Operation of Business in the Ordinary Course ........................18
Section 3.25 No Pending Transactions .........................................................................19
Section 3.26 Y2K Compliance ..................................................................................19
Section 3.27 Subsidiaries ....................................................................................19
Section 3.28 Foreign Corrupt Practices Act ...................................................................19
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE BUYER...........................................................20
Section 4.1 Representations and Warranties Contained in the Subscription Agreement ...........................20
ARTICLE 5. CERTAIN COVENANTS AND AGREEMENTS OF THE SELLER, THE PARENT AND THE BUYER..............................20
Section 5.1 Access and Information. ..........................................................................20
Section 5.2 Conduct of Business. .............................................................................20
Section 5.3 Expenses .........................................................................................22
Section 5.4 Stamp Taxes, Duties, Etc. ........................................................................22
Section 5.5 Reasonable Efforts. ..............................................................................22
Section 5.6 Certain Notifications. ...........................................................................22
Section 5.7 Acquisition Proposals. ...........................................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 5.8 Continued Assistance. ............................................................................23
Section 5.9 The Seller's and the Parent's Covenants Not to Compete ...........................................23
Section 5.10 Revised Schedules ...............................................................................24
Section 5.11 Company Funding .................................................................................24
ARTICLE 6. CONDITIONS TO THE PURCHASE AND SALE...................................................................25
Section 6.1 Conditions to the Purchase and Sale Relating to the Buyer ........................................25
Section 6.2 Conditions to the Purchase and Sale Relating to the Seller. .....................................26
ARTICLE 7. AMENDMENT AND WAIVER..................................................................................27
Section 7.1 Amendment and Modification. ......................................................................27
Section 7.2 Waiver. ..........................................................................................27
ARTICLE 8. TERMINATION...........................................................................................28
Section 8.1 Grounds for Termination. .........................................................................28
Section 8.2 Effect of Termination. ...........................................................................28
Section 8.3 Return of Information. ...........................................................................28
ARTICLE 9. INDEMNIFICATION.......................................................................................28
Section 9.1 Indemnification by the Seller ....................................................................28
Section 9.2 Indemnification by the Buyer. ....................................................................29
Section 9.3 Claims. ..........................................................................................29
Section 9.4 Third Party Claims ...............................................................................29
ARTICLE 10. MISCELLANEOUS.......................................................................................30
Section 10.1 Survival ........................................................................................30
Section 10.2 Public Disclosure. ..............................................................................31
Section 10.3 Assignment. .....................................................................................31
Section 10.4 Entire Agreement. ...............................................................................31
Section 10.5 Counterparts; Facsimile. ........................................................................31
Section 10.6 Section Headings. ...............................................................................31
Section 10.7 Notices. ........................................................................................31
Section 10.8 Governing Law. ..................................................................................33
Section 10.9 Consent to Arbitration ..........................................................................33
Section 10.10 Waiver of Jury Trial ...........................................................................34
Section 10.11 Illegality .....................................................................................34
Section 10.12 Knowledge. .....................................................................................35
Section 10.13 No Third Party Beneficiaries. ..................................................................35
Section 10.14 Construction and Representation by Counsel. ....................................................35
Section 10.15 English Language Controlling ...................................................................35
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
EXHIBITS
Exhibit A Subscription Agreement
Exhibit B Investors Agreement
Exhibit C Technical Assistance Agreement
SCHEDULES
Schedule 1 Individual Interests
Schedule 3.2(a) Capitalization of the Companies
Schedule 3.2(b) Constituent Documents
Schedule 3.2(c) Capital Contributions
Schedule 3.3(a) Ownership of the Companies; Legal Requirements for Transfer
Schedule 3.3(b) Shareholders Agreements and Limited Liability Company Agreements
Schedule 3.4(b) Legal Requirements Relating to Ownership of Shares
Schedule 3.5 Financial Statements
Schedule 3.7(b) Personal Property Ownership and Leases
Schedule 3.8 Real Property Leases
Schedule 3.9 Licenses
Schedule 3.10(a) License Applications
Schedule 3.10(b) Legal Requirements Related to License Applications
Schedule 3.11 Insurance
Schedule 3.12(b) Permits
Schedule 3.16(a) Contracts
Schedule 3.16(b) Defaults by Other Parties
Schedule 3.16(c) Covenants not to Compete
Schedule 3.16(e) Related Party Agreements
Schedule 3.17(b) Legal Representatives
Schedule 3.19 Employment Matters
Schedule 3.21 Intellectual Property
Schedule 3.22 Consents
Schedule 3.23 Books and Records
Schedule 3.25 Pending Transactions
Schedule 3.27 Subsidiaries
</TABLE>
iii
<PAGE> 5
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, dated as of August 20, 1999 (this
"Agreement"), by and among Formus Communications, Inc., a Delaware corporation
(the "Parent") and Formus International, Inc., a Delaware corporation (the
"Seller") and VeloCom Inc., a Delaware corporation (the "Buyer").
RECITALS
WHEREAS, the Parent owns all of the outstanding equity interests in the
Seller;
WHEREAS, the Seller is the sole member of, and owns all of the
outstanding equity interests in, Formus Communications - Latin America, LLC, a
Colorado limited liability company ("Formus LA");
WHEREAS, Formus LA is the sole member of, and owns all of the
outstanding equity interests in, (i) Formus Communications - Argentina, LLC, a
Colorado limited liability company ("Argentina LLC"); (ii) Formus Communications
- - Bolivia, LLC, a Colorado limited liability company ("Bolivia LLC"); (iii)
Formus Communications - Chile, LLC, a Colorado limited liability company ("Chile
LLC"); (iv) Formus Communications - Colombia LLC, a Colorado limited liability
company ("Colombia LLC"); (v) Formus Communications - Peru, LLC, a Colorado
limited liability company ("Peru LLC"); and (vi) Formus Communications -
Venezuela, LLC, a Colorado limited liability company ("Venezuela LLC");
WHEREAS, Formus LA owns (i) approximately 99.9% of the outstanding
equity interests in Formus S.A., an Argentine sociedad anonima ("Argentina SA");
(ii) 1% of the outstanding equity interests in Formus Bolivia S.A., a Bolivian
sociedad anonima ("Bolivia SA"); (iii) approximately 0.1% of the outstanding
equity interests in Formus Comunicaciones de Chile Limitada, a Chilean sociedad
de responsibilidad limitada ("Chile SRL"); and (iv) approximately 0.1% of the
outstanding equity interests in Formus Peru S.A., a Peruvian sociedad anonima
("Peru SA");
WHEREAS, Argentina LLC owns 27.93% of the outstanding equity interests
in Telelatina Management Company LLC, a Delaware limited liability company
("TMC");
WHEREAS, (i) Bolivia LLC owns 98% of the outstanding equity interests
in Bolivia SA; (ii) Chile LLC owns 99.9% of the outstanding equity interests in
Chile SRL; (iii) Colombia LLC owns 1% of the outstanding equity interests in
Bolivia SA and 97.5% of the outstanding equity interests in Formus Colombia S.A.
E.S.P., a Colombian sociedad anonima ("Colombia SA"); (iv) Peru LLC owns
approximately 99.9% of the outstanding equity interest in Peru SA; and (v)
Venezuela LLC owns 100% of the outstanding equity interests in
Telecommunicaciones Interactivas de Venezuela C.A., a Venezuelan compania
anonima ("Venezuela CA");
<PAGE> 6
WHEREAS, the Seller has certain rights to direct the transfer of (i)
the 2.5% of the outstanding equity interests of Colombia SA currently held by
the certain individuals set forth on Schedule 1; and (ii) the approximately 0.1%
of the outstanding equity interests of Argentina SA currently held by the
individual set forth on Schedule 1 (the interests described in (i) and (ii) are
referred to in this Agreement as the "Individual Interests");
WHEREAS, the Seller is a party to that certain Memorandum de
Entendimiento dated March 13, 1998 between the Seller and El Pais Division
Multimedia (the "Uruguay MOU") and has all of the rights and obligations set
forth in the Uruguay MOU;
WHEREAS, the Seller is a party to that certain Memorandum of
Understanding dated May 20, 1998 between Felipe Lopez Caballero, a citizen and
resident of Colombia, and the Seller (the "Colombia MOU");
WHEREAS, the Seller desires to (i) contribute its entire ownership
interests in Formus LA; (ii) assign all of its rights and obligations under the
Uruguay MOU and the Colombia MOU; (iii) cause the contribution of the Individual
Interests (the items described in (i), (ii) and (iii) are referred to in this
Agreement as the "Investments," which as of the date hereof have an aggregate
value of US$6,010,719.50 (as adjusted, the ""Investment Contribution")); and
(iv) contribute US$21,588,280.50 (as adjusted, the "Cash Contribution"), to the
Buyer in exchange for the issuance by the Buyer of 1,574,803 shares of common
stock of the Buyer, par value US$.01 per share (the "Common Shares"), and
7,866,333 shares of Class A Preferred Stock of the Buyer, par value US $.01 per
share (the "Preferred Shares") to the Parent pursuant to the terms of a
Subscription Agreement between the Buyer and the Parent dated as of the date
hereof and attached hereto as Exhibit A (the "Subscription Agreement");
WHEREAS, the Buyer desires to acquire and receive the Investments and
the Cash Contribution from the Seller and the Parent pursuant to the terms and
conditions of this Agreement and the Subscription Agreement;
WHEREAS, the Seller and its Affiliates have completed a restructuring
which involved the transfer of certain direct and indirect interests in the
License Holding Companies (the "Restructuring");
NOW, THEREFORE, in consideration of the representations, warranties and
agreements contained herein and for such other good and valuable consideration,
receipt of which is hereby acknowledged by the parties, the parties hereto agree
as follows:
2
<PAGE> 7
AGREEMENTS
ARTICLE 1.
CERTAIN DEFINITIONS
Capitalized terms used in this Agreement are used as defined in this
Article 1 or elsewhere in this Agreement, including in the Schedules (such terms
to be equally applicable to the singular and plural forms thereof).
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control with,
such Person; for purposes of this definition, "control" shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of an entity, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" shall mean this Agreement, the Exhibits and Schedules
attached hereto as amended from time to time in accordance with the terms set
forth herein.
"Argentina LLC" shall have the meaning set forth in the Recitals.
"Argentina SA" shall have the meaning set forth in the Recitals.
"Argentine Pesos" or "A$" shall mean the lawful currency of the
Republic of Argentina.
"Bolivanos" or "sB$" shall mean the lawful currency of Bolivia.
"Bolivars" or "B$" shall mean the lawful currency of the Republic of
Venezuela.
"Bolivia LLC" shall have the meaning set forth in the Recitals.
"Bolivia SA" shall have the meaning set forth in the Recitals.
"Business Day" shall mean any day other than a Saturday, Sunday or day
on which commercial banks in Denver, Colorado, are authorized or required by Law
to be closed.
"Buyer" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Cash Contribution" shall have the meaning set forth in the Recitals.
"Chile LLC" shall have the meaning set forth in the Recitals.
"Chile SRL" shall have the meaning set forth in the Recitals.
"Chilean Peso" or "CH$" shall mean the lawful currency of the Republic
of Chile.
"Closing" shall have the meaning set forth in Section 2.3 of this
Agreement.
3
<PAGE> 8
"Closing Date" shall have the meaning set forth in Section 2.3 of this
Agreement.
"Colombia LLC" shall have the meaning set forth in the Recitals.
"Colombia MOU" shall have the meaning set forth in the Recitals.
"Colombia SA" shall have the meaning set forth in the Recitals.
"Colombian Pesos" or "C$" shall mean the lawful currency of the
Republic of Colombia.
"Common Shares" shall have the meaning set forth in the Recitals.
"Companies" shall mean the US LLCs, the License Holding Companies and
TMC.
"Consent" shall have the meaning set forth in Section 3.22 of this
Agreement.
"Contracts" shall mean any and all oral or written contracts,
agreements, obligations, franchises, warranties, guaranties, undertakings,
commitments, understandings, arrangements, leases, licenses, registrations,
easements, rights-of-way, mortgages, bonds, notes and other instruments and
obligations and interests therein or rights thereunder, excluding any Permits in
each case which are material to the business of the Parent, the Seller or any
Company, as the case may be.
"Damages" shall have the meaning set forth in Section 9.1 of this
Agreement.
"Deductible" shall have the meaning set forth in Section 9.1 of this
Agreement.
"Dispute" shall have the meaning set forth in Section 10.9(a) of this
Agreement.
"Dollar" or "US$" shall mean the lawful currency of the United States
of America.
"Encumbrances" shall have the meaning set forth in Section 2.1 of this
Agreement.
"Environmental Laws" shall mean any Laws or Legal Requirements relating
to human health and safety, pollution, protection or cleanup of the environment
(including, but not limited to, ambient air, surface water, groundwater, land
surface or subsurface strata and flora or fauna) and such other Laws or Legal
Requirements relating to the release, containment, removal, remediation,
response, cleanup or abatement of any sort of chemical or hazardous substance.
"Financial Statements" shall have the meaning set forth in Section 3.5
of this Agreement.
"Foreign Corrupt Practices Act" shall mean the Foreign Corrupt
Practices Act of the United States of America (15 U.S.C.A. Section 78dd) and any
successor statute or legislation.
4
<PAGE> 9
"Foreign Official" means (i) an officer or employee of the government
of the Republic of Argentina, Bolivia, the Republic of Chile, the Republic of
Colombia, the Republic of Peru or the Republic of Venezuela or any political
subdivision, department, agency or instrumentality thereof; (ii) a Person acting
in an official capacity for or on behalf of any such government or department,
agency or instrumentality; (iii) a member or official of a political party in
the Republic of Argentina, Bolivia, the Republic of Chile, the Republic of
Colombia, the Republic of Peru or the Republic of Venezuela; (iv) a candidate
for political office in the Republic of Argentina, Bolivia, the Republic of
Chile, the Republic of Colombia, the Republic of Peru or the Republic of
Venezuela or (v) any other meanings or interpretations given to the term under
the Foreign Corrupt Practices Act as it applies to any of the Companies.
"Formus LA" shall have the meaning set forth in the Recitals.
"GAAP" shall mean generally accepted accounting principles then in
effect in the relevant jurisdiction.
"ICC" shall have the meaning set forth in Section 10.9(b) of this
Agreement.
"ICC Rules" shall have the meaning set forth in Section 10.9(b) of this
Agreement.
"Indemnifiable Claims" shall have the meaning set forth in Section 9.3
of this Agreement.
"Indemnified Party" shall have the meaning set forth in Section 9.3 of
this Agreement.
"Indemnifying Party" shall have the meaning set forth in Section 9.3 of
this Agreement.
"Individual Interests" shall have the meaning set forth in the
Recitals.
"Investment Contribution" shall have the meaning set forth in the
Recitals.
"Investments" shall have the meaning set forth in the Recitals.
"Investors Agreement" shall have the meaning set forth in Section
6.1(l) of this Agreement.
"Judgments" shall mean any and all judgments, orders, directives,
rulings, decisions, injunctions, decrees or awards of any federal, state,
municipal, departmental or foreign court, arbitrator or administrative or
governmental authority, bureau or agency, acting in a judicial capacity.
"Latin America" shall mean the countries of Belize, Guatemala,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Mexico, Venezuela, Guyana,
French Guyana, Suriname, Colombia, Peru, Brazil, Bolivia, Argentina, Uruguay,
Paraguay and Chile, but shall not include Ecuador.
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"Laws" shall mean all laws (whether statutory or otherwise), rules and
regulations of all governmental, judicial, legislative, executive,
administrative or regulatory authorities (federal, state, municipal,
departmental, foreign or otherwise).
"Legal Requirements" shall mean any and all applicable (i) Permits,
(ii) Laws, (iii) Judgments, and (iv) contracts with any federal, state,
municipal or departmental or foreign court, arbitrator or administrative or
governmental authority, bureau or agency relating to compliance with matters
described in (ii) and (iii) above.
"Liabilities" shall have the meaning set forth in Section 3.13 of this
Agreement.
"License Applications" shall have the meaning set forth in Section 3.10
of this Agreement.
"License Breach" shall have the meaning set forth in Section 9.1(b)(i)
of this Agreement.
"License Holding Companies" shall mean Argentina SA, Bolivia SA, Chile
SRL, Colombia SA, Peru SA and Venezuela CA.
"Licenses" shall have the meaning set forth in Section 3.9 of this
Agreement.
"New Soles" or "NS$" shall mean the lawful currency of the Republic of
Peru.
"Parent" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Permits" shall mean any and all permits, authorizations, approvals,
registrations, waivers, variances and licenses (i) under any (x) Laws or (y)
Judgments with any federal, state, municipal or departmental court, arbitrator
or administrative or governmental authority, bureau or agency relating to
compliance with the matters described in (x) above or (ii) granted by any
federal, state, municipal or departmental administrative or governmental
authority, bureau or agency (whether domestic or foreign).
"Permitted Encumbrances" shall mean undetermined or inchoate Liens
arising or potentially arising under statutory provisions which have not at the
time been filed and of which written notice has not been served pursuant to Law
or which relate to obligations not overdue or delinquent, minor imperfections in
title, if any, not material in nature and which, individually and in the
aggregate, do not materially interfere with or affect the conduct of any
Companies' businesses or the use or value of the Investments.
"Person" shall mean any individual, partnership, joint venture, firm,
corporation, association, trust or other similar entity or any government or
political subdivision or any agency, department or instrumentality thereof.
"Peru LLC" shall have the meaning set forth in the Recitals.
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"Peru SA" shall have the meaning set forth in the Recitals.
"Plan" shall have the meaning set forth in Section 3.20(a) of this
Agreement.
"Preferred Shares" shall have the meaning set forth in the Recitals.
"Related Party Agreements" shall have the meaning set forth in Section
3.16(e) of this Agreement.
"Restructuring" shall have the meaning set forth in the Recitals.
"Seller" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Shares" shall mean the Common Shares and the Preferred Shares.
"Subscription Agreement" shall have the meaning set forth in the
Recitals.
"Tax" and "Taxes" shall mean (i) all taxes, assessments, levies,
imports, duties, license fees, registration fees or other similar governmental
charges including, without limitation, income taxes, franchise taxes, transfer
taxes or fees, value added taxes, sales taxes, excise taxes, ad valorem taxes,
withholding taxes, minimum taxes and social security or other employee-related
taxes and (ii) any interest, penalties or additions to tax imposed on a tax
described in clause (i) hereof imposed by any federal, state, municipal,
departmental or foreign governmental agency or political subdivision.
"Technical Assistance Agreement" shall have the meaning set forth in
Section 6.1(n) of this Agreement.
"Telecommunications Opportunities" shall mean any and all business or
investment opportunities involving the provision of telecommunications services,
including, but not limited to, data, voice or video transmission, internet
access or any other telecommunications service using wireless, LMDS or broadband
technology.
"Third Party Claims" shall have the meaning set forth in Section 9.4 of
this Agreement.
"TMC" shall have the meaning set forth in the Recitals.
"Trademark Rights" shall have the meaning set forth in Section 3.21 of
this Agreement.
"Transaction Documents" shall mean this Agreement, the Subscription
Agreement and the Investors Agreement.
"Uruguay MOU" shall have the meaning set forth in the Recitals.
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"US LLCs" shall mean Formus LA, Argentina LLC, Bolivia LLC, Chile LLC,
Colombia LLC, Peru LLC and Venezuela LLC.
"Venezuela CA" shall have the meaning set forth in the Recitals.
"Venezuela LLC" shall have the meaning set forth in the Recitals.
ARTICLE 2.
PURCHASE AND SALE
SECTION 2.1 PURCHASE AND SALE. Subject to the terms and conditions of
this Agreement, the Seller agrees to sell, assign, transfer, convey and deliver
or, to cause the sale, assignment, transfer, conveyance and delivery, to the
Buyer, and the Buyer agrees to take delivery of, the Investments and the Cash
Contribution and all of the Seller's, the Parent's and the individuals who own
the Individual Interests' rights, privileges and preferences relating to the
Investments and the Cash Contribution for the consideration specified in Section
2.2 of this Agreement free and clear of any mortgage, imperfection of title,
lien, pledge, option, security interest, claim, charge or other encumbrance of
any kind whatsoever (collectively, "Encumbrances").
SECTION 2.2 PURCHASE PRICE. In consideration of the sale of the
Investments and the delivery of the Cash Contribution to the Buyer, the Buyer
shall issue the Shares to the Seller in accordance with the terms and conditions
of this Agreement and the Subscription Agreement.
SECTION 2.3 CLOSING; DELIVERY AND PAYMENT. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Holland & Hart LLP, 555 17th Street, Denver, CO 80220 on the
later of (i) August 31, 1999, or (ii) the date that is five (5) Business Days
after the date that all of the approvals, consents and other conditions set
forth in Sections 6.1 and 6.2 of this Agreement have been obtained, satisfied or
waived or at such other time or place as may be mutually agreed in writing by
the Buyer and the Seller (the "Closing Date").
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT
The Seller and the Parent, jointly and severally, hereby represent and
warrant to the Buyer as follows:
SECTION 3.1 ORGANIZATION AND STANDING.
(a) Each of the US LLCs is a limited liability company duly
formed, validly existing and in good standing under the laws of the State of
Colorado, United States of America and has all requisite corporate power and
authority to conduct lawfully its present businesses.
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(b) TMC is a limited liability company duly formed under the
laws of the State of Delaware, United States of America, and is validly existing
and in good standing under the laws of the State of Delaware, United States of
America and has all requisite corporate power and authority to conduct lawfully
its present business. TMC has established a duly authorized branch in the
Republic of Argentina and is licensed and in good standing to conduct business
in the Republic of Argentina.
(c) Argentina SA is a sociedad anonima duly formed and
organized under the laws of the Republic of Argentina and is validly existing
and in good standing under the laws of the Republic of Argentina and has all
requisite corporate power and authority to conduct lawfully its present
businesses.
(d) Bolivia SA is a sociedad anonima duly formed and organized
under the laws of Bolivia and is validly existing and in good standing under the
laws of Bolivia and has all requisite corporate power and authority to conduct
lawfully its present businesses.
(e) Chile SRL is a sociedad de responsibilidad limitada duly
formed and organized under the laws of the Republic of Chile and is validly
existing and in good standing under the laws of the Republic of Chile and has
all requisite corporate power and authority to conduct lawfully its present
businesses.
(f) Colombia SA is a sociedad anonima duly formed and
organized under the laws of the Republic of Colombia, and is validly existing
and in good standing under the laws of the Republic of Colombia and has all
requisite corporate power and authority to conduct lawfully its present
businesses.
(g) Peru SA is a sociedad anonima duly formed and organized
under the laws of the Republic of Peru and is validly existing and in good
standing under the laws of the Republic of Peru and has all requisite corporate
power and authority to conduct lawfully its present businesses.
(h) Venezuela CA is a compania anonima duly formed and
organized under the laws of the Republic of Venezuela and is validly existing
and in good standing under the laws of the Republic of Venezuela and has all
requisite corporate power and authority to conduct lawfully its present
businesses.
SECTION 3.2 CAPITALIZATION OF THE COMPANIES.
(a) Schedule 3.2(a) sets forth the outstanding capital of each
Company, the number of each Company's authorized and issued shares and their
nominal value or a description of other equity interests as applicable. All of
the shares or membership interests of each Company have been duly authorized,
validly issued and are fully paid and non-assessable. No Company has any other
shares or other equity interests of any kind authorized or outstanding, any
outstanding securities convertible into or exchangeable for or carrying the
right to acquire
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any equity security of such Company or any outstanding options, warrants or
other agreements or commitments under which such Company is obligated to issue
any additional shares or other equity interests. None of the shares or other
equity interests of any Company that are owned by the Seller, the Parent, Formus
LA, any other Company, or any of the individuals set forth on Schedule 1 are
subject to any Encumbrances.
(b) The Seller has delivered to the Buyer true and complete
copies of the constituent documents of each of the Companies, as listed on
Schedule 3.2(b).
(c) Schedule 3.2(c) sets forth the capital contributions made
by the Seller, the Parent, Formus LA or any other Company to each of the
Companies as of August 12, 1999.
SECTION 3.3 OWNERSHIP; SHAREHOLDER AGREEMENTS.
(a) Schedule 3.3(a) sets forth a true and correct list of the
shareholders or other holder of equity of each Company, the number of shares or
other equity interests owned by such holders and the percentage ownership
represented by each such holding. Each of the Seller, the Parent, Formus LA, the
other Companies and the individuals set forth on Schedule 1 has full ownership
of all of the shares or other equity interests identified on Schedule 3.3(a) as
being held by them. Title to all of the Investments shall pass to the Buyer,
free and clear of all Encumbrances, upon the delivery of such Investments and
compliance with the Legal Requirements set forth on Schedule 3.3(a) at the
Closing. Each of the Seller, the Parent, Formus LA and the individuals set forth
on Schedule 1, as the case may be, shall notify each Company of the transfer of
such Investments in writing.
(b) Schedule 3.3(b) sets forth a true and complete list of (i)
all shareholders agreements, limited liability company agreements or other
agreements in respect of or relating to the equity interests in the Companies to
which any of the Parent, the Seller or the Companies is a party, and (ii) all
Contracts relating to the purchase, sale, transfer or other disposition of any
securities or equity interests of any of the Companies to which any of the
Parent, the Seller or the Companies is a party.
SECTION 3.4 AUTHORITY.
(a) Each of the Seller and the Parent has full power, right
and authority to execute the Transaction Documents and to perform all of its
obligations thereunder. The execution and delivery of the Transaction Documents
by each of the Seller and the Parent has been, and the consummation by each of
the Seller and the Parent of the transactions contemplated thereby will, by the
Closing have been, duly authorized by all necessary corporate action of each of
the Seller and the Parent. This Agreement and the Subscription Agreement have
been, and, as of the Closing Date, the rest of the Transaction Documents will
have been, duly and validly executed and delivered by each of the Seller and the
Parent and constitute the legal, valid, binding and enforceable obligation of
each of the Seller and the Parent subject to applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other similar Laws affecting
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creditors' rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity). The execution, delivery and performance by each
of the Seller and the Parent of the Transaction Documents and the consummation
of the transactions contemplated thereby will not (i) conflict with or violate,
in any material respect, any Contracts or Permits to which the Seller, the
Parent or the Companies are a party or bound and, in particular, will not cause
prepayment of any banking or other indebtedness of any of the Companies and will
not otherwise give any other Person the right to accelerate, renegotiate or
terminate or receive any payment from any of the Companies and will not
constitute a default, event of default or an event which with the passage of
time or lack of notice, or both, would constitute a default or event of default
under such Contract, (ii) conflict with or violate any provision of any
applicable Legal Requirement to which the Seller, the Parent or the Companies is
subject, (iii) conflict with or violate any Judgment applicable to the Seller,
the Parent or the Companies, (iv) result in the creation of any Encumbrance upon
any of the Investments, or (v) conflict with, or result in a breach or default
under, any term or condition of the constituent documents of the Companies.
(b) The Seller, the Parent, the individuals set forth on
Schedule 1 and all the relevant Companies have all requisite consents and
approvals of all necessary governmental authorities to own the shares or other
equity interests in each of the Companies. Except as described on Schedule
3.4(b), the Seller, the Parent, the individuals set forth on Schedule 1 and all
relevant Companies have complied with all Legal Requirements in connection with
their ownership of the shares or other equity interests in the Companies.
SECTION 3.5 FINANCIAL STATEMENTS. The Seller and the Parent have
delivered to the Buyer the audited and unaudited financial statements of each of
the Companies and the related income statement and retained earnings statements
listed on Schedule 3.5 (such financial statements are hereinafter referred to as
the "Financial Statements"). Except as may be otherwise noted therein, each of
the Financial Statements present fairly, in all material respects and in
accordance with GAAP, the financial position of the applicable Company as of the
date set forth therein and the results of operations of the applicable Company
for the fiscal period set forth therein, except that the unaudited Financial
Statements (i) do not have all footnotes required by GAAP and (ii) are subject
to normal, year-end adjustments.
SECTION 3.6 MATERIAL CHANGES.
(a) Except as set forth in the Financial Statements, since the
date of the latest respective Financial Statements and except in connection with
the Restructuring (i) there have been no changes in the business, operations,
assets or liabilities of any of the Companies which, individually or in the
aggregate, has had or would be reasonably likely to have, a material adverse
affect on the business, operations, assets, prospects or condition (financial or
otherwise) of any of the Companies; (ii) none of the Companies have made or
declared any dividend or declared, made or paid any other distribution in
respect of its capital stock; (iii) none of the Companies have suffered any
casualty which resulted in any material damage, destruction or loss
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(whether or not covered by insurance); (iv) none of the Seller, the Parent, the
individuals set forth on Schedule 1 or any Company has engaged in any
transaction which, if engaged in during the period from the date hereof to the
Closing, would violate the covenants of the Seller and the Parent set forth in
Section 5.2 of this Agreement; and (v) no Company has suffered any strike or
other work stoppage.
SECTION 3.7 TITLE TO ASSETS AND PROPERTIES.
(a) Each Company has (i) with respect to real property which
is leased and used by it in its business, valid and subsisting leasehold
interests and (ii) with respect to the owned or leased personal property and
assets used by it in its business, good title or valid leasehold interests, in
each instance, free and clear of any Encumbrances, except Permitted Encumbrances
or any Encumbrances reflected in the Financial Statements.
(b) Schedule 3.7(b) sets forth a list of all tangible personal
property owned or leased by each Company having a value in excess of US$50,000.
SECTION 3.8 REAL PROPERTY AND LEASES. Schedule 3.8 sets forth a list of
all leasehold interests of real property of each Company except for cell site
leases executed in the ordinary course of business. Except as set forth on
Schedule 3.8, all leases and subleases listed therein are in full force and
effect and no Company is in default in any material respect under any of such
leases or subleases.
SECTION 3.9 THE LICENSES
(a) Schedule 3.9 sets forth a complete list of all of the
telecommunications licenses held by the Companies (the "Licenses"). Each of the
Licenses listed in Schedule 3.9 was duly authorized, granted and delivered by
the appropriate governmental entity or any instrumentality thereof to the
Company identified in Schedule 3.9 as holding such License and recorded with the
appropriate governmental entity in accordance with all applicable Legal
Requirements. Each of the Licenses is held by the Company identified in Schedule
3.9 as holding such License free and clear of any Encumbrance or other
attachments and duties of any kind, except as set forth in the relevant License.
Each Company holds all Permits necessary for the holding of each of the Licenses
held by such Company and the operation of its business. There are no
restrictions or limitations on the use of the rights granted by the Licenses
except for those expressly set forth in each of the Permits, Licenses, and
applicable Law.
(b) Except as set forth on Schedule 3.9, since the award of
the Licenses, each Company holding such a License has complied in all material
respects with the terms and conditions of the License held by it (including any
required build-out deadlines and notice or filing obligations) and has made all
necessary payments required to be made thereunder. To the knowledge of the
Seller and the Parent, no facts or circumstances involving the Seller, the
Parent or the Companies exist which would result in any of the Licenses being
revoked, adversely modified, suspended or terminated by any governmental entity
or any instrumentality thereof.
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The Seller and the Parent have no reason to believe that the Licenses will not
be renewed in the ordinary course. None of the transactions contemplated hereby
or referred to in this Agreement, nor any transactions in connection with the
Restructuring will result or has resulted in the termination or revocation of
any License.
(c) As of the date hereof, neither the Seller's and its
Affiliates ownership interest in each of TMC and Argentina SA nor any of the
agreements entered into among TMC and Argentina SA or other third parties would
(i) result in any of the Licenses being revoked, adversely modified, suspended
or terminated by any governmental entity or any instrumentality thereof or (ii)
cause any fines, fees or penalties to be applied to TMC, Argentina SA or any
third party.
SECTION 3.10 THE LICENSE APPLICATIONS.
(a) Schedule 3.10(a) sets forth a complete list of all of the
telecommunications Licenses applied for by the Companies (the "License
Applications"). Each of the License Applications listed in Schedule 3.10(a) was
duly filed with the appropriate governmental entity or an instrumentality
thereof by the Company identified in Schedule 3.10(a) as having filed such
License Application. Each Company holds all Permits necessary for the filing and
holding of each of the License Applications filed by such Company. To the
knowledge of the Seller and the Parent, there will be no restrictions or
limitations on the use of the rights granted by any License awarded to any of
the Companies based on the License Applications filed by the Companies except
for those expressly set forth in Schedule 3.10(a).
(b) Except as set forth on Schedule 3.10(b), each Company
filing a License Application has complied in all material respects with the
application requirements issued by the appropriate governmental entities or
instrumentalities thereof and has made all necessary payments in connection
therewith. To the knowledge of the Seller and the Parent, no facts or
circumstances involving the Seller, the Parent or the Companies exist which
would result in any of the License Applications being rejected, adversely
modified, suspended or terminated by any governmental entity or any
instrumentality thereof, except that no representation is made herein regarding
any potential effects of the actions of competitors of the Companies or the
possibility that any License Application will be rejected in favor of an
application filed by a competitor. None of (i) the transactions contemplated
hereby or referred to in this Agreement or (ii) the transactions conducted in
connection with the Restructuring will result or has resulted in the termination
or revocation of any License Application.
SECTION 3.11 INSURANCE.
(a) Schedule 3.11 contains a true and complete list of the
material insurance policies that insure the assets or operations of the
Companies. All premiums in respect of insurance policies that are due have been
paid to date and are in full force and effect.
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(b) None of the Companies has been notified of any
cancellation of or any refusal of any insurance coverage relating to its
operations by any insurance carrier to which it has applied for insurance since
its formation. Each Company is in compliance in all material respects with such
insurance policies and has paid all outstanding premiums when and as due. Except
as set forth on Schedule 3.11, there is no pending claim under any insurance
policy to which any Company is an insured or beneficiary or any fact or
circumstance reasonably likely to give rise to such a claim.
(c) The Seller and the Parent shall use their commercially
reasonable efforts, and shall cause the Companies to use their commercially
reasonable efforts, to keep such policies or substantially equivalent policies
in full force and effect up to the Closing.
SECTION 3.12 COMPLIANCE WITH LAW.
(a) Each of the Companies has been in compliance in all
material respects with all (i) Environmental Laws, (ii) applicable
telecommunications Laws, and (iii) material Legal Requirements. None of the
Companies has received (A) any citations, notices of violations, complaints,
consent orders (or amendments to or modifications of such orders), compliance
schedules or other similar enforcement orders, or (B) any written notice in any
form, including inspection reports, from any governmental entity or any other
Person which in any case would indicate that there was not then or is not
currently such compliance with all such Legal Requirements.
(b) Schedule 3.12(b) sets forth an accurate and complete list
of all material Permits which are used or held by each Company in connection
with the operation of its business and includes the expiration date and renewal
status of all such Permits. Except as set forth on Schedule 3.12(b), (i) all
material Permits of each Company are in full force and effect, (ii) any
applications for renewal of any material Permit due prior to the Closing have
been, or will be, timely filed prior to the Closing, (iii) no proceeding or
other legal action to modify, suspend, revoke, withdraw, terminate or otherwise
limit any such material Permit is pending or, to the knowledge of the Seller,
the Parent and the Companies, threatened, (iv) each Company has made all
payments required to be made under all material Permits, including, without
limitation, in respect of any Licenses, and (v) no administrative or
governmental actions have been taken or, to the knowledge of the Seller, the
Parent and the Companies, threatened in connection with the expiration,
continuance or renewal of such material Permits or Licenses which could affect
the ability of the Companies to own any assets, to operate, use or maintain any
assets or to conduct any of their operations in substantially the same manner in
which such operations were conducted on the date hereof and immediately prior to
and as of the date hereof.
SECTION 3.13 LIABILITIES. None of the Companies has incurred any
outstanding material obligation, debt or liability, fixed or contingent
("Liabilities"), that are not reflected on the Financial Statements, except
obligations under Licenses or Contracts. No Company has incurred or will incur
any Liability (including any Liability for Taxes) as a result of the
Restructuring.
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SECTION 3.14 TAXES.
(a) The Companies have filed all federal, state, departmental,
municipal and foreign Tax returns required by law to be filed by them other than
such filings, the failure of which to have been made, would not be reasonably
likely to have a material adverse effect on the business, operations, assets,
prospects or condition of the respective Company. The provisions shown on the
Financial Statements are adequate to reflect any material amount of unpaid Taxes
of the Companies due or to become due with respect to fiscal periods ended on or
before the date of the Financial Statements. As of the date hereof, to the
Seller's and the Parent's knowledge, there is no claim or assessment pending
against any of the Companies based on a failure to pay Taxes and no basis exists
for any such claim.
(b) Neither the Seller, the Parent nor the Companies are aware
of and, to the Seller's and the Parent's knowledge, there are no circumstances
which, either by passage of time or issuance of an assessment binding on the
Companies to pay any Tax or contribution, may give rise to any type of dispute
with any Tax authority in relation to any Tax obligation or Liability.
(c) The Restructuring has not and will not result in any Taxes
being owned or payable by any Company and has not caused and will not cause any
negative Tax consequences for any Company.
SECTION 3.15 DISPUTES. There is no suit, action, claim, arbitration or
similar proceeding or investigation pending or, to the Seller's and the Parent's
knowledge, threatened against any of the Companies (i) which, if adversely
resolved, would be reasonably likely to have a material adverse effect on the
assets, business, operations, prospects or condition (financial or otherwise) of
any of the Companies, (ii) with respect to which there is a reasonable
likelihood of a determination which would prevent the Seller and the Parent from
consummating the sale of the Investments or the other transactions contemplated
by this Agreement, (iii) which seeks to enjoin or obtain damages in respect of
the consummation of the sale of the Investments or the other transactions
contemplated by this Agreement or (iv) which seeks to revoke or amend any of the
Licenses or License Applications. Neither the Seller, the Parent nor any of the
Companies is a party to or is bound by any Judgment of any governmental
authority, arbitrator or any other Person. No Company has compromised, settled
or lost any arbitration or judicial or administrative proceeding.
SECTION 3.16 CONTRACTS.
(a) Schedule 3.16(a) contains an accurate and complete list of
all Contracts to which any Company is a party or by which any of such Company's
assets or properties are bound or affected and which (i) involve the obligation
(including contingent obligations) to pay by or to such Company amounts in
excess of US$50,000 in the aggregate, (ii) are Contracts with any shareholder or
member or any Affiliate of any shareholder or member, (iii) are Contracts with
governmental entities, or (iv) were not entered into in the ordinary course of
business of such Company.
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(b) Except as set forth in Schedule 3.16(b), all Contracts are
valid, binding and enforceable by such Company in accordance with their
respective terms and such Company is not in default in any material respect
under any of such Contracts nor, to the knowledge of the Seller and the Parent,
is there any basis for any valid claim of default or violation under any
Contract. To the knowledge of the Seller and the Parent and except as set forth
on Schedule 3.16(b), no other party to any of such Contracts is in default in
any material respect thereunder nor does there exist any event or condition,
which upon the giving of notice or the lapse of time or both, would (i)
constitute a default in any material respect or event of default thereunder or
(ii) entitle any other party thereto to terminate such Contract.
(c) Except as set forth on Schedule 3.16(c), no Company is a
party to any Contract containing an undertaking on its part not to compete in
any business, industry or geographical area.
(d) The Restructuring has not had and will not have any
adverse impact on any of the Contracts set forth on Schedule 3.16(a) and has not
and will not cause any default by any Company under such Contracts.
(e) Schedule 3.16(e) sets forth each of the technical services
agreements and other Contracts which the Parent or its Affiliates, excluding the
Companies, have entered into with any of the Companies (the "Related Party
Agreements"). The Parent and the Seller agree that each of the Related Party
Agreements shall, at the sole discretion of the Buyer, as of the Closing Date,
either be terminated or transferred to a Person designated by the Buyer. The
Buyer agrees to deliver termination or assignment instructions regarding each
Related Party Agreement to the Parent and the Seller on or prior to the fifth
day prior to the Closing Date.
(f) Each of the Uruguay MOU and the Colombia MOU was validly
executed and delivered by the Parent, the Seller or the Company party thereto,
and is in full force and effect. Except for the Uruguay MOU and the Colombia
MOU, none of the Seller, the Parent nor any Company has any other arrangements
or undertakings, whether written or oral, with the third parties who are parties
to the Uruguay MOU and the Colombia MOU.
SECTION 3.17 DEBT OBLIGATIONS AND COMMITMENTS.
(a) Except as set forth on the Financial Statements, no
Company has any outstanding indebtedness nor has any Company given any guaranty,
indemnity or security or otherwise agreed to become directly, indirectly or
contingently liable for any obligation, debt, commitment or Liability of any
other Person.
(b) Except for legal representatives of each of the Companies
as set forth on Schedule 3.17(b), no Person has been granted any power, right or
authority (whether pursuant to a power of attorney or otherwise) to bind or
commit any of the Companies to any obligations or activities outside the
ordinary course of business.
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SECTION 1.18 BROKERS AND FINDERS. None of the Seller, the Parent, the
individuals set forth on Schedule 1, the Companies or any of their Affiliates
has employed any broker, finder, consultant or intermediary in connection with
the transactions contemplated by this Agreement that would be entitled to a
broker's, finder's or similar fee or commission in connection therewith.
SECTION 3.19 COLLECTIVE BARGAINING AGREEMENTS, EMPLOYMENT AGREEMENTS
AND EMPLOYEE RELATIONS.
(a) Except as set forth on Schedule 3.19, the Companies do not
have in effect any collective bargaining agreements or employment agreements
which are not terminable at will in accordance with the Laws of the
jurisdictions in which they operate. Except as set forth on Schedule 3.19, there
are not, to the knowledge of the Parent and the Seller, disputes currently
subject to any grievance procedure, arbitration or litigation under such
collective bargaining agreements or employment agreements nor is there any
default under any such agreements, by any Company, or to the knowledge of the
Seller and the Parent, any other party thereto.
(b) Schedule 3.19 sets forth all employees and directors of
each Company and their remuneration rates, applicable benefits and the
applicable term of their employment.
(c) The Restructuring has not caused, and will not cause, any
Company to have any obligation to pay severance or any other amount to any
Person.
SECTION 3.20 EMPLOYEE BENEFITS.
(a) No Company maintains or contributes to or has any
Liability with respect to (i) any incentive, bonus, commission or deferred
compensation or severance or termination pay plan, agreement or arrangement for
the benefit of employees employed by it or any director, (ii) any pension,
profit-sharing, stock purchase, stock option, group life insurance,
hospitalization insurance, disability, retirement or any other employee benefit
plan, agreement or arrangement, for the benefit of employees employed by it or
any director or (iii) any fringe benefit plan, agreement or arrangement for the
benefit of employees employed by it or any director (the items referred to in
(i), (ii), and (iii) above are hereinafter referred to collectively as the
"Plans" and individually as a "Plan").
(b) There are no scheduled or agreed-upon future increases of
benefit levels for employees employed, and no increases in benefits have (i)
been proposed by any Company for the benefit of their employees or any director,
(ii) been made the subject of representation or similar communication by any
Company to their employees or directors or (iii) been requested or demanded by
employees employed by any Company under circumstances which make it reasonable
to expect that such increase will be granted.
(c) Each Company has made all requisite pension and other
governmental and/or social security contributions on its own behalf and on
behalf of its employees and is in
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compliance with all labor and social security obligations pursuant to the
applicable Laws and Legal Requirements. Each Company has made all payments to
its employees which are provided for under the applicable Laws and Legal
Requirements.
(d) Since December 31, 1998, no senior level employee of any
Company has been terminated or has resigned.
SECTION 3.21 TRADEMARKS, PATENTS, TRADE NAMES, ETC.
(a) Schedule 3.21 contains a listing of all patents, know-how,
trademarks, trade names, service marks, service names, copyrights and other
intellectual or proprietary property used in the conduct of each Company's
business (the "Trademark Rights"). None of the Seller, the Parent or the
Companies has received any notice from any other Person challenging the right of
any of them to use any such Trademark Rights owned or used by or licensed to any
Company. Except as set forth on Schedule 3.21, the Seller, the Parent and the
Companies have no knowledge that any Trademark Right is being infringed upon or
appropriated by others, and none is subject to any outstanding Judgment
affecting the scope of the free and unrestricted use by any Company or is used
contrary to the provisions of any licensing or other agreement. The Seller, the
Parent and the Companies have no knowledge that there are any geographic
restrictions on the use by any Company of the Trademark Rights.
(b) The Companies have not entered into any agreement or
arrangement for the provision or acquisition of any Trademark Rights; provided,
however the Buyer acknowledges that it is not purchasing any of the Trademark
Rights which include the word "Formus" pursuant to this Agreement and the Buyer
agrees that the names of the Companies will be changed to remove the word
"Formus" from such names as soon as practicable after the Closing.
SECTION 3.22 CONSENTS. Except as set forth on Schedule 3.22, no
consent, license, approval, waiver, expiration of waiting period or
authorization of, or registration or declaration with, any governmental
authority, agency, bureau or commission, or any other Person (a "Consent"), is
required to be obtained or made by the Seller, the Parent or any individual set
forth on Schedule 1, in connection with their execution, delivery, performance
of this Agreement and enforceability of their respective obligations under this
Agreement and the transactions contemplated hereby (including the
Restructuring).
SECTION 3.23 RECORDKEEPING COMPLIANCE. Except as set forth on Schedule
3.23, each Company has maintained its books and records and accounts in
accordance with all applicable Legal Requirements, and all corporate and other
documents required to be submitted to relevant federal, state, departmental and
municipal authorities by such Company have been duly and punctually submitted
and have been true and correct in all material respects.
SECTION 3.24 CONDITION OF THE COMPANIES; OPERATION OF BUSINESS IN THE
ORDINARY COURSE. All of the material equipment, buildings and other assets of
the Companies used in
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connection with the operation of their businesses are in good, workmanlike
condition and fit for use for their intended purpose, ordinary wear and tear
excepted.
SECTION 3.25 NO PENDING TRANSACTIONS. Except for this Agreement and
except as set forth on Schedule 3.25, neither the Seller, the Parent nor any
Company are parties to or bound by any agreement, negotiations, discussions,
commitments or undertakings with respect to (i) the merger or consolidation of
any Company with, or acquisition of all or substantially all of the property and
assets of, any other Person, (ii) the sale, lease or exchange of all or
substantially all of any Company's property and assets to any other Person or
(iii) the sale or issuance of any equity interests, membership interests or
capital stock (or any rights convertible into such equity interests, membership
interests or capital stock) of any Company.
SECTION 3.26 Y2K COMPLIANCE. Each License Holding Company has taken
steps to verify from vendors that in and following the Year 2000, (i) its
computer systems and (ii) equipment containing embedded microchips (including
systems and equipment supplied by others or with which the systems of such
Company interface) will function properly. The cost to each Company of the
reasonably foreseeable consequences of Year 2000 to such Company resulting from
the failure of its systems cannot be reasonably expected to have a material
adverse effect on the operations, assets, condition (financial or otherwise) or
prospects of such Company.
SECTION 3.27 SUBSIDIARIES. Except as set forth on Schedule 3.27, no
Company owns any subsidiaries or owns or controls any shares, membership
interests or securities of, or has any other proprietary interest in, or control
of the management or policies of, any corporate entity.
SECTION 3.28 FOREIGN CORRUPT PRACTICES ACT. The Seller and the Parent
represent that (i) they have received a copy of the Foreign Corrupt Practices
Act and understand its requirements, (ii) they have not taken any action which
is or could be deemed to be a violation of the Foreign Corrupt Practices Act in
respect of any Company; (iii) they are not aware of any action or conduct which
could be deemed to be a violation of the Foreign Corrupt Practices Act in
respect of any Company and (iv) none of them, or to their knowledge, their
Affiliates, nor any of their managers, officers, directors, employees,
shareholders, members, agents or representatives (including the managers,
officers, directors, employees, shareholders, members, agents or representatives
of their Affiliates) has offered, given, paid, authorized the payment of, or
promised, directly or indirectly, any money, gift, promise or other thing of
value to any Foreign Official (or to any other Person while knowing it will be
offered, given or promised to a Foreign Official) for any purpose including, by
way of example but not limitation, influencing any act or decision of such
Person acting in their official capacity, inducing such Person to do or omit to
do any action in violation of their lawful duty, inducing such Person to use
their influence with the government of the Republic of Argentina, Bolivia, the
Republic of Chile, the Republic of Colombia, the Republic of Peru or the
Republic of Venezuela or any instrumentality thereof to affect or influence any
act or decision of such government or instrumentality, in order to assist any
Company or their shareholders or members to obtain or retain business for or
with, or in directing business to, any Person.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller as follows:
SECTION 4.1 REPRESENTATIONS AND WARRANTIES CONTAINED IN THE
SUBSCRIPTION AGREEMENT. Each of the representations and warranties made by the
Buyer in the Subscription Agreement is hereby incorporated by reference herein.
ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS OF THE SELLER, THE PARENT AND THE BUYER
SECTION 5.1 ACCESS AND INFORMATION.
(a) The Seller and the Parent shall provide the Buyer and its
representatives, after the date of execution of this Agreement, full access,
during regular business hours and upon reasonable advance notice, to the books
and records pertaining to the Companies, the Investments, the Licenses and the
License Applications, and shall furnish, or cause to be furnished, to the Buyer
any financial and operating data and other information with respect to the
Companies, the Investments, the Licenses and the License Applications as the
Buyer shall from time to time reasonably request. From the date hereof to the
Closing Date, the Seller and the Parent shall use reasonable efforts to endeavor
to keep the Buyer informed concerning any material changes that may occur
affecting the Companies, the Investments, the Licenses or the License
Applications.
(b) Any such information provided or obtained pursuant to this
Section 5.1 shall be held in the strictest confidence and, in the event the
transactions contemplated by this Agreement are not consummated, shall be
returned or destroyed (along with all copies thereof and notes, analysis,
memoranda and other materials relating thereto prepared by or for the Buyer) in
accordance with, and pursuant to, Section 8.3 of this Agreement.
SECTION 5.2 CONDUCT OF BUSINESS. From the date hereof, and except as
otherwise contemplated by this Agreement or consented to or approved by the
Buyer in writing, the Seller and the Parent covenant and agree that they shall
cause the Companies to operate their businesses only in the ordinary course of
business and to preserve and maintain their properties, businesses and
relationships with suppliers, customers, employees, agents and others having
business dealings with them. Without limiting the generality of the foregoing,
except as may be otherwise contemplated by this Agreement, during the period
from the date of this Agreement to the Closing, without the prior written
consent of the Buyer, the Seller and the Parent shall cause the Companies not
to:
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(a) create, incur or assume any debt, Liability or obligation,
direct or indirect, whether accrued, absolute, contingent or otherwise except as
set forth on Schedule 5.2(a) and except for obligations under Contracts;
(b) assume, guarantee, endorse or otherwise become responsible
(whether directly, contingently or otherwise) for the obligations of, or make
any loans or advances to, any other Person except as set forth on Schedule
5.2(a);
(c) waive or release any rights of material value relating to
their businesses (including, without limitation, any rights relating to the
Licenses or the License Applications), or to cancel, compromise, release or
assign any indebtedness owed to them;
(d) transfer, sell or otherwise convey any assets having a
value in the aggregate in excess of US$100,000;
(e) mortgage, pledge or subject to any Encumbrance any of
their assets or properties (including the Licenses) or in any way create or
consent to the creation of any title condition affecting any of their assets or
properties except as set forth on Schedule 5.2(a);
(f) with respect to their directors, legal representatives,
consultants or officers:
(i) increase the rate of terms of compensation
payable or to become payable to any of them,
(ii) pay or agree to pay any pension, retirement
allowance or other employee benefit except as required by applicable Law,
(iii) commit themselves to any pension, profit
sharing, bonus, incentive, deferred compensation, stock purchase, stock option,
stock appreciation right, group insurance, severance pay, retirement or other
employee benefit plan, agreement or arrangement, or
(iv) enter into any employment or severance agreement
with or for the benefit of them;
(g) enter into or voluntarily terminate any lease with an
aggregate value in excess of US$20,000, or make any material change in any
existing lease;
(h) enter into any employment agreement, explicit or implied,
with or for any Person with a value in excess of US$100,000;
(i) make or become obligated to make any capital expenditures
(for equipment or otherwise) in excess of US$10,000 or enter into any
commitments therefor except as set forth on Schedule 5.2(i);
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(j) make any material alteration in the manner of keeping the
books, accounts or records, or in the accounting practices therein reflected,
except as required by Legal Requirements or GAAP;
(k) (i) change or amend their constituent documents, (ii)
issue any shares of their capital stock, or issue or sell any securities
convertible into or exchangeable for or carrying the right to, or options with
respect to, or warrants to purchase or rights to subscribe to, any shares of
their capital stock or enter into any agreement obligating them to do any of the
foregoing or (iii) pay or declare any dividends or make, pay or declare any
other distribution with respect to their capital stock;
(l) enter into any Contract with a value in excess of
US$100,000 individually or US$1,000,000 in the aggregate except for site leases
entered into by TMC in the ordinary course of business; and
(m) agree to take any of the foregoing actions.
SECTION 5.3 EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby (including fees and
disbursements of accountants and attorneys) shall be paid (i) by the Seller
and/or the Parent, if such costs or expenses are incurred by or on behalf of the
Seller, the Parent or any Company, and (ii) by the Buyer, if such costs or
expenses are incurred by or on behalf of the Buyer.
SECTION 5.4 STAMP TAXES, DUTIES, ETC. All sales, transfer, filing,
recordation and similar taxes and fees (including all transfer taxes and
conveyance and recording fees, if any), and all stamp taxes, registration taxes,
duties or other charges arising from the sale and transfer of the Investments
shall be borne equally by the Seller and the Parent, on the one hand, and the
Buyer, on the other hand.
SECTION 5.5 REASONABLE EFFORTS. Subject to the terms and conditions
herein provided, the Buyer, the Seller and the Parent agree to use their
respective reasonable efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper or advisable under
applicable Law and Legal Requirements to consummate and make effective the
transactions contemplated by this Agreement including, but not limited to,
changing the names of the Companies to remove the name "Formus" as soon as
practicable after the Closing. The Buyer, the Seller, the Parent and the
Companies shall use their reasonable efforts to obtain Consents, waivers and
clearances of all third parties and governmental or regulatory authorities
necessary or advisable to consummate and make effective the transactions
contemplated by this Agreement. If at any time after the Closing Date any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers or directors of the Buyer, the Companies, the
Seller and the Parent, as the case may be, shall execute and deliver any further
instruments or documents and take all such necessary action that may reasonably
be requested of
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them without any further consideration except as provided herein, except that
any such action taken after the Closing shall be at the expense of the Buyer.
SECTION 5.6 CERTAIN NOTIFICATIONS. At all times prior to the Closing
Date, the Buyer shall promptly notify the Seller and the Seller and the Parent
shall promptly notify the Buyer in writing of the occurrence of any event that
to their knowledge will or may result in the failure to satisfy the conditions
contained in Article 6 of this Agreement.
SECTION 5.7 ACQUISITION PROPOSALS. From and after the date hereof to
the earlier of the Closing or the termination of this Agreement, neither the
Seller or the Parent nor any of their respective employees, agents, consultants
and representatives (including, without limitation, any investment banker,
attorney or accountant retained by the Seller or the Parent) shall initiate or
solicit, directly or indirectly, any inquiries for the making of any proposal by
any Person other than the Buyer with respect to (i) any sale of capital stock or
membership interests in or assets of the Companies, (ii) the merger,
consolidation, reorganization, recapitalization or similar transaction involving
the Companies, (iii) any sale, license or lease of the Licenses or the License
Applications, and (iv) any other transaction that may be inconsistent with or
that may have an adverse effect upon any of the transactions contemplated by
this Agreement. The Seller and the Parent shall use their best efforts to inform
their respective employees, agents, consultants and representatives (including,
without limitation, any investment banker, attorney or accountant retained by
the Seller or the Parent) to immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Person other than the
Buyer with respect to the matters referred to in the preceding sentence.
SECTION 5.8 CONTINUED ASSISTANCE. The Seller and the Parent agree that
following the Closing they shall take all actions reasonably necessary,
including without limitation the items set forth on Schedule 5.8, to assist the
Buyer and the Companies, at Buyer's expense, with (i) maintaining the Licenses
in good standing and in compliance with applicable Laws and Legal Requirements
and (ii) securing licenses contemplated by the License Applications in
compliance with applicable Laws and Legal Requirements.
SECTION 5.9 THE SELLER'S AND THE PARENT'S COVENANTS NOT TO COMPETE.
(a) The Seller and the Parent hereby covenant and agree on
their own behalf and on behalf of their majority-owned subsidiaries that, for a
period of 3 years from the Closing Date, the Buyer shall be their sole
investment vehicle for all Telecommunications Opportunities in Latin America and
that they will not invest in or otherwise participate in any other entity
engaged in any Telecommunications Opportunity in Latin America during such 3
year period. The agreement of the Seller, the Parent and their majority-owned
subsidiaries contained in this Section 5.9(a) shall not prohibit the Seller, the
Parent or their Affiliates from investing in or holding shares or other equity
interests in any publicly traded corporation engaged in Telecommunications
Opportunities in Latin America so long as such investment or holding does not
exceed 5% of the outstanding shares or equity interests of such corporation.
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(b) Because the remedy at law for any breach of the provisions
of this Section 5.9(a) would be inadequate, the Seller and the Parent consent to
the granting by any court of competent jurisdiction of an injunction or other
equitable relief, without the necessity of actual monetary loss being proved, in
order that any breach or threatened breach of such provisions may be effectively
restrained.
(c) It is the intention of the parties hereto that the
provisions of this Section 5.9(a) be enforced to the fullest extent permissible
under the laws and policies of each jurisdiction in which enforcement may be
sought, and that the unenforceability (or the modification to conform to such
laws or policies) of any provisions hereof shall not render unenforceable, or
impair, the remainder of the provisions hereof. Accordingly, if any provisions
of this Section 5.9(a) shall be determined to be invalid or unenforceable,
either in whole or in part, this Section 5.9(a) shall be deemed amended to
delete or modify, as necessary, the offending provision in order to render this
Section 5.9(a) valid and enforceable, such amendment to apply only with respect
to the operation of this Section 5.9(a) in the particular jurisdiction in which
such determination is made.
(d) The agreements and covenants set forth in this Section
5.9(a) are in addition to any rights that the Buyer may have in law or at
equity.
SECTION 5.10 REVISED SCHEDULES. The Seller and the Buyer shall each
have the right to deliver to the other party, at least two Business Days prior
to the Closing Date, revised schedules to the representations and warranties set
forth in Sections 3 and 4 and in the Subscription Agreement, as applicable, to
reflect any matters which have occurred from and after the date of this
Agreement, which, if existing on the date of this Agreement, would have resulted
in a disclosure or exception with regard to any such representation or warranty.
If such matters alone or in the aggregate have, or may reasonably be expected to
have, a material adverse effect, the party to whom the revised schedule was
delivered shall have the right to terminate this Agreement or to propose an
adjustment in the consideration set forth in Section 2.2 of this Agreement. If
the other party does not agree to such adjustment, the Agreement may be
terminated by the party who proposed such adjustment.
SECTION 5.11 COMPANY FUNDING. From the date hereof until the Closing
Date, the Seller and the Parent shall contribute to the Companies, in proportion
to their ownership interests in such Companies, the funds necessary for the
operation of the Companies in accordance with those obligations under any
shareholders agreements or operating agreements relating to the Companies in
order to protect its ownership percentage in each Company from dilution. Any
such contributions which are duly made and documented in form reasonably
satisfactory to the Buyer shall be credited towards the payment of the Cash
Contribution and shall also increase the value of the Investment Contribution.
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ARTICLE 6.
CONDITIONS TO THE PURCHASE AND SALE
SECTION 6.1 CONDITIONS TO THE PURCHASE AND SALE RELATING TO THE BUYER.
The obligation of the Buyer to consummate the transactions contemplated hereby
at the Closing as contemplated by this Agreement shall be subject to the
satisfaction of or waiver in writing by the Buyer on or prior to the Closing of
each of the following conditions (transactions contemplated by this Agreement
and the Subscription Agreement and consummated on the Closing Date shall all be
deemed to occur simultaneously):
(a) Each of the representations and warranties of the Seller
and the Parent contained in this Agreement shall be true and correct in all
material respects as of the Closing Date, with the same effect as though such
representations and warranties had been made on and as of the Closing Date;
except to the extent such representations and warranties relate solely to an
earlier date, in which case such representations and warranties shall have been
true and correct in all material respects as of such earlier date; each of the
covenants and agreements of the Seller and the Parent to be performed on or
prior to the Closing Date shall have been performed in all material respects;
(b) No applicable Legal Requirement or Judgment of or in any
court or tribunal of competent jurisdiction shall be in effect that prohibits
the Buyer from consummating the transactions contemplated hereby;
(c) All Consents of any governmental or regulatory authority
or any other Persons, the granting of which is required or appropriate for the
consummation of the transactions contemplated hereby, shall have been obtained;
(d) The Seller shall have delivered to the Buyer, in form
reasonably acceptable to the Buyer and in proper form for recording when
appropriate, such deeds, assignments and other good and sufficient instruments
of transfer, conveying and transferring to the Buyer the right, title and
interest in and to the Investments and the appropriate recordations affecting
such transfer shall have been made in the books and records of each of the
Companies;
(e) Since January 1, 1999, there shall have been no material
adverse change in the Investments or the business, operations, prospects or
condition (financial or otherwise) of the Companies;
(f) None of the Companies shall be in breach of any Contract
with any governmental entity and each of the Licenses shall be in good standing
and in full force and effect;
(g) The Buyer shall have received the Financial Statements for
each of the Companies;
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(h) The Laws and Legal Requirements set forth in Schedule
3.3(a) shall have been complied with;
(i) The Buyer shall have appointed members to the board of
directors of each of the Companies and the members appointed by the Seller shall
have resigned;
(j) The board of directors of the Buyer shall have approved
the acquisition of the Investments and the Cash Contribution and the
consummation of the other transactions contemplated by this Agreement and the
Subscription Agreement by no later than August 31, 1999;
(k) the Buyer, the Buyer's stockholders and the Parent shall
have entered into an investors agreement in substantially the form attached
hereto as Exhibit B (the "Investors Agreement");
(l) the Buyer shall have received the books and records of
each of the Companies;
(m) the Parent and the Buyer shall have executed an LMDS
technical assistance agreement in substantially the form attached hereto as
Exhibit C (the "Technical Assistance Agreement"); and
(n) the Buyer shall have received a certified schedule of the
contributions by the Seller and/or the Parent made in accordance with Section
5.11 hereof through the Closing Date.
SECTION 6.2 CONDITIONS TO THE PURCHASE AND SALE RELATING TO THE SELLER.
The obligations of the Seller to consummate the transactions contemplated hereby
at the Closing as contemplated by this Agreement shall be subject to the
satisfaction of or waiver in writing by the Seller on or prior to the Closing
Date of each of the following conditions:
(a) Each of the representations and warranties of the Buyer
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date, with the same effect as though such representations and
warranties had been made on and as of the Closing Date, except to the extent
such representations and warranties relate solely to an earlier date, in which
case such representations and warranties shall have been true and correct in all
material respects as of such earlier date, and each of the covenants and
agreements of the Buyer to be performed on or prior to the Closing Date shall
have been performed in all material respects;
(b) No applicable Legal Requirement or Judgment of or in any
court or tribunal of competent jurisdiction shall be in effect that prohibits
the Seller from consummating the transactions contemplated hereby;
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(c) All Consents of any governmental or regulatory authority
or any other Person, the granting of which is required or appropriate for the
consummation of the transactions contemplated hereby shall have been obtained;
(d) The Seller's and the Parent's boards of directors shall
have considered and approved the transactions contemplated by this Agreement by
no later than August 31, 1999;
(e) The Seller, the Seller's stockholders and the Buyer or the
Parent, as the case may be, shall have entered into the Investors Agreement;
(f) The Parent and the Seller shall have executed the
Technical Assistance Agreement;
(g) Since January 1, 1999, there shall have been no material
adverse change in the business, operations, prospects or condition (financial or
otherwise) of the Buyer;
(h) None of the Buyer or its subsidiaries shall be in breach
of any Contract with any governmental entity and each of the Licenses (as
defined in the Subscription Agreement) shall be in good standing and in full
force and effect;
(i) The Seller shall have received the Financial Statements
(as defined in the Subscription Agreement) for each of the Companies (as defined
in the Subscription Agreement); and
ARTICLE 7.
AMENDMENT AND WAIVER
SECTION 7.1 AMENDMENT AND MODIFICATION. This Agreement and any of the
terms contained herein may only be amended by an amendment set forth in writing
and executed by the Buyer, the Seller and the Parent.
SECTION 7.2 WAIVER. At any time prior to the Closing either the Seller,
on the one hand, or the Buyer, on the other hand, may (i) extend the time for
the performance of any of the obligations or other acts of the other party
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered pursuant hereto, or
(iii) waive compliance with any of the agreements or conditions of the other
party contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
by the party granting the extension or waiver. No waiver of any of the
provisions of this Agreement shall be deemed to or shall constitute a waiver of
any other provision hereof. No delay on the part of any party hereto in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
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ARTICLE 8.
TERMINATION
SECTION 8.1 GROUNDS FOR TERMINATION. This Agreement may be terminated
at any time prior to the Closing:
(a) by written agreement of the Buyer, on the one hand, and
the Seller and the Parent, on the other hand;
(b) by either the Buyer or the Seller by giving ten (10) days'
advance written notice of such termination to the other party if a final,
nonappealable Judgment has been entered against the Buyer, the Seller, the
Parent or any of the Companies restraining, prohibiting or declaring illegal the
purchase of the Investments contemplated herein; or
(c) by any of the Seller, the Parent or the Buyer, if the
Closing does not occur by September 30, 1999.
SECTION 8.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to the provisions of this Article 8, the provisions set forth in
Sections 5.1(b), 5.3, 8.2, 8.3, 10.2, 10.8, 10.9, 10.10, 10.11, 10.13 and 10.14
shall survive any such termination, provided, that termination pursuant to
Section 8.1(b) shall not relieve the defaulting or breaching party hereunder
from any Liability to the other party hereto resulting from the default or
breach hereunder of such defaulting or breaching party occurring prior to the
date of termination.
SECTION 8.3 RETURN OF INFORMATION. If for any reason whatsoever the
transactions contemplated by this Agreement are not consummated, the Buyer, on
the one hand, and the Seller and the Parent, on the other hand, shall upon
request from the other, promptly destroy or return to the other party, all
books, records and documents (including all copies, if any, thereof) furnished
by the other party or any of such party's respective agents, employees, or
representatives.
ARTICLE 9.
INDEMNIFICATION
SECTION 9.1 INDEMNIFICATION BY THE SELLER AND THE PARENT.
(a) The Seller and the Parent shall, jointly and severally,
indemnify and hold the Buyer harmless from and against any and all damages
(excluding consequential damages), losses, liabilities, actions, claims or
expenses, including reasonable attorneys' fees ("Damages"), resulting from any
breach of a representation, warranty or covenant made by the Seller or the
Parent hereunder or by the Parent pursuant to the Subscription Agreement.
Subject to Section 9.1(b), the Seller and the Parent shall not have any
liability under the prior sentence unless and until the aggregate amount of all
Damages relating thereto exceeds $100,000 (the "Deductible"). Subject to Section
9.1(b), the Seller and the Parent shall only be liable for Damages in excess of
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the Deductible and the maximum liability of the Seller and the Parent for
Damages under this Agreement and the Subscription Agreement shall not exceed the
amount of the Investment Contribution established as of the Closing Date.
(b) Furthermore, the Seller and the Parent shall, jointly and
severally, indemnify and hold the Buyer harmless from and against any and all
Damages resulting from (i) any breach of, non-compliance with the terms of or
violation of the License owned by Argentina SA prior to the Closing Date (a
"License Breach") or (ii) any Liability for Taxes owed by Argentina SA relating
to the period prior to the Closing Date. The Deductible shall not apply to any
Damages arising from any claim for indemnification by the Buyer pursuant to this
Section 9.1(b) and the maximum liability of the Parent and Seller for Damages
arising from any claim for indemnification by the Buyer pursuant to this Section
9.1(b) shall not exceed US$10,000,000. The obligations of the Seller and the
Parent pursuant to subclause 9.1(b)(i) shall be conditioned upon the Buyer (A)
having given written notice to the Seller and the Parent promptly upon being
made aware of an alleged License Breach in accordance with Sections 9.3 and 9.4
hereof, (B) using reasonable care and commercially reasonable efforts to cure
such alleged License Breach (if curable by the Buyer or its Affiliates) and/or
mitigating any damages caused by such alleged License Breach and (C) cooperating
with and allowing the Seller and the Parent to participate fully with the Buyer
to cure and/or mitigate such alleged License Breach in accordance with Sections
9.3 and 9.4 hereof.
SECTION 9.2 INDEMNIFICATION BY THE BUYER. The Buyer shall indemnify and
hold the Seller and the Parent harmless from and against any and all Damages
resulting from any breach of a representation, warranty or covenant made by the
Buyer hereunder or pursuant to the Subscription Agreement. The Buyer shall not
have any liability under this Section 9.2 unless and until the aggregate amount
of all Damages relating thereto exceeds the Deductible and then the Buyer shall
only be liable for Damages in excess of the Deductible. Notwithstanding the
foregoing, the maximum liability of the Buyer for Damages under this Agreement
and the Subscription Agreement shall not exceed the amount of the Cash
Contribution established as of the Closing Date.
SECTION 9.3 CLAIMS. Any party claiming a right to indemnification under
Section 9.1 or 9.2 of this Agreement, respectively (an "Indemnified Party"),
shall give prompt written notice to the other party (the "Indemnifying Party")
of (i) the incurrence of Damages or (ii) the institution of any legal actions,
third party audits, third party investigations, suits or proceedings, each, in
connection with which the Indemnified Party would be entitled to claim
indemnification from the Indemnifying Party under Section 9.1 or 9.2 of this
Agreement (respectively, "Indemnifiable Claims"), which written notice shall set
forth the nature of the Indemnifiable Claim, the factual basis therefor and
shall reference this Section 9.3.
SECTION 9.4 THIRD PARTY CLAIMS. The respective obligations and
liabilities of the Buyer and the Seller and the Parent regarding any
Indemnifiable Claims resulting from claims made by third parties ("Third Party
Claims") shall be subject to the following terms and conditions: The
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<PAGE> 34
Indemnified Party shall give the Indemnifying Party prompt written notice of any
Third Party Claims. If the Indemnified Party fails to give such prompt notice to
the Indemnifying Party, the Indemnified Party shall not forfeit its Third Party
Claims except to the extent that the Indemnifying Party has been prejudiced
thereby. Upon notice from the Indemnified Party, the Indemnifying Party may, but
shall not be required to, assume the defense of any such Third Party Claim,
including its compromise or settlement, in which the outcome would give rise to
a claim for indemnification hereunder, and the Indemnifying Party shall pay all
reasonable costs and expenses thereof and shall be fully responsible for the
outcome thereof. The Indemnifying Party shall give notice to the Indemnified
Party as to its intention to assume the defense of any such Third Party Claims
within ten (10) Business Days after the date of receipt of the Indemnified
Party's notice in respect of such Third Party Claims. No compromise or
settlement in respect of any Third Party Claims may be effected by the
Indemnifying Party without the Indemnified Party's prior consent (which consent
shall not be unreasonably withheld). The Indemnifying Party shall have no
liability with respect to any compromise or settlement thereof effected without
its prior consent (which consent shall not be unreasonably withheld). If an
Indemnifying Party does not, within ten (10) Business Days after the Indemnified
Party's notice is given, give notice to the Indemnified Party of its assumption
of the defense of the Third Party Claims, the Indemnifying Party shall be deemed
to have waived its rights to control the defense thereof; provided, that the
Indemnifying Party shall be entitled to participate, at its own cost and
expense, in the defense of such Third Party Claims and the Indemnified Party
shall fully cooperate with the Indemnifying Party in respect of the defense of
such Third Party Claims. In the event that the Indemnifying Party assumes the
defense of any Third Party Claims, it shall not be responsible or liable for any
further costs or expenses of legal counsel incurred by the Indemnified Party in
connection with the defense thereof unless agreed to in advance by such
Indemnifying Party. If the Indemnified Party assumes the defense of any Third
Party Claim in accordance with this Section 9.4, the Indemnifying Party shall
pay all reasonable costs and expenses of such defense.
ARTICLE 10.
MISCELLANEOUS
SECTION 10.1 SURVIVAL
(a) The representations and warranties made by the parties
each to the other in or pursuant to this Agreement shall survive and expire on
the occurrence of the date that is twelve months after the Closing Date and
shall cease to be of any further force or effect thereafter, except with respect
to and to the extent of any claims with respect to which written notice
specifying, in reasonable detail, the nature and amount of claims has been given
by either of the Buyer to the Seller and the Parent or by the Seller and the
Parent to the Buyer prior to such expiration and except for the representations
and warranties set forth in Sections 3.3(a), 3.9, 3.10 and 3.14, which shall
survive until the expiration of the applicable statue of limitations.
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<PAGE> 35
(b) The covenants made by the parties each to the other in or
pursuant to this Agreement shall survive indefinitely and shall expire in
accordance with the applicable statute of limitations, except to the extent any
such covenant specifically terminates earlier than such time.
SECTION 10.2 PUBLIC DISCLOSURE. Each of the parties to this Agreement
hereby agrees with the other parties hereto that, except as may be required to
comply with applicable Law or except as a party considers it appropriate under
applicable securities laws based on written advice of counsel, no press release
or similar public announcement or communication shall be made or caused to be
made concerning the execution or performance of this Agreement unless
specifically approved in advance and in writing by all parties hereto and,
except that the parties may, with prior notice to the other parties, provide
information about this Agreement and the transactions contemplated hereby to
potential investors, lenders and their representatives. The Seller, the Parent
and the Buyer agree that any public announcement required by applicable Law
shall only be made after reasonable notice to the other party or parties.
SECTION 10.3 ASSIGNMENT. Except as provided in the following sentence,
or except with the prior written consent of the other parties hereto, this
Agreement may not be assigned by any party hereto, and any such assignment shall
be void and of no force or effect. Upon five (5) Business Days' prior written
notice to the Seller, the Buyer may assign, without the prior written consent of
the Seller, its rights under this Agreement, in whole or in part to any majority
owned subsidiary of the Buyer provided that Buyer shall remain subject to all of
its obligations hereunder. This Agreement shall be binding upon and inure to the
benefit of successors of the parties hereto.
SECTION 10.4 ENTIRE AGREEMENT. This Agreement, together with the
Subscription Agreement and the Schedules and Exhibits attached hereto, (a)
constitutes the entire agreement and supersedes all other agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (b) is not intended to and shall not be construed to
confer upon any Persons other than the parties hereto any rights or remedies
hereunder.
SECTION 10.5 COUNTERPARTS; FACSIMILE. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall be considered one and the same instrument. This Agreement may
be executed and delivered via facsimile.
SECTION 10.6 SECTION HEADINGS. The section and article headings
contained in this Agreement are for reference purposes only and shall not in any
way affect the meaning or interpretation of this Agreement.
SECTION 10.7 NOTICES. All notices hereunder shall be deemed given by a
party hereto if in writing and delivered personally or by facsimile transmission
or by registered or certified mail (return receipt requested) to the other party
at the following address for such party (or at such other address as shall be
specified by like notice):
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if to the Seller, to:
Formus Communications, Inc.
720 S. Colorado Blvd., Suite 600 North
Denver, CO 80246
Facsimile: (303) 504-3201
Attention: Chief Financial Officer
Attention: General Counsel
Formus International, Inc.
720 S. Colorado Blvd., Suite 600 North
Denver, CO 80246
Facsimile: (303) 504-3201
Attention: Chief Financial Officer
with copies to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4200
Denver, CO 80203
Facsimile: (303) 866-0200
Attention: W. Dean Salter, Esq.
if to the Buyer, to:
VeloCom Inc.
Suite 710
6400 South Fiddlers Green Circle
Englewood, CO 80111
Facsimile: (303) 874-1125
Attention: Michael S. Quinn
with a copy to:
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
Facsimile: (303) 295-8261
Attention: Billi R. McCullough
Any notice given by mail or facsimile transmission shall be effective
when received.
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SECTION 10.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO
THE CONFLICTS OF LAWS PROVISIONS THEREOF.
SECTION 10.9 CONSENT TO ARBITRATION.
(a) Nature of the Dispute. Any dispute between the parties to
this Agreement arising out of or relating to this Agreement, including, without
limitation, the interpretation of any provision of this Agreement or the breach,
termination or invalidity of this Agreement (a "Dispute") shall be settled
exclusively and finally by arbitration. It is specifically understood and agreed
that any Dispute may be submitted to arbitration irrespective of the magnitude
thereof, the amount in controversy or whether such Dispute would otherwise be
considered justifiable or ripe for resolution by a court.
(b) Rules of Arbitration. The arbitration shall be conducted
in accordance with the Rules of Arbitration of the International Chamber of
Commerce ("ICC") as in effect on the date of this Agreement (the "ICC Rules"),
except to the extent that the ICC Rules conflict with the provisions of this
Section 10.9, in which event the provisions of this Section 10.9 shall control.
(c) Arbitration Procedure. The arbitral tribunal shall consist
of three (3) arbitrators, each of whom shall be bilingual in English and Spanish
but each of whom shall have English as their first language. The parties to this
Agreement agree that the choice of arbitrators shall be as follows:
(i) If there are only two parties to a Dispute, one
(1) arbitrator shall be appointed by each party and the third shall be selected
by the two party-appointed arbitrators or, failing agreement, by the ICC, in
accordance with the ICC Rules.
(ii) If there are more than two parties to a Dispute,
then the three (3) arbitrators shall be appointed by the parties to the Dispute
in accordance with the ICC Rules established for the appointment of a sole
arbitrator. If the parties are not able to agree on all three arbitrators then
the ICC shall appoint the remaining one, two or three arbitrators.
(d) Location; Language. The arbitration shall be conducted in
Denver, Colorado and shall be conducted in English.
(e) Consolidation. In order to facilitate the comprehensive
resolution of related disputes, and upon request by any party to the arbitration
proceeding, the arbitration panel may at any time before the first oral hearing
of evidence consolidate the arbitration proceeding with any other arbitration
proceeding between any of the parties to this Agreement. The arbitrators shall
not determine to consolidate such arbitration unless they determine that (i)
there are issues of fact or law common to the two proceedings so that a
consolidated proceeding would be more efficient
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<PAGE> 38
than separate proceedings and (ii) no party to this Agreement would be
prejudiced as a result of such consolidation through undue delay or otherwise.
In the case of a consolidated proceeding involving more than two parties to this
Agreement, the arbitrators shall be selected in accordance with Section
10.9(c)(ii).
(f) Binding Decision and Award. Any decision or award of the
arbitral tribunal shall be final and binding upon the parties to the arbitration
proceeding. The parties to this Agreement hereby waive to the extent permitted
by law any rights to appeal or to review of such award by any court or tribunal.
The parties to this Agreement agree that any party to this Agreement may need to
obtain interim injunctive relief from a court. Therefore, a request for interim
injunctive relief by a party to a court, whether before, during or after the
arbitration proceedings have been initiated in accordance with the ICC Rules,
shall not be deemed incompatible with, or a waiver of, any provisions of this
section. In addition to the authority conferred on the arbitration tribunal by
the ICC Rules, the arbitration tribunal shall have the authority to make such
orders for interim relief, including injunctive relief, as it may be deem just
and equitable. The parties to this Agreement agree that the arbitral award may
be enforced against the parties to the arbitration proceeding or their assets
wherever they may be found and that a judgment upon the arbitral award may be
entered in any court having jurisdiction thereof.
(g) Miscellaneous. At any oral hearing of evidence in
connection with the arbitration, each party thereto or its legal counsel shall
have the right to examine its witnesses and to cross-examine the witnesses of an
opposing party. No evidence of any witness shall be presented in written form
unless the opposing party or parties shall have the opportunity to cross-examine
such witness, except as the parties to the Dispute otherwise agree in writing or
except under extraordinary circumstances where the arbitrators determine that
the interests of justice require a different procedure. Without in any way
limiting the foregoing and notwithstanding anything herein to the contrary, the
parties to this Agreement may, upon the prior written consent of all parties to
a Dispute, submit any Dispute to an expert acceptable to all such parties for
consideration and advice. Each party to this Agreement agrees, in the event such
submission is made, to reasonably consider the advice of such expert in
connection with such Dispute.
(h) Costs. The fees and expenses of the arbitrators and the
arbitration proceeding shall be split by the parties to the arbitration. Each
party shall bear its own costs and expenses in connection with any arbitration
proceeding, with the exception of fees and costs associated with the use of a
translator, to the extent necessary, which shall be borne equally amongst the
parties.
SECTION 10.10 WAIVER OF JURY TRIAL. Each party to this Agreement hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim arising out of or relating to this Agreement.
SECTION 10.11 ILLEGALITY. In case any provision in this Agreement shall
be invalid, illegal or unenforceable, to the extent permitted by applicable Law,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
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SECTION 10.12 KNOWLEDGE. For purposes of this Agreement, the terms
"knowledge" or "know" with respect to the Seller, the Parent or the Companies
(except TMC) shall mean (i) the actual knowledge of the Seller, the Parent or
the Companies (except TMC), respectively, after reasonable inquiry directed to
the employees and the consultants of the Seller, the Parent or the Companies
(except TMC) who, by virtue of his or her position or otherwise, could
reasonably be expected to be well-informed as to the subject matter of the
inquiry and (ii) the constructive knowledge of the Seller, the Parent or the
Companies (except TMC), respectively, based on reasonable inquires that
similarly situated individuals would undertake in similar positions. For
purposes of this Agreement, any statements relating to TMC in this Agreement are
made on the basis of the actual knowledge of the Seller and the Parent only. The
previous sentence is also true as to any statements made using the defined term
"Companies," as such statements are made about TMC, since this defined term
includes TMC.
SECTION 10.13 NO THIRD PARTY BENEFICIARIES. This Agreement is intended
to be solely for the benefit of the parties hereto and is not intended to confer
any benefits upon, or create any rights in favor of, any Person other than the
parties hereto.
SECTION 10.14 CONSTRUCTION AND REPRESENTATION BY COUNSEL. The parties
hereto represent that in the negotiation and drafting of this Agreement they
have been represented by and relied upon the advice of counsel of their choice.
SECTION 10.15 ENGLISH LANGUAGE CONTROLLING. This Agreement shall be
executed in the English language, which shall control the rights,
responsibilities and obligations of the parties.
*********************************************************
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<PAGE> 40
IN WITNESS WHEREOF, this Agreement has been signed, on behalf of each
of the parties hereto as of the date first above written.
BUYER
VELOCOM INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
SELLER
FORMUS INTERNATIONAL, INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
PARENT
FORMUS COMMUNICATIONS, INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
36
<PAGE> 41
EXHIBIT A
SUBSCRIPTION AGREEMENT
<PAGE> 42
EXHIBIT B
INVESTORS AGREEMENT
<PAGE> 43
EXHIBIT C
TECHNICAL ASSISTANCE AGREEMENT
<PAGE> 1
EXHIBIT 2.2
- -------------------------------------------------------------------------------
EXCHANGE AGREEMENT
Dated as of August 30, 1999
Among
FORMUS COMMUNICATIONS, INC.,
FORMUS INTERNATIONAL, INC.
and
THE SHAREHOLDERS LISTED ON SCHEDULE 1 HERETO
- -------------------------------------------------------------------------------
<PAGE> 2
EXCHANGE AGREEMENT
EXCHANGE AGREEMENT, (this "Agreement") dated as of August 30, 1999, by
and among Formus Communications, Inc. ("FCI"), Formus International, Inc.
("FII"), corporations incorporated under the laws of the State of Delaware, the
Direct Shareholders listed on Schedule 1 hereto (the "Direct Shareholders"),
Chase European Equity Associates II LLC, a Delaware limited liability company
("Chase II"), TCB Beteiligungs GmbH, a company incorporated under the laws of
the Federal Republic of Germany ("TCB" and, together with Chase II, the
"Indirect Shareholders" and, together with the Direct Shareholders, the
"Shareholders").
RECITALS
A. The Shareholders and FCI and FII desire to exchange the direct and indirect
interests in Callino GmbH, a company incorporated under the laws of the Federal
Republic of Germany ("Callino") for preferred stock of FCI, and to provide for
certain other matters.
B. One of the Direct Shareholders, Mr. Matthias Weber, as CEO of Callino, and
FCI and FII desire to extend and amend the agreement between Mr. Weber and
Callino, and to provide for certain other matters, all on the terms and
conditions set forth below.
AGREEMENT
ARTICLE I.
EXCHANGE OF STOCK
Section 1.1 Exchange of Stock.
(a) On the Closing Date (as defined below), subject to the
terms and conditions set forth in this Agreement, FCI will issue to FII and FII
will deliver or cause to be delivered to the Shareholders or their
representative a number of shares of FCI Series E Preferred Stock, par value
$.001 per share or FCI Series F Preferred Stock, par value $.001 per share
(collectively the "FCI Stock") and an amount of cash, in each case as set forth
opposite such Shareholder's name on Schedule 1. The shares of FCI Stock that FII
is so obligated to deliver, together with the shares of Stock that FII is
obligated to deliver pursuant to clause (c) of Section 1.2, are referred to as
the "Exchange Shares."
(b) Upon delivery of the Exchange Shares to the Shareholders
at the Closing, subject to the terms and conditions set forth in this Agreement,
each of the Direct Shareholders shall deliver to FII or its designee the shares
owned by them in Callino set forth opposite such Direct Shareholder's name on
Schedule 1 hereto ("Callino Shares"), and each of the Indirect Shareholders
shall deliver to FII or its designee their entire interests in Formus
<PAGE> 3
Communications-Germany B.V. ("Formus B.V."), a private company formed under the
laws of The Netherlands, set forth opposite such Indirect Shareholder's name on
Schedule 1 hereto (the "Formus B.V. Shares").
Section 1.2 Closing.
(a) The exchange of shares referred to in Section 1.1 and the
consummation of all other transactions contemplated by this Agreement (the
"Closing") shall take place at 10:00 A.M. at the offices of Holme
Roberts & Owen LLP, located at 1700 Lincoln Street, Suite 4100, Denver,
Colorado, as soon as practicable, and in no event later than five business days
following the satisfaction or waiver (by the party so entitled to waive) of the
conditions to Closing for some or all Shareholders (subject to completion of all
corporate requirements necessary to issue the Exchange Shares and all other
conditions), or at such other time and place, or on such other date, not later
than September 15, 1999, as the parties hereto shall agree in writing. Such date
is herein referred to as the "Closing Date."
(b) At the Closing, (i) FII shall deliver or cause to be
delivered to each of the Shareholders (and in the case of 1,154,410 shares of
stock issuable to Mr. Weber, to the Escrow Agent, as defined in the Extension
Agreement) a certificate or certificates for the Exchange Shares registered in
the name of such Shareholder and in such denominations as such Shareholder shall
designate in writing, (ii) each Direct Shareholder shall take or cause to be
taken all necessary action to cause the transfer of the Callino Shares
(including all rights with respect thereto) to FII or its designee including
without limitation the execution of a notarized assignment deed which shall be
valid upon receipt of the Exchange Shares, and (iii) each Indirect Shareholder
shall take or cause to be taken all necessary action to cause the transfer of
the Formus B.V. Shares to FII or its designee. Appropriate deeds of transfer and
assignment will be executed and notarized and the transfer will be recorded in
the books and records of the subject company regarding the assignment to FII or
its designee of the Callino Shares and the Formus B.V. Shares. The Callino
Shares and the Formus B.V. Shares are referred to collectively as the "Exchanged
Interests."
(c) At the Closing Mr. Weber shall execute and deliver to
Callino and FCI and FII an agreement (the "Extension Agreement"), in the form
attached hereto as Exhibit A, (i) extending the expiration date of the agreement
between him and Callino (then ARCIS MediaCom Management GmbH) dated January 14,
1999 from its current expiration date of June 30, 2000, to December 31, 2000,
(ii) terminating any other agreements among Mr. Weber, Callino, the
Shareholders, or any of them, including, without limitation, all agreements that
would entitle Mr. Weber to acquire any equity interest in Callino or any
subsidiary or affiliate of Callino or any other entity (other than equity
interests of FCI to be acquired pursuant to this Agreement) and (iii) providing
for certain other matters. In exchange for executing, delivering and performing
the Extension Agreement, Formus will deliver to Mr. Weber 1,154,410 Exchange
Shares at Closing.
(d) At the Closing, as additional consideration to be paid by
FII to the Shareholders hereunder, FII shall pay the cash consideration set
forth opposite such
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<PAGE> 4
Shareholder's name on Schedule 1. Such payment shall be made by delivery of a
certified check in the amount of US$100,000, payable to Dr. Michael Hoenig, as
the duly authorized representative of the Shareholders for such purpose.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of FCI and FII. Each of FCI
and FII hereby represent and warrant to Shareholders as follows, except as shown
on Schedules of Exception (the "Schedule") attached hereto:
(a) Organization, Good Standing and Qualification. Each of FCI
and FII is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each has (or will have in the case of
agreements to be signed at closing) all requisite corporate power and authority
to own and operate its properties and assets, to execute and deliver this
Agreement and, in the case of FCI, an Investors' Rights Agreement of FCI (the
"Investors' Rights Agreement") and a Stockholder Agreement of FCI (the
"Stockholder Agreement" and together with the Investors' Rights Agreement, the
"Related Agreements"), in each case substantially in the form made available to
the Shareholders or their representatives on the date hereof, to issue and sell
the Exchange Shares and to carry out the provisions of this Agreement, the
Related Agreements and the Restated Certificate of Incorporation of FCI (the
"Restated Certificate") and to carry on its business as presently conducted and
as presently proposed to be conducted. Each is duly qualified and is authorized
to do business and is in good standing in each jurisdiction in which the nature
of its activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so would not have a material adverse effect on FCI, FII or their business. FCI
does not own, directly or indirectly, equity securities of any other
corporation, limited partnership, limited liability company or other similar
entity. FCI is not a participant in any joint venture, partnership or similar
arrangement.
(b) Capitalization; Voting Rights. The authorized capital
stock of FCI is set forth on Section 2.1(b) of the Schedule. All issued and
outstanding shares of FCI's capital stock (i) have been duly authorized and
validly issued, (ii) are fully paid and nonassessable, and (iii) were issued in
compliance with all applicable state and federal laws concerning the issuance of
securities. The rights, preferences, privileges and restrictions of the Exchange
Shares will be substantially as stated in the term sheet delivered to
Shareholders or their representative. Except as may be granted pursuant to the
Related Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or agreements of any kind for the purchase or
acquisition from FCI of any of its securities. When issued in compliance with
the provisions of this Agreement and the Restated Certificate, the Exchange
Shares will be validly issued, fully paid and nonassessable, and will be free of
any liens or encumbrances; provided, however, that the Exchange Shares may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein or in the Related Agreements or as otherwise required by
such laws at the time a transfer is
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<PAGE> 5
proposed. The authorized capital stock of the subsidiaries of FCI (the
"Subsidiaries") is as set forth on Section 2.1(b) to the Schedule. All issued
and outstanding shares of each of the Subsidiaries (i) have been duly authorized
and validly issued, (ii) are fully paid and nonassessable, and (iii) were issued
in compliance with all applicable state and federal laws concerning the issuance
of securities. There are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or agreements of any kind for the purchase or
acquisition from the Subsidiaries of any of their securities.
(c) Authorization; Binding Obligations. All corporate action
on the part of FCI and FII, its officers, directors and stockholders necessary
for the authorization of this Agreement and the Related Agreements, the
performance of all obligations of each hereunder and thereunder at the Closing
and the authorization, sale, issuance and delivery of the Exchange Shares
pursuant hereto has been taken or will be taken prior to the Closing. The
Agreement and the Related Agreements, when executed and delivered, will be valid
and binding obligations of each of FCI and FII enforceable in accordance with
their terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; (ii) general principles of equity that
restrict the availability of equitable remedies; and (iii) to the extent that
the enforceability of the indemnification provisions in Section 2.9 of the
Investors' Rights Agreement may be limited by applicable laws.
(d) Financial Statements. FCI's unaudited consolidated balance
sheet as of June 30, 1999, (the "Latest Balance Sheet") and unaudited
consolidated statements of operations of the FCI for the period from January 1,
1999 to June 30, 1999 (the "Statement Date") delivered to Shareholders or their
representative (the "Financial Statements") fairly present in all material
respects the financial position and the results of operations of FCI for the
period covered thereby.
(e) Liabilities. None of FCI, FII nor the Subsidiaries has any
material liabilities and, to the best of its knowledge, FCI knows of no material
contingent liabilities not disclosed in the Latest Balance Sheet, except current
liabilities incurred in the ordinary course of business subsequent to the
Statement Date that have not been, either in any individual case or in the
aggregate, materially adverse.
(f) Investments in United States Real Property Interests.
FCI's capital stock does not constitute a United States real property interest
as that term is defined in Section 897(c)(1)(A)(ii) of the Internal Revenue Code
of 1986, as amended (the "Code"). The preceding representation is based on a
determination by FCI that FCI is not and has not been a United States real
property holding corporation (as that term is defined in Section 897(c)(2) of
the Code) during the five (5) year period preceding the date of this Agreement.
If at any time in the future FCI should become a United States real property
holding corporation, FCI shall, as promptly as possible, notify each Shareholder
of such change in status.
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<PAGE> 6
(g) Agreements; Action.
(1) There are no agreements, understandings or
proposed transactions between FCI, FII or the Subsidiaries and any of their
respective officers, directors or any affiliate thereof other than agreements
explicitly contemplated hereby and agreements between FCI and its employees with
respect to employment or the sale of FCI's Common Stock.
(2) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which FCI, FII or any Subsidiary is a party or to FCI's knowledge by
which they are bound that may involve (i) obligations (contingent or otherwise)
of, or payments to, FCI in excess of $100,000 or (ii) the license of any
telecommunications frequency or spectrum, patent, copyright, trade secret or
other proprietary right to or from FCI (other than licenses arising from the
purchase of "off the shelf" or other standard products), or (iii) provisions
restricting or affecting the development, manufacture or distribution of
products or services, or (iv) indemnification by FCI, FII or any Subsidiary with
respect to infringements of proprietary rights (other than indemnification
obligations arising from purchase or sale agreements entered into in the
ordinary course of business).
(3) None of FCI, FII nor the Subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of their capital stock, (ii) since the
Statement Date incurred any indebtedness for money borrowed or any other
liabilities (other than with respect to dividend obligations, distributions,
indebtedness and other obligations incurred in the ordinary course of business
or as disclosed in the Financial Statements) individually in excess of $50,000
or, in the case of indebtedness and/or liabilities individually less than
$50,000, in excess of $100,000 in the aggregate, (iii) made any loans or
advances to any person, other than ordinary advances for travel expenses or bona
fide loans to wholly-owned subsidiaries, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(4) For the purposes of subsections (2) and (3)
above, all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same person or entity
(including persons or entities FCI has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.
(5) None of FCI, FII nor any Subsidiary has engaged
in the past twelve (12) months in any discussion (i) with any representative of
any corporation or corporations regarding the consolidation or merger of FCI,
FII or any Subsidiary with or into any such corporation or corporations, (ii)
with any corporation, partnership, association or other business entity or any
individual regarding the sale, conveyance or disposition of all or substantially
all of the assets of FCI, FII or any Subsidiary, or a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of FCI, FII or any Subsidiary is disposed of, or (iii) regarding any other form
of acquisition, liquidation, dissolution or winding up of FCI, FII or any
Subsidiary.
(h) Obligations to Related Parties. There are no obligations
of FCI, FII or any Subsidiary to officers, directors, stockholders, or employees
of FCI, FII or any Subsidiary other
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<PAGE> 7
than (i) for payment of salary for services rendered since the commencement of
FCI's most recent payroll period, (ii) reimbursement for reasonable expenses
incurred on behalf of FCI, FII or any Subsidiary and (iii) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of FCI (the "Board"). None of the officers, directors or
stockholders of FCI, FII or any Subsidiary, or any members of their immediate
families, is indebted to FCI, FII or any Subsidiary or has any direct or
indirect ownership interest in any firm or corporation with which FCI, FII or
any Subsidiary is affiliated or with which FCI, FII or any Subsidiary has a
business relationship, or any firm or corporation that competes with FCI, FII or
any Subsidiary, except that officers, directors and/or stockholders of FCI or
members of their immediate families or any Subsidiary may own stock in publicly
traded companies that may compete with FCI, FII or any Subsidiary. No officer,
director or stockholder, or any member of their immediate families, is, directly
or indirectly, interested in any material contract with FCI, FII or any
Subsidiary (other than such contracts as relate to any such person's ownership
of capital stock or other securities of FCI). Except as may be disclosed in the
Financial Statements, none of FCI, FII nor any Subsidiary is a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
(i) Changes. Since the Statement Date, there has not been to
FCI's knowledge:
(1) any change in the assets, liabilities, financial
condition or operations of FCI, FII or any Subsidiary from that reflected in the
Financial Statements, other than changes in the ordinary course of business,
none of which individually or in the aggregate has had or is expected to have a
material adverse effect on such assets, liabilities, financial condition or
operations of FCI, FII or any Subsidiary;
(2) any resignation or termination of any key
officers of FCI, FII or any Subsidiary; and FCI, to the best of its knowledge,
does not know of the impending resignation or termination of employment of any
such officer;
(3) any material change, except in the ordinary
course of business, in the contingent obligations of FCI, FII or any Subsidiary
by way of guaranty, endorsement, indemnity, warranty or otherwise;
(4) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties,
business or prospects or financial condition of FCI, FII or any Subsidiary;
(5) any waiver by FCI, FII or any Subsidiary of a
valuable right or of a material debt owed to it;
(6) any direct or indirect loans made by FCI, FII or
any Subsidiary to any stockholder, employee, officer or director of FCI, FII or
any Subsidiary, other than advances made in the ordinary course of business;
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(7) any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder of
FCI, FII or any Subsidiary;
(8) any declaration or payment of any dividend or
other distribution of the assets of FCI, FII or any Subsidiary;
(9) any labor organization activity;
(10) any debt, obligation or liability incurred,
assumed or guaranteed by FCI, FII or any Subsidiary, except those for immaterial
amounts and for current liabilities incurred in the ordinary course of business;
(11) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets of FCI, FII or
any Subsidiary;
(12) any change in any material agreement to which
FCI, FII or any Subsidiary is a party or by which it is bound that materially
and adversely affects the business, assets, liabilities, financial condition,
operations or prospects of FCI, FII or any Subsidiary, including compensation
agreements with FCI's, FII's or any Subsidiary's employees; or
(13) any other event or condition of any character
that, either individually or cumulatively, has materially and adversely affected
the business, assets, liabilities, financial condition, operations or prospects
of FCI, FII or any Subsidiary.
(j) Title to Properties and Assets; Liens, etc. Each of FCI,
FII and each of the Subsidiaries has good and marketable title to its properties
and assets, including the properties and assets reflected in the Latest Balance
Sheet included in the Financial Statements, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (i) those resulting from taxes that have not yet become
delinquent, (ii) minor liens and encumbrances that do not materially detract
from the value of the property subject thereto or materially impair the
operations of FCI, FII or any Subsidiary, and (iii) those that have otherwise
arisen in the ordinary course of business. All facilities, machinery, equipment,
fixtures, vehicles and other properties owned, leased or used by FCI, FII and
the Subsidiaries are in good operating condition and repair and are reasonably
fit and usable for the purposes for which they are being used, reasonable wear
and tear excepted.
(k) Patents and Trademarks. Each of FCI, FII and the
Subsidiaries owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, information
and other proprietary rights and processes necessary for its business as now
conducted and as proposed to be conducted, without any known infringement of the
rights of others. There are no outstanding options, licenses or agreements of
any kind relating to the foregoing, nor is FCI, FII or any Subsidiary bound by
or a party to any options, licenses or agreements of any kind with respect to
the patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes of any
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<PAGE> 9
other person or entity other than such licenses or agreements arising from the
purchase of "off the shelf" or standard products. None of FCI, FII nor any
Subsidiary has received any communications alleging that FCI, FII or any
Subsidiary has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity. None
of FCI, FII nor any Subsidiary is aware that any of its or any of the
Subsidiaries' respective employees 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 interfere with their duties to FCI, FII or the Subsidiaries or that would
conflict with the FCI's, FII's or any Subsidiary's business as proposed to be
conducted. None of the execution nor delivery of this Agreement, nor the
carrying on of FCI's, FII's or the Subsidiaries' business by the employees of
FCI, FII and the Subsidiaries, nor the conduct of FCI's, FII's or the
Subsidiaries' businesses as proposed, will, to FCI's knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any employee is
now obligated. FCI does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of FCI's, FII's or
the Subsidiaries' employees made prior to their employment by FCI, FII or any
Subsidiary, except for inventions, trade secrets or proprietary information that
have been assigned to FCI, FII or the Subsidiaries.
(l) Compliance with Other Instruments. FCI is not in violation
or default of any term of its Restated Certificate or Bylaws, or of any
provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order, writ or, to its knowledge, any statute, rule or regulation
applicable to FCI that would materially and adversely affect the business,
assets, liabilities, financial condition, operations or prospects of FCI. Each
of FII and each of the Subsidiaries is not in violation or default of any term
of its certificate of incorporation, articles of incorporation, memorandum of
association, estatutos, deed of formation or bylaws, or of any provision of any
mortgage, indenture, contract, agreement, instrument or contract to which it is
party or by which it is bound or of any judgment, decree, order, writ or, to
FCI's knowledge, any statute, rule or regulation applicable to FII or to such
Subsidiary that would materially and adversely affect the business, assets,
liabilities, financial condition, operations or prospects of FII or such
Subsidiary. The execution, delivery, and performance of and compliance with this
Agreement, and the Related Agreements, and the issuance and sale of the Exchange
Shares pursuant hereto will not, with or without the passage of time or giving
of notice, result in any such material violation, or be in conflict with or
constitute a default under any such term, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of FCI, FII or any Subsidiary or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit license, authorization or approval
applicable to FCI, FII or any Subsidiary, their business or operations or any of
their assets or properties.
(m) Litigation. There is no action, suit, proceeding or
investigation pending or to FCI's knowledge currently threatened against FCI
that questions the validity of this Agreement or the Related Agreements, or the
right of FCI or FII to enter into any of such agreements, or to consummate the
transactions contemplated hereby or thereby. There is no action, suit,
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proceeding or investigation or to FCI's knowledge currently threatened against
FCI, FII or any Subsidiary that might result, either individually or in the
aggregate, in any material adverse change in the assets, condition, affairs or
prospects of FCI, financially or otherwise, or any change in the current equity
ownership of FCI or any Subsidiary, nor is FCI aware that there is any basis for
the foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to FCI) involving the prior employment
of any of the employees of FCI, FII or any Subsidiary, their use in connection
with FCI's business of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements with
prior employers. None of FCI, FII nor any Subsidiary is a party or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality. There is no action, suit, proceeding or
investigation by FCI, FII or any Subsidiary currently pending or that FCI
intends to initiate.
(n) Tax Returns and Payments. Each of FCI, FII and each
Subsidiary has timely filed all material tax returns (federal, state and local)
required to be filed by it. All taxes shown to be due and payable on such
returns, any assessments imposed, and to FCI's knowledge all other taxes due and
payable by FCI, FII and each Subsidiary on or before the Closing have been paid
or will be paid prior to the time they become delinquent. None of FCI, FII nor
any Subsidiary has been advised (i) that any of its returns, federal, state or
other, have been or are being audited as of the date hereof, or (ii) of any
deficiency in assessment or proposed judgment to its federal, state or other
taxes. FCI has no knowledge of any liability of any tax to be imposed upon the
properties or assets of FCI, FII or any Subsidiary as of the date of this
Agreement that is not adequately provided for.
(o) Employees. None of FCI, FII nor any Subsidiary has any
collective bargaining agreements with any of their employees. There is no labor
union organizing activity pending or, to FCI's knowledge, threatened with
respect to FCI, FII or any Subsidiary. No employee has any agreement or
contract, written or verbal, regarding his employment. None of FCI, FII nor any
Subsidiary is a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To FCI's knowledge, no employee of FCI, FII or any Subsidiary, nor
any consultant with whom FCI, FII or any Subsidiary has contracted, is in
violation of any material term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, FCI, FII or any Subsidiary
because of the nature of the business to be conducted by FCI, FII or any
Subsidiary; and to FCI's knowledge the continued employment by FCI, FII and the
Subsidiaries of their respective present employees, and the performance of
FCI's, FII's and the Subsidiaries' contracts with their independent contractors
will not result in any such violation. None of FCI, FII nor any Subsidiary has
received any notice alleging that any such violation has occurred. No employee
of FCI, FII or any Subsidiary has been granted the right to continued employment
by FCI, FII or any Subsidiary or to any material compensation following
termination of employment with FCI, FII or any Subsidiary. None of FCI, FII nor
any Subsidiary is aware that any officer or key employee, or that any group of
key employees, intends to terminate their employment with FCI, FII or any
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Subsidiary, nor does FCI, FII or any Subsidiary have a present intention to
terminate the employment of any officer, key employee or group of key employees.
(p) Proprietary Information and Inventions Agreements. Each
former and current employee, officer and consultant of FCI, FII and the
Subsidiaries has executed a Proprietary Information and Invention Agreement in
substantially the form provided to Shareholders.
(q) Obligations of Management. Each officer of FCI, FII and
the Subsidiaries is currently devoting one hundred percent (100%) of such
officer's business time to the conduct of the business of FCI, FII or the
Subsidiaries. FCI is not aware of any officer or key employee of FCI, FII or the
Subsidiaries planning to work less than full time at FCI, FII or the
Subsidiaries in the future.
(r) Registration Rights. Except as required pursuant to the
Investors' Rights Agreement and the Stockholders Agreement, FCI is presently not
under any obligation, and has not granted any rights, to register (as defined in
Section 1.1 of the Investors' Rights Agreement) any of FCI's presently
outstanding securities or any of its securities that may hereafter be issued.
(s) Compliance with Laws; Permits. To FCI's knowledge, none of
FCI, FII nor any Subsidiary is in violation of any applicable statute, rule,
regulation, order or restriction of any domestic or foreign government or any
instrumentality or agency thereof in respect of the conduct of its business or
the ownership of its properties that violation would materially and adversely
affect the business, assets, liabilities, financial condition, operations or
prospects of FCI, FII or the Subsidiaries. No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement and the issuance of the Exchange
Shares, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner. FCI, FII and the Subsidiaries have all franchises, permits,
licenses and any similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects or financial condition of FCI, FII or
any Subsidiary and FCI believes FCI, FII and the Subsidiaries can obtain,
without undue burden or expense, any similar authority for the conduct of their
business as planned to be conducted.
(t) Environmental and Safety Laws. To FCI's knowledge, none of
FCI, FII nor any of the Subsidiaries is in violation of any applicable statute,
law or regulation relating to the environment or occupational health and safety,
and to FCI's knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law or regulation.
(u) Offering Valid. Assuming the accuracy of the
representations and warranties of the Shareholders contained in Section 2.2
hereof, the offer, sale and issuance of the Exchange Shares will be exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") and will have been registered or qualified (or are exempt from
10
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registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws. None of FCI, FII nor any
agent on its behalf has solicited or will solicit any offers to sell or has
offered to sell or will offer to sell all or any part of the Exchange Shares to
any person or persons so as to bring the sale of such Exchange Shares by FCI
within the registration provisions of the Securities Act.
(v) Full Disclosure. To FCI's knowledge and belief, this
Agreement, the Exhibits hereto, the Related Agreements and any certificate
delivered by FCI to Shareholders or their attorneys or agents or representative
in connection herewith or therewith or with the transactions contemplated hereby
or thereby, neither contain any untrue statement of a material fact nor, to
FCI's knowledge and belief, omit to state a material fact necessary in order to
make the statements contained herein or therein not misleading. To FCI's
knowledge and belief, there are no facts that (individually or in the aggregate)
materially adversely affect the business, assets, liabilities, financial
condition or operations of FCI that have not been set forth in the Agreement,
the Schedules hereto, the Related Agreements or in other documents delivered to
Shareholders or their attorneys or agents or representative in connection
herewith or disclosed orally to Shareholders by an executive officer of FCI.
(w) Minute Books. The minute books of FCI made available to
the Shareholders or their representatives contain a complete summary of all
meetings of directors and stockholders since the time of incorporation.
(x) Insurance. FCI has or will obtain promptly following the
Closing fire and casualty insurance policies with coverage customary for
companies similarly situated to FCI.
(y) Investment Company Act. FCI is not an "investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
Section 2.2 Representations and Warranties of Shareholders. Each
Shareholder, severally and not jointly, hereby represents and warrants to FCI
and FII as follows:
(a) Ownership of Exchange Interest. On the date of this
Agreement such shareholder is, and the Closing Date such Shareholder will be,
the lawful owner of the Exchanged Interest set forth opposite such Shareholder's
name on Schedule 1, free and clear of all encumbrances. The delivery to FII of
the Exchanged Interest of such Shareholder pursuant to this Agreement will
transfer to FII valid title thereto, free and clear of any and all adverse
claims.
(b) Authorization and Validity of Agreement. Such Shareholder
has full power and authority to execute and deliver this Agreement and each
Related Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by such Shareholder (if other than an individual) and the
consummation of the transactions contemplated hereby, have been duly authorized
and approved, and no other action on the part of such Shareholder is necessary
to authorize the execution, delivery and performance of this Agreement and the
consummation of
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the transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Shareholder and is a valid and binding obligation of such
Shareholder, enforceable against it in accordance with its terms, except to the
extent that its enforceability may be subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting the
enforcement of creditors' rights generally and to general equitable principles.
(c) Existence and Good Standing. Each Shareholder that is not
a natural person is duly organized and validly existing and has all the
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted.
(d) Consents and Approvals; No Violations. The execution and
delivery of this Agreement by such Shareholder and the consummation of the
transactions contemplated hereby (1) will not violate any statute, rule,
regulation, order or decree of any public body or authority by which such
Shareholder or any of its properties or assets are bound, (2) will not require
any filing with, or permit, consent or approval of, or the giving of any notice
to, any governmental or regulatory body, agency or authority on or prior to the
Closing Date and (3) will not result in a violation or breach of, conflict with,
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation, payment or acceleration)
under, or result in the creation of any lien or other encumbrance upon any of
the properties or assets of such Shareholder under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, franchise,
permit, agreement, lease, franchise agreement or any other instrument or
obligation to which such Shareholder is a party, or by which it or any of its
properties or assets may be bound.
(e) Nature of Investment. Such Shareholder is acquiring the
Exchange Shares for its own account, for investment only and not with a view to,
or for sale in connection with, a distribution thereof within the meaning of the
Securities Act.
(f) No Knowledge of Violation.
(1) To the knowledge of each Direct Shareholder, the
business and operations of Callino have been conducted as required by law, the
charter and other regulations of Callino, and there is no default under the
Callino Shareholders Agreement dated September 10, 1998 among Callino and its
shareholders (the "Callino Shareholders Agreement") or any other agreement to
which the shareholders of Callino are parties.
(2) To the knowledge of each Indirect Shareholder,
there is no default under the Amended and Restated Shareholder's Agreement or
the Amended and Restated Investment Agreement, both of which are dated March 8,
1999 and are among Formus B.V. and its shareholders (the "Formus B.V. Investment
Agreement"; collectively with the Callino Shareholders Agreement, the "Callino
Agreements").
(g) No Other Interest. Each Shareholder acknowledges that it
has no direct or indirect economic or other interest in Callino or any of its
subsidiaries or affiliates or any right to
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acquire such interest, except for such Shareholder's Exchanged Interest and, as
to Mr. Weber only, those rights which are being terminated by the Extension
Agreement.
(h) Full Disclosure. To such Shareholder's knowledge and
belief, this Agreement, the Exhibits hereto, and any certificate delivered by or
on behalf of the Shareholders to FCI, FII or their attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby or
thereby, neither contain any untrue statement of a material fact nor, to such
Shareholder's knowledge and belief, omit to state a material fact necessary in
order to make the statements contained herein or therein not misleading
(excluding statements of FCI or FII, with respect to which no representation or
warranty is made). To such Shareholder's knowledge and belief, there are no
facts that (individually or in the aggregate) materially adversely affect the
business, assets, liabilities, financial condition or operations of Callino that
have not been set forth in the Agreement, the Schedules hereto, or in other
documents delivered to FCI or FII or their attorneys or agents in connection
herewith or disclosed orally to FCI or FII by an executive officer of Callino.
(i) Foreign Corrupt Practices Act. To the knowledge of each
Shareholder, neither Callino nor any of its subsidiaries (nor any of their
respective affiliates, directors, officers, employees, agents or subcontractors)
have committed any act that would violate applicable laws prohibiting bribery or
corruption in Germany or any act that, if committed by a U.S. person or entity,
would constitute a violation of the Foreign Corrupt Practices Act of the United
States of America ("FCPA"). Without limiting the generality of the foregoing, to
the knowledge of each Shareholder no such person has made any payment or given
or offered anything of value, directly or indirectly, to any government official
(including any director, employee or agent of any government department, agency
or instrumentality) to influence any of its decisions, or to gain any other
advantage.
ARTICLE III.
COVENANTS
Section 3.1 Reasonable Best Efforts. Each of the parties hereto agrees
to use its reasonable best efforts to take, or cause to be taken, all action, to
do or cause to be done, and to assist and cooperate with the other party hereto
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including, but not limited to, (a) the obtaining
of all necessary waivers, consents and approvals from governmental or regulatory
agencies or authorities and the making of all necessary registrations and
filings and the taking of all reasonable steps as may be necessary to obtain any
approval or waiver from, or to avoid any action or proceeding by, any
governmental agency or authority, (b) the obtaining of all necessary consents,
approvals or waivers from third parties and (c) the defending of any lawsuits or
any other legal proceedings whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby including,
without limitation, seeking to having any temporary restraining order entered by
any court or administrative authority vacated or reversed.
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Section 3.2 Conduct of Business of FCI. During the period from the date
of this Agreement to the Closing Date, except as may be first approved by
Shareholders holding a majority of the Callino Shares (such approval not to be
unreasonably withheld or delayed) or as is otherwise permitted or required by
this Agreement, FCI agrees (a) to maintain its Restated Certificate and By-Laws
in their respective forms on the date of this Agreement, except for changes in
authorized capital and other changes that would not, in any case, adversely
affect the Exchange Shares, or the Conversion Shares, (b) to refrain from
declaring or paying any dividends except which are payable solely in FCI common
stock, and (c) to refrain from agreeing whether or not in writing, to do any of
the foregoing.
Section 3.3 Exchange Shares; Certificates. Each Shareholder
acknowledges that any certificate representing Exchange Shares and Conversion
Shares will bear the following legend:
The shares represented by this Certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), and such securities may not be offered or
sold except (1) pursuant to an exemption from, or in a
transaction not subject to, the registration requirements
under the Securities Act or (2) pursuant to an effective
registration statement under the Securities Act, in each case
in accordance with any applicable securities laws of any State
of the United States.
Each Shareholder shall comply with the terms of the foregoing legend. Such
legend shall be removed from the certificates representing any such Exchange
Shares or Conversion Shares at the request of the holder thereof at such time as
they become eligible for resale pursuant to Rule 144(k) under the Securities
Act.
Section 3.4 No Encumbrance. No Shareholder shall sell, encumber or
otherwise transfer or agree to transfer its Exchanged Interest or take or agree
to take any other action that would adversely affect its ability to perform its
obligations hereunder.
Section 3.5 Confidentiality. The parties hereto each agree not to
disclose to any third party the existence or contents of this Agreement or their
discussions regarding the transactions contemplated hereby, or any other
information obtained by such Shareholder as a result of such Person (including
the affiliates) being an officer, director or direct or indirect shareholder of
Callino, except to the extent reasonably necessary to complete such transactions
or as required by law. The parties further agree that any confidential
information they receive in their due diligence or otherwise in the course of
negotiating or completing the transactions contemplated by this Agreement, and
all confidential information received from any source regarding or related to
Callino (including its subsidiaries) will be kept confidential, will not be
disclosed to third parties (except those that have a need to know in order to
complete such transactions and who agree to keep such information confidential)
and will not be used for any purpose other than to complete the transactions
contemplated by this Agreement. This Section 3.5 will not apply to information
that (a) was in the public domain before the disclosing party disclosed it to
the receiving party, (b) entered the public domain through no fault of the
receiving party after the
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disclosing party disclosed it to the receiving party, (c) is required to be
disclosed under applicable law, (d) a party considers appropriate to disclose
under the securities laws of the United States of America; or (e) is disclosed
to potential purchasers of a Shareholder's Exchange Shares, including legal or
financial advisors retained by the Shareholder or potential purchaser in
connection with such sale (including potential sources of financing for the
purchase price of such Exchange Shares), provided each such potential purchaser,
advisor and lender signs a confidentiality agreement, in form and substance
satisfactory to FCI, prohibiting such potential purchaser, advisor or lender
from using such information for any other purpose or from disclosing such
information to any other Person or entity. In addition, this Section 3.5 will
not apply to disclosures made by FCI or any of its affiliates (i) in connection
with due diligence investigations by potential partners of FCI or any of its
affiliates or persons who are considering providing debt, equity or other
financing to or acquiring FCI or any of its affiliates or financial advisors or
underwriters involved in such transactions or (ii) announcing the closing of the
transactions contemplated hereby.
Section 3.6 Capital Contributions. Prior to the Closing, (i) each of
the Direct Shareholders shall fund or cause to be funded such Shareholder's pro
rata portion of the first DM 10,000,000 of the DM 20,000,000 capital call made
in June 1999 (the "Callino Capital Call"), and (ii) each of the Indirect
Shareholders shall fund or cause to be funded its pro rata portion of any
capital call made or to be made by Formus B.V., as applicable, for the purpose
of satisfying such entity's obligation to fund the Callino Capital Call.
Section 3.7 Waivers Under Agreements. Each of the Shareholders who is a
party to the Callino Agreements, Formus B.V., and TCB hereby waives any
restriction on transfer of the Callino shares or its indirect interest in
Callino, preemptive rights (legal or contractual), rights of first offer, tag
along rights, drag along rights or similar matters with respect to the
transactions contemplated by this Agreement and the option agreement described
in Section 4.3(h) and each such party will promptly execute or cause to be
executed such notarial deeds and other documents and take such other actions as
are requested by FCI or FII to effect the foregoing.
ARTICLE IV.
CONDITIONS
Section 4.1 Conditions Precedent to the Obligations of FCI, FII and the
Shareholders. The obligations of each of FCI, FII and the Shareholders under
this Agreement are conditioned upon the satisfaction or waiver, at or prior to
the Closing, of each of the following conditions:
(a) Injunction. No preliminary or permanent injunction or
other order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which prohibits the consummation of the
transactions contemplated by this Agreement or has the effect of making the
transactions contemplated by this Agreement illegal and which is in effect at
the Closing Date (each party agreeing to use its reasonable best efforts to have
any such injunction or order lifted).
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<PAGE> 17
(b) Statutes. No statute, rule, regulation, executive order,
decree or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the consummation
of the transactions contemplated by this Agreement or has the effect of making
the transactions contemplated by this Agreement illegal.
Section 4.2 Conditions Precedent to the Obligations of Shareholders.
The obligations of the Shareholders to consummate the transactions contemplated
hereby are additionally subject to the satisfaction or waiver on or before the
Closing Date of the following conditions precedent:
(a) Accuracy of Representations and Warranties. All
representations and warranties of FCI and FII contained herein shall be true and
correct in all material respects as of the date hereof and at and as of the
Closing Date, with the same force and effect as though made at and as of the
Closing Date; provided, that the parties hereto acknowledge and agree that the
representations, including any Schedules related thereto, may be updated in
writing at or prior to Closing to the extent that such update (i) reflects a
change in circumstances that is consistent with FCI's obligations under Section
3.2 and (ii) does not materially affect the legal or economic substance of the
transactions contemplated by this Agreement and does not amount to a material
adverse change in the conditions of FCI, FII and the Subsidiaries, taken as a
whole.
(b) Performance by FCI and FII. Each of FCI and FII shall have
performed in all material respects all obligations and agreements, and complied
in all material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by its prior to the Closing Date.
(c) Consents and Approvals. All consents, approvals and other
action by, all notices to and all filings with all Persons, including all courts
and administrative and governmental bodies that are required to have been
obtained, taken or made to consummate the transactions contemplated by this
Agreement shall have been obtained, undertaken or made, and all waiting periods
shall have expired or been waived, as the case may be.
(d) No Material Adverse Change. Prior to the Closing no event
shall have occurred or failed to occur, which occurrence, or failure to occur,
as the case may be, has had or is reasonably likely to have a material adverse
effect on FCI and its Subsidiaries, taken as a whole, whether as a result of any
legislative or regulatory change, revocation of any License or rights to do
business, fire, explosion, accident, casualty, labor trouble, flood, drought,
riot, storm, condemnation or act of God or other public force or otherwise.
(e) Opinion of Counsel. Shareholders shall have received an
opinion, dated the Closing Date, of Holme Roberts & Owen LLP, in substantially
the form of Exhibit B attached hereto.
(f) Good Standing and Other Certificates. FCI and FII shall
have delivered (i) copies of the Restated Certificate certified by the Secretary
of State of the State of Delaware, and (ii) a certificate from the Secretary of
State of the State of Delaware to the effect that each of
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<PAGE> 18
FCI and FII is in good standing in such jurisdiction and listing all charter
documents of each on file.
(g) Officer's Certificates. FCI and FII shall have delivered a
certificate of the President or any Vice President of FCI and FII, dated the
Closing Date certifying that the conditions specified in Sections 4.1(b),
4.2(a), 4.2(b) and 4.2(d) have been satisfied.
(h) Deliveries. Each Shareholder shall have received a duly
executed stock certificate representing the Exchange Shares that FII is required
to deliver pursuant to Section 1.1(a) hereof.
(i) Other Agreements. FCI shall have duly executed and
delivered the Investors' Rights Agreement and the Stockholder Agreement.
(j) Cash Consideration. FCI shall have paid the cash
consideration as provided in Section 1.2(d).
Section 4.3 Conditions Precedent to the Obligations of FCI and FII. The
obligation of FCI and FII to consummate the transactions contemplated hereby are
additionally subject to the satisfaction, on or before the Closing Date, of the
following conditions precedent (provided that FCI and FII may waive any
conditions hereunder as to a specific Shareholder without being deemed to have
waived that condition or any other condition as to any other Shareholder):
(a) Accuracy of Representations and Warranties. All
representations and warranties of each Shareholder contained herein shall be
true and correct in all material respects as of the date hereof and on and as of
the Closing Date, with the same force and effect as though made on and as of the
Closing Date.
(b) Performance by Shareholders. Each Shareholder shall have
performed in all material respects all obligations and agreements, and complied
in all material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to the Closing Date.
(c) Consents and Approvals. All consents, approvals and other
actions by, all notice to and all filings with all Persons, including all courts
and administrative and governmental bodies that are required to have been
obtained, taken or made to consummate the transactions contemplated by this
Agreement shall have been obtained, undertaken or made, and all waiting periods
shall have expired or been waived, as the case may be.
(d) Opinions of Counsel. FCI and FII shall have received one
or more opinions, dated the Closing Date, of Counsel to the Direct Shareholders,
Chase European Equity Associates I LLC ("Chase I"), Chase II, and TCB, in each
case in form and substance reasonably satisfactory to FCI and FII.
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<PAGE> 19
(e) Certificates. The Shareholders shall have delivered to FCI
and FII a certificate dated the Closing Date certifying that the Conditions set
forth in Sections 4.1(b), 4.3(a) and 4.3(b) have been satisfied.
(f) Deliveries. The deeds of assignment and/or transfer of the
Exchanged Interests, and all related documents, shall have been executed by all
parties thereto, notarized and delivered to FII, as applicable, and all
necessary or appropriate action shall have been taken with respect thereto to
fully effect the transfer of all of the Exchanged Interests to FII or its
designee.
(g) Related Agreements. Each Shareholder shall have duly
executed and delivered the Stockholder Agreement and the Investors' Rights
Agreement.
(h) Non-compete Agreements. Dr. Hoenig, Dr. Diekmann, Angelika
Diekmann, Simone Diekmann, Alexander Diekmann and Mr. Weber shall have entered
into non-compete agreements with Callino containing the terms attached hereto as
Exhibit C.
(i) The Extension Agreement. The Extension Agreement with Mr.
Weber shall have been duly executed and delivered by Mr. Weber to FCI and FII.
(j) Waiver and Consent. Chase I shall have entered into a
Waiver and Consent, in a form acceptable to FCI and FII, waiving its rights
under the Callino Agreements and consenting to the transactions provided for
herein.
(k) Management Option Agreements. Callino shall have
restructured its management option programs as agreed at the July 29, 1999
Callino Shareholder meeting by agreements satisfactory to FCI.
(l) Indirect Shareholder Powers of Attorney. Each of Chase II
and TCB, as transferor, and FII or its designee, as transferee, and Formus B.V.
shall have duly executed and delivered a power of attorney to a civil law notary
of The Netherlands for purposes of executing a notarial deed ("Notarial Deed")
in respect of the transfer of the Exchanged Interest of such Indirect
Shareholder in Formus B.V. to FII or its designee as provided herein and each
Notarial Deed of transfer shall have been duly executed effecting such transfer.
(m) Payment Obligations. All sums due and owing to FII or any
of its affiliates pursuant to the Formus B.V. Investment Agreement shall have
been paid to FII.
(n) Callino Shareholders Resolution. The shareholders of
Callino shall have duly adopted the Callino shareholder resolutions in the form
attached hereto as Exhibit D.
(o) Formus B.V. Board Resolution. The management board of
Formus B.V. shall have duly adopted the Formus B.V. board resolutions in the
form attached hereto as Exhibit E.
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<PAGE> 20
ARTICLE V.
SURVIVAL; INDEMNIFICATION
Section 5.1 Survival. The respective representations and warranties of
the parties hereto contained in this Agreement or in any Schedule, Exhibit or
certificate delivered together herewith or pursuant thereto shall survive the
Closing for a period of one year, except that the representations of FCI and FII
in Sections 2.1(a) and (b) and of Shareholders in Sections 2.2(a) and (b) shall
survive indefinitely; provided, that the obligations to indemnify shall not
terminate at the time provided above if, prior to such time, a notice of claim
relating to Losses (as defined below) specifying the detail the nature thereof
(although the amount of Losses, if not yet determinable, need not be specified)
has been given to Shareholders or FCI, as the case may be. The other covenants
of the parties hereunder shall survive the Closing and shall not terminate
except as expressly provided herein.
Section 5.2 Indemnification. The parties agree to indemnify and hold
each other harmless from all claims, expenses, obligations, damages, costs,
payments, liabilities, losses, interest, fines and penalties, including, without
limitation, costs and expenses of litigation (including costs of investigation),
reasonable attorney's fees and reasonable consultant's fees (collectively,
"Losses") suffered or paid, directly or indirectly, through application of the
indemnified party's assets or otherwise, as a result of or arising out of the
failure of any representation or warranty made by Shareholders or FCI or their
respective affiliates, as the case may be, to be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date.
ARTICLE VI.
TERMINATION AND ABANDONMENT
Section 6.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned, at any time prior to the
Closing Date;
(a) by mutual consent of the Shareholders and FCI and FII;
(b) by FCI or by a majority in interest of Shareholders, if
the Closing shall not have occurred on or prior to September 15, 1999, unless
the failure to so consummate by such time is due to the material breach of any
representation or warranty, or failure to satisfy any covenant or condition
contained in this Agreement by the party seeking to so terminate;
(c) by either a majority of interest of Shareholders or FCI,
if there has been a material breach of any representation or warranty on the
party of the other; provided, that any such breach of a representation or
warranty has not been cured within 30 days following receipt by the breaching
party of notice of such breach;
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<PAGE> 21
(d) by either Shareholders or FCI, if there shall be any law
or regulation of any competent authority that makes consummation of the
Agreement, or the transactions contemplated hereby, illegal or otherwise
prohibited or if any judgment, injunction, order or decree of any competent
authority prohibiting such transactions is entered and such judgment,
injunction, order or decree shall become final and nonappealable.
Section 6.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 6.1 by either party, written notice thereof
shall forthwith be given to the other party specifying the provisions hereof
pursuant to which such termination is made, and this Agreement shall become void
and have no effect, and there shall be no liability hereunder on the part of
Shareholders or FCI. Nothing in this Section 6.2 shall relieve any party to this
Agreement of liability for breach of this Agreement.
ARTICLE VII.
MISCELLANEOUS
Section 7.1 Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of the
State of Colorado without regard to the conflict of laws provisions thereof.
Notwithstanding the foregoing, all matters related to the transfer of the
Exchanged Interests to FII pursuant to Section 2.1 hereof shall be governed by
German law or Dutch law, as applicable, to the extent, but only the extent
required under applicable German or Dutch law.
Section 7.2 Headings. The descriptive headings of the several Articles
and Sections of this Agreement are inserted for convenience only, do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
Section 7.3 Parties in Interest; Binding Effect. FCI and FII may assign
their obligations hereunder to deliver the Exchange Shares and acquire the
Exchanged Interests to any entity affiliated with FCI or FII, provided neither
shall be relieved of its obligations hereunder. This Agreement may not be
transferred, assigned, pledged or hypothecated by any party hereto, other than
by operation of law. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and permitted assigns. It shall be binding upon each
Shareholder at such time as such Shareholder signs without regard to whether any
other Shareholder has signed.
Section 7.4 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
Section 7.5 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and
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<PAGE> 22
shall be deemed to have been duly given if delivered in person or by overnight
courier, with postage prepaid, or sent by telecopier (confirmed by overnight
carrier), as follows:
(a) if to Shareholders, to the addresses listed on
Schedule 1 hereto
with a copy to:
Dr. Ralph G. Drouven
Gaedertz Rechtsanwalte
Theodore Heuss Ring 19-21
50668 Koln, Germany
(b) if to FCI and FII, to:
Formus Communications, Inc.
Formus International, Inc.
720 South Colorado Boulevard
Suite 600 North
Denver, Colorado 80246
Attention: General Counsel
with a copy to:
Holme Roberts & Owen LLP
1700 Lincoln Street
Suite 1700
Denver, Colorado 80203
Attention: W. Dean Salter, Esq.
or to such other Person or address as any party hereto shall specify in writing
to each of the other parties. Except for a notice of a change of address, which
shall be effective only upon receipt thereof, all such notices, requests,
demands, waivers and communications shall be deemed to have been received on the
date of delivery unless by overnight courier, in which case on the second
business day after the dispatch thereof.
Section 7.6 Entire Agreement. This Agreement and the annexes, schedules
and other documents referred to herein or delivered pursuant thereto,
collectively contain the entire understanding of the parties hereto with respect
to the subject matter contained herein and supersede all prior agreements and
understandings, oral and written, with respect thereto unless specifically set
forth to the contrary herein.
Section 7.7 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in writing by the parties
hereto in any and all respects before the Closing, by action taken by the
respective Boards of Directors of such parties, or by the respective officers
authorized by such Boards of Directors.
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<PAGE> 23
Section 7.8 Severability. If any term, provision, covenant or
restriction contained in this Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void, unenforceable or against
its regulatory policy, the remainder of the terms, provisions, covenants and
restrictions contained in this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
Section 7.9 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person other than the parties hereto.
Section 7.10 "Person" Defined. "Person" shall mean and include an
individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, a group and a government or other department or
agency thereof.
Section 7.11 "Business Day" Defined. A "business day" shall be any day
excluding Saturday, Sunday or any day which shall be a legal holiday in the
States of New York or Colorado or the Federal Republic of Germany.
Section 7.12 Shareholder Representative. Each of Dr. Axel Diekmann,
Angelika Diekmann, Simone Diekmann, Alexander Diekmann and Mr. Weber hereby
appoint Dr. Michael Hoenig as his or her representative and attorney-in-fact to
act on behalf of each them in connection with closing the transactions
contemplated by this Agreement. Without limitation, Dr. Hoenig may on behalf of
said Shareholders extend the time for Closing, waive conditions to Closing, and
modify or amend the Agreement provided he cannot change the number of Exchange
Shares to be received by such Shareholder. FCI and FII shall be protected
entirely in relying upon any document purported to be signed by Dr. Hoenig on
behalf of such Shareholders.
Section 7.13 Expenses. Each party to this Agreement shall pay its own
fees and expenses in connection herewith; provided, however, that FII shall pay
the notarial fees actually incurred by the parties in connection with the
notarization of this Agreement and the assignment and transfer of the Exchanged
Interests pursuant hereto.
[SIGNATURE PAGES FOLLOW]
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<PAGE> 24
SIGNATURE PAGES TO EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed in their respective corporate names by their respective officers, each
of whom is duly and validly authorized and empowered, all as of the date and
year first above written.
SHAREHOLDERS:
-----------------------------------
Dr. Michael Hoenig
-----------------------------------
Dr. Axel Diekmann
-----------------------------------
Angelika Diekmann
-----------------------------------
Simone Diekmann
-----------------------------------
Alexander Diekmann
-----------------------------------
Matthias Weber
CHASE CAPITAL PARTNERS (CCP) GERMANY B.V.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
<PAGE> 25
CHASE EUROPEAN EQUITY ASSOCIATES II LLC
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
TCB BETEILIGUNGS GMBH
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
FORMUS COMMUNICATIONS, INC.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
FORMUS INTERNATIONAL, INC.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
<PAGE> 26
SCHEDULE 1 TO EXCHANGE AGREEMENT
EXCHANGE SHARES AND EXCHANGED INTERESTS
I. Exchange Shares to be received by Direct Shareholders and Indirect
Shareholders at Closing
<TABLE>
<CAPTION>
DIRECT SHAREHOLDERS
- --------------------------------------------------------------------------------
Aggregate
Number of Cash
Name and Address Exchange Shares Consideration
- ---------------------------- --------------- -------------
<S> <C> <C>
Dr. Michael Hoenig 2,029,601 US$13,400
Maximilianstr. 14 (Series E)
80539 Munchen, Germany
Dr. Axel Diekmann 765,934 US$5,000
Eggendobel 2 (Series E)
94032 Passau, Germany
Angelika Diekmann 765,934 US$5,000
Eggendobel 2 (Series E)
94032 Passau, Germany
Simone Diekmann 765,847 US$5,000
Eggendobel 2 (Series E)
94032 Passau, Germany
Alexander Diekmann 765,847 US$5,000
Eggendobel 2 (Series E)
94032 Passau, Germany
Matthias Weber 2,199,406 US$6,900
Ulrichsberg 1 (Series E)
86391 Leitershofen, Germany
Chase Capital Partners (CCP) 5,199,186 US$34,200
Germany B.V. (Series F)
c/o Chase Capital Partners Europe
Limited
125 London Wall
London EC2Y 5AJ, England
</TABLE>
<PAGE> 27
SCHEDULE OF EXCEPTIONS
DELIVERED PURSUANT TO SECTION 2.1
OF EXCHANGE AGREEMENT
<PAGE> 28
EXHIBIT A TO EXCHANGE AGREEMENT
FORM OF EXTENSION AGREEMENT
<PAGE> 29
EXHIBIT B TO EXCHANGE AGREEMENT
FORM OF HRO OPINION
<PAGE> 30
EXHIBIT D TO EXCHANGE AGREEMENT
FORM OF CALLINO SHAREHOLDER RESOLUTIONS
<PAGE> 31
EXHIBIT E TO EXCHANGE AGREEMENT
FORM OF FORMUS B.V. BOARD RESOLUTIONS
<PAGE> 1
EXHIBIT 4.2
EMPLOYEE STOCKHOLDERS AGREEMENT
THIS EMPLOYEE STOCKHOLDERS AGREEMENT (the "Agreement") is entered into
as of August 1, 1997, by and among the individuals set forth on Exhibit A
attached hereto and all individuals who agree from time to time to be bound by
the terms hereof pursuant to an accession letter in the form of Exhibit B
attached hereto (the "Stockholders") and Formus Communications, Inc., a Delaware
corporation (the "Company"). The individuals from time to time party to this
Agreement are referred to collectively as the "Stockholders."
RECITALS
A. Each Stockholder now owns or may hereafter acquire shares of common
stock, par value $.001 (the "Common Stock"), of the Company, or options to
purchase Common Stock or other equity securities of the Company, whether issued
pursuant to the Company's Equity Incentive Plan or the Non-Employee Directors
Stock Option Plan or otherwise.
B. In consideration of the mutual promises and covenants hereinafter
set forth and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
SECTION 1. FIRST REFUSAL AND TRANSFER RESTRICTIONS.
SECTION 1.1 GENERAL. Except as set forth in Section 1.5 and Section 2,
the Stockholders shall not sell, transfer, gift, assign, pledge, hypothecate,
encumber or otherwise dispose of (collectively, "Transfer") any Equity
Securities without first complying on each such occasion with this Section 1. As
used herein, the term "Equity Securities" means (i) the Common Stock and any
other stock or similar equity security of the Company including any preferred
stock, (ii) any security convertible, with or without consideration, into Common
Stock or any such stock or similar security, (iii) any security carrying any
warrant or right to subscribe to or purchase any stock or similar security, or
(iv) any such warrant or right.
SECTION 1.2 NOTICE OF TRANSFERS. Should a Stockholder propose to
Transfer any of the shares of Equity Securities now owned or subsequently
acquired by such Stockholder ("Offered Securities") in one or more related
transactions, such Stockholder (the "Selling Stockholder") shall promptly
deliver a written notice to the Company including a copy of a signed offer by
the proposed transferee (the "Notice") at least 30 days prior to the
effectiveness of such Transfer. The Notice shall describe in reasonable detail
the proposed Transfer including, without limitation, the number of Offered
Securities to be Transferred, the nature of such Transfer, the consideration to
be paid, the name and address of each prospective purchaser or transferee and
evidence reasonably satisfactory to the Company that each transferee will be
permitted to acquire the Offered Securities under Section 2.1. In the event that
the Transfer is being made pursuant to the provisions of Section 1.5 hereof, the
Notice shall state under which subparagraph the Transfer is being made.
<PAGE> 2
SECTION 1.3 RIGHT OF FIRST REFUSAL. The Company shall have the right,
exercisable by delivering written notice to the Selling Stockholder within 20
days after receipt by the Company of the Notice, to purchase all or a portion of
the Offered Securities on the terms and conditions specified in the Notice. The
right of first refusal of the Company established in this Section 1.3 shall not
be diminished or affected because the exercise of such rights could or would
impair the Selling Stockholder's ability to consummate the transaction specified
in the Notice giving rise to such rights of first refusal.
SECTION 1.4 SALE OF OFFERED SECURITIES. To the extent that the Company
elects not to purchase Equity Securities pursuant to Section 1.3, then the
Selling Stockholder may consummate the Transfer of such Offered Securities to
the purchaser specified in the Notice, provided such transaction (i) is
completed within 60 days after the expiration of the Company's right of first
refusal as set forth above, (ii) is completed at the price and upon the terms
designated in the Notice, and (iii) the proposed purchaser agrees to be bound by
the terms and provisions of this Agreement and becomes a party to this Agreement
immediately upon receipt of such Offered Securities. Any proposed transfer on
terms and conditions more favorable than those described in the Notice, as well
as any subsequent proposed transfer or sale of any of the Offered Shares shall
again be subject to the rights of first refusal hereunder.
SECTION 1.5 PERMITTED TRANSACTIONS. The rights of the Company created
by Section 1.3 shall not pertain or apply to:
(a) any Transfer not prohibited by Section 2.1 to affiliates,
ancestors, siblings, in-laws, descendants or spouse or to a trust for the
benefit of such persons, provided that (i) the Stockholder making such Transfer
retains voting control over the Equity Securities so transferred and (ii) the
transferee agrees to be bound by the terms and restrictions of this Agreement;
and
(b) any Transfer not prohibited by Section 2.1 with respect to
which the Company does not elect to exercise its right of first refusal after
proper notice given in accordance with the terms hereof.
SECTION 1.6 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall
have the right to assign in whole or in part its right of first refusal granted
in Section 1.3 to one or more of the Investors, as that term is defined in the
Second Amended and Restated Investors' Rights Agreement to be executed on or
about August 13, 1997, among the Company and the Investors specified therein.
SECTION 1.7 TERMINATION OF RIGHTS AND RESTRICTIONS UNDER SECTION 1. The
rights and restrictions set forth in this Section 1 shall terminate when the
Common Stock becomes publicly traded pursuant to a registration under Section 12
of the Securities Exchange Act of 1934 (the "Exchange Act").
2
<PAGE> 3
SECTION 2. PROHIBITIONS ON TRANSFER RELATING TO FCC RULES.
SECTION 2.1 PROHIBITION ON TRANSFER. Notwithstanding any provision of
this Agreement or any agreement or understanding to the contrary, no Stockholder
shall Transfer any of such Stockholder's Equity Securities without the prior
written consent of the Company setting forth the good faith determination by the
Company's board of directors that such transfer, taken alone or with any other
transfers, will not adversely affect the Company's status as a "small business"
for the purposes of the Federal Communications Commission's proceedings, rules
and regulations, as in effect from time to time, relating to the establishment
and licensing of local multipoint distribution service ("LMDS"), a fixed,
broadband, point-to-multipoint, microwave service. While a Stockholder is either
employed with the Company or serving as a director on the board of directors of
the Company or on the board of directors of a subsidiary of the Company, the
Company may withhold consent to any transfer in its sole and unfettered
discretion. Otherwise, having made such determination, such consent will not be
unreasonably withheld.
SECTION 2.2 TREATMENT OF PROHIBITED TRANSFERS. Any attempt to Transfer
shares of the Company in violation hereof shall be void ab initio and the
Company agrees it will not give effect to any such Transfer on its books and it
will not treat any alleged transferee as the holder of such shares for any
purpose.
SECTION 2.3 TERMINATION OF PROHIBITION. The restrictions set forth in
this Section 2 shall terminate when (a) the Common Stock becomes publicly traded
pursuant to a registration under Section 12 of the Exchange Act and (b) the
Company's board of directors determines that such restrictions are no longer
necessary or advisable for the purposes of the operations of the Company under
the LMDS proceedings, rules and regulations referred to in Section 2.1.
SECTION 3. MARKING OF CERTIFICATES.
SECTION 3.1 LEGEND. Each certificate representing shares of Equity
Securities subject to this Agreement shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND
THE TRANSFER OF SUCH SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS. SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF, EXCEPT IN
COMPLIANCE WITH APPLICABLE LAW. PRIOR TO
REGISTRATION OF ANY TRANSFER, THE CORPORATION MAY
REQUIRE REASONABLE EVIDENCE THAT SUCH TRANSFER IS IN
COMPLIANCE WITH APPLICABLE STATE END FEDERAL
SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS PURSUANT
TO A
3
<PAGE> 4
STOCKHOLDERS AGREEMENT, SUCH AGREEMENT, AMONG OTHER
THINGS, (1) RESTRICTS CERTAIN RIGHTS WITH RESPECT TO
THE SALE AND TRANSFER OF THE SECURITIES AND
OTHERWISE ENCUMBERS THE SECURITIES REPRESENTED
HEREBY AND (2) PROVIDES THAT, UPON PURCHASE OR OTHER
ACQUISITION OF THE SECURITIES REPRESENTED HEREBY,
ANY TRANSFEREE SHALL IMMEDIATELY BECOME SUBJECT TO
AND BOUND BY THE TERMS OF SUCH AGREEMENT. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST
TO THE SECRETARY OF THE CORPORATION."
SECTION 3.2 ADDITIONAL SHARES. If any Stockholder holds or acquires any
other Equity Securities of the Company, such other Equity Securities shall be
subject to the terms of this Agreement other than the registration rights
referred to in Section 4.1.
SECTION 4. REGISTRATION RIGHTS
SECTION 4.1 If the Company enters into any agreement with any holder of
shares of capital stock of the Company (the "Company Shares") whereby the
Company grants to such purchaser(s) any demand, piggyback or other registration
rights ("Registration Rights") with respect to such Company Shares, the Company
shall grant to the Stockholders initially party hereto the same such
Registration Rights with respect to the Equity Securities owned by Stockholders;
provided that, the Registration Rights granted to the Stockholders shall provide
that the Company will bear the expenses of registration. Any Stockholder that
becomes a party hereto pursuant to an accession letter shall not be entitled to
the benefit of this Section 4.1.
SECTION 4.2 "MARKET STAND-OFF" AGREEMENT. In connection with any
registration statement registering the sale of Common Stock or other Equity
Securities of the Company under the Securities Act, each Stockholder hereby
agrees that, with respect to the Shares of Common Stock or other Equity
Securities held at the time by such Stockholder not being included in such
registration, such Stockholder shall enter into an agreement not to sell or
otherwise dispose of any such Common Stock or Equity Securities following the
effectiveness of such registration statement, for the same period, upon the same
terms and subject to the same conditions as are imposed upon or agreed to by the
Investors specified in the Second Amended and Restated Investors' Rights
Agreement to be entered into on or about August 13, 1997, among the Company and
such Investors, pursuant to or in lieu of the requirements of Section 2.13 of
the Investors' Rights Agreement.
SECTION 5. INVESTORS STOCKHOLDERS AGREEMENT
SECTION 5.1 DRAG ALONG RIGHTS. In the event that, pursuant to Section
4.1 of the Stockholders Agreement to be entered into on or about August 13,
1997, among the Company and the Investors specified therein (the "Investors'
Stockholder Agreement"), there occurs an Approved Sale (as defined in the
Investors' Stockholder Agreement), each Stockholder agrees to consent to and
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<PAGE> 5
to participate in such Approved Sale upon the same terms, and subject to the
same conditions, as if said Section 4.1 as if set forth in full herein.
SECTION 5.2 VOTING. Each of the Stockholders hereby agrees to vote the
shares of Common Stock owned by such Stockholder in accordance with the
provisions of Section 2.1 of the Investors' Stockholder Agreement.
SECTION 6. MISCELLANEOUS.
SECTION 6.1 ASSIGNMENT. Subject to the transfer restrictions set forth
above, 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
party, other than the parties hereto, and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
SECTION 6.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Colorado as applied to agreements
entered into solely between residents of, and to be performed entirely within,
such state.
SECTION 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.
SECTION 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.
SECTION 6.5 NOTICES.
(a) All notices, requests, demands and other communications
under this Agreement or in connection herewith shall be given to or made upon
the Stockholders to their respective addresses as set forth under their name on
Exhibit A attached hereto, and if to the Company, to Formus Communications,
Inc., 5600 S. Quebec, Suite 305D, Englewood, CO 80111, Attention: Chief
Financial Officer, with a copy to W. Dean Salter, Esq., Holme Roberts & Owen
LLP, 1700 Lincoln Street, Suite 4100, Denver, CO 80203.
(b) All notices, requests, demands and other communications
given or made in accordance with the provisions of this Agreement shall be in
writing, and shall be sent by airmail, return receipt requested, or by telex or
telecopy (facsimile) with confirmation of receipt, and shall be deemed to be
given or made when receipt is so confirmed.
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<PAGE> 6
(c) Any party may, by written notice to the other, alter its
address or respondent, and such notice shall be considered to have been given
five days after the airmailing, telexing or telecopying thereof.
SECTION 6.6 ATTORNEY'S FEES. If any action at law or in equity
(including arbitration) is necessary to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorney's fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.
SECTION 6.7 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, portions of such provisions,
or such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
SECTION 6.8 RIGHTS OF STOCKHOLDERS. Each Stockholder shall have the
absolute right to exercise or refrain from exercising any right or rights that
such holder may have by reason of this Agreement, including, without limitation,
the right to consent to the waiver or modification of any obligation under this
Agreement, and such holder shall not incur any liability to any other holder of
any securities of the Company as a result of exercising or refraining from
exercising any such right or rights.
SECTION 6.9 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any Stockholder, upon any breach or default
of the Company under this Agreement, shall impair any such right, power or
remedy of such Stockholder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
SECTION 6.10 ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any all other written or oral
agreements existing between the parties hereto are expressly canceled.
SECTION 6.11 SPECIFIC PERFORMANCE. The parties hereto hereby declare
that it is impossible to measure in money the damages which will accrue to a
party hereto or to their heirs, personal representatives or assigns by reason of
a failure to perform any of the obligations under this Agreement and agree that
the terms of this Agreement shall be specifically enforceable. If any party
hereto or his heirs, personal representatives or assigns institutes any action
or proceeding to
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<PAGE> 7
specifically enforce the provisions hereof, any person against whom such action
or proceeding is brought hereby waives the claim or defense therein that such
party or such personal representative has an adequate remedy at law, and such
person shall not offer in any such action or proceeding the claim or defense
that such remedy at law exists.
IN WITNESS WHEREOF, this Agreement is hereby executed as of the date
first above written.
FORMUS COMMUNICATIONS, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
STOCKHOLDERS
--------------------------------------------
Brian E. Gast
--------------------------------------------
James R. Downs
--------------------------------------------
Philip Bailly
--------------------------------------------
Richard Ballard
--------------------------------------------
Thomas P. Dodds
7
<PAGE> 8
--------------------------------------------
Raymond W. Nettleton
--------------------------------------------
Vernon F. Kenley
--------------------------------------------
Laura Rowedder
8
<PAGE> 9
EXHIBIT A
EMPLOYEE STOCKHOLDER LIST
9
<PAGE> 10
EXHIBIT B
[FORM OF ACCESSION LETTER]
Formus Communications, Inc.
5600 S. Quebec, Suite 305D
Englewood, CO 80111
Re: Employee Shareholders Agreement
Ladies and Gentlemen:
The undersigned hereby agrees to be bound by the terms of that certain
Employee Stockholders Agreement, dated as of August 1, 1997 (the "Agreement"),
among Formus Communications, Inc., a Delaware corporation (the "Company"), and
the several holders of the Company's Common Stock or other equity securities
from time to time signatory thereto, upon the same terms and conditions and with
the same rights and obligations as such other Stockholders. I further
acknowledge that I have received a copy of the Agreement and have been given
appropriate opportunity to ask questions about the Company and the Agreement
prior to signing this letter.
Very truly yours,
[Stockholder Signature]
<PAGE> 1
EXHIBIT 4.3
THE FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
FORMUS COMMUNICATIONS, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. GENERAL.......................................................1
1.1 Definitions...................................................1
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER........................3
2.1 Restrictions on Transfer......................................3
2.2 Demand Registration...........................................5
2.3 Piggyback Registrations.......................................6
2.4 Form S-3 Registration.........................................7
2.5 Expenses of Registration......................................8
2.6 Obligations of the Company....................................9
2.7 Termination of Registration Rights...........................10
2.8 Delay of Registration; Furnishing Information................10
2.9 Indemnification..............................................10
2.10 Assignment of Registration Rights............................12
2.11 Amendment of Registration Rights.............................13
2.12 Limitation on Subsequent Registration Rights.................13
2.13 "Market Stand-Off" Agreement.................................13
2.14 Rule 144 Reporting...........................................14
SECTION 3. COVENANTS OF THE COMPANY.....................................14
3.1 Basic Financial Information and Reporting....................14
3.2 Inspection Rights............................................15
3.3 Confidentiality of Records...................................15
3.4 Stock Equivalent Vesting.....................................16
3.5 Proprietary Information and Inventions Agreement.............16
3.6 Real Property Holding Corporation............................16
3.7 Observer Rights..............................................16
3.8 Meetings of the Board of Directors...........................16
3.9 Nominating Committee.........................................16
3.10 Expenses; Compensation.......................................16
3.11 Compliance...................................................16
3.12 Business Practices...........................................17
3.13 Transactions with Affiliates.................................17
3.14 Indemnification..............................................18
3.15 Board of Director Approval...................................18
3.16 Assignment of Company's Rights...............................18
3.17 Restrictions on Future Issuances of Common Stock.............18
3.18 Compliance with Small Business Investment Act................18
3.19 Use of Proceeds..............................................18
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.20 Non-Discrimination Compliance................................18
3.21 Termination of Covenants.....................................19
SECTION 4. RIGHTS OF FIRST OFFER........................................19
4.1 Subsequent Offerings.........................................19
4.2 Exercise of Rights...........................................19
4.3 Issuance of Equity Securities to Other Persons...............19
4.4 Termination of Rights of First Offer.........................20
4.5 Transfer of Rights of First Offer............................20
4.6 Excluded Securities..........................................20
SECTION 5. MISCELLANEOUS................................................21
5.1 Governing Law................................................21
5.2 Survival.....................................................21
5.3 Successors and Assigns.......................................21
5.4 Severability.................................................21
5.5 Amendment and Waiver.........................................21
5.6 Delays or Omissions..........................................21
5.7 Notices......................................................22
5.8 Entire Agreement.............................................22
5.9 Termination of Prior Agreement...............................22
5.10 Attorneys' Fees..............................................22
5.11 Titles and Subtitles.........................................22
5.12 Counterparts.................................................22
</TABLE>
ii
<PAGE> 4
INDEX OF SCHEDULES
SCHEDULE OF INVESTORS SCHEDULE A
SCHEDULE OF EMPLOYEE STOCKHOLDERS SCHEDULE B
iii
<PAGE> 5
FOURTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the
"Agreement") is entered into as of the 3rd day of September, 1999, by and among
FORMUS COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and certain
holders of the Company's capital stock identified on Schedule A hereto (the
"Investors").
RECITALS
WHEREAS, certain of the Investors entered into the Third Amended and
Restated Investors' Rights Agreement, dated as of September 28, 1998, to provide
certain registration rights, information rights and other rights to such
Investors (the "Prior Agreement");
WHEREAS, the Company proposes to sell and issue shares of Series E and
Series F Preferred Stock pursuant to that certain Preferred Stock Purchase
Agreement dated as of even date herewith (the "Purchase Agreement"); and
WHEREAS, as a condition to entering into the Purchase Agreement, the
purchasers of the Series E and F Preferred Stock have requested that the Company
extend to them registration rights, information rights and other rights as set
forth below, and the Company and the parties to the Prior Agreement are willing
to terminate the rights given to them pursuant to the Prior Agreement and
replace their rights in their entirety with the rights set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Purchase Agreement, the parties mutually agree as follows:
SECTION 1. GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"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 that permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means any person owning of record Shares or Registrable
Securities that have not been sold to the public or any assignee of record (in
accordance with Section 2.10 hereof) of such
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Registrable Securities; provided, that a holder of Employee Shares shall be
deemed to be a "Holder" with respect to such Employee Shares only for the
purposes of Section 2 hereof.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"MAJOR INVESTOR" shall mean a holder of Registrable Securities
representing, together with the Registrable Securities held by any affiliated
entity of such holder, at least ten percent (10%) of the fully diluted Common
Stock of the Company.
"PREFERRED STOCK" means the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock of the Company.
"QUALIFIED PUBLIC OFFERING" shall mean the Company's first firm
commitment underwritten public offering of its Common Stock registered under the
Securities Act in which (i) the per share price is at least (A) $13.50 per share
(as adjusted for stock splits, combinations and the like) if the offering occurs
on or prior to 6 months of the closing under the Purchase Agreement (the
"Closing"), (B) $16.00 per share (as adjusted for stock splits, combinations and
the like) if the offering occurs after 6 months and on or prior to 12 months of
the Closing, and (C) $20.00 per share (as adjusted for stock splits,
combinations and the like) if the offering occurs after 12 months from the
Closing, and (ii) the gross cash proceeds to the Company (before deducting
underwriting, discounts, commissions, and fees) are at least $100,000,000.
"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.
"REGISTRABLE SECURITIES" means (i) Common Stock of the Company issued
or issuable upon conversion of the Shares; (ii) the November Shares (as defined
below); (iii) for the purposes of Section 2 hereof, the Employee Shares (as
defined below); and (iv) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security that is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, such above-described securities. 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
under the Securities Act or sold in a private transaction in which the
transferor's rights under Section 2 of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either (i) are then issued and
outstanding or (ii) are issuable pursuant to then exercisable or convertible
securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company
in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without
limitation, all registration and filing fees,
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printing expenses, fees and disbursements of counsel for the Company, reasonable
fees and disbursements of a single special counsel for the Holders, blue sky
fees and expenses and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company that shall be paid in any event by the Company).
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"SHARES" shall mean (i) the shares of the Company's Series E and Series
F Preferred Stock issued pursuant to the Purchase Agreement; (ii) the shares of
Series C Stock and Series D Stock issued pursuant to that certain Preferred
Stock Purchase Agreement, dated September 28, 1998; (iii) the shares of the
Company's Series A Preferred Stock and Series B Preferred Stock issued pursuant
to that certain Preferred Stock Purchase Agreement, dated August 13, 1997, as
amended; (iv) the shares of the Company's Common Stock issued pursuant to that
certain Common Stock Purchase Agreement, dated as of November 20, 1996 as
amended and restated February 28, 1997 (the "November Shares"); and (v) for the
purposes of Section 2 hereof, the shares of the Company's Common Stock held as
of September 1, 1999, by the stockholders who are parties to that certain
Employee Stockholders Agreement dated as of August 1, 1997 (the "Employee
Stockholders Agreement"), such stockholders and the number of shares held by
them as of September 1, 1999 are set forth on Schedule B hereto (the "Employee
Shares").
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or
any portion of the Shares or Registrable Securities unless and until:
(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) The transferee has agreed in writing to be
bound by the terms of this Agreement if it is still in effect, (B) 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 (C) if reasonably requested by the Company, such
Holder shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, or such other evidence that the Company may
reasonably request, that such disposition will not result in a violation of the
Securities Act. Except in the case of unusual circumstances, the Company agrees
that it will not require opinions of counsel for transactions made
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<PAGE> 8
pursuant to Rule 144 by the Investors initially party to this Agreement to the
extent that such Investors provide reasonable evidence of compliance with such
rule.
(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 (A) that is a partnership to its
partners or former partners in accordance with partnership interests, (B) that
is a corporation to its stockholders in accordance with their interest in the
corporation,(C) that is a limited liability company to its members or former
members in accordance with their interest in the limited liability company, (D)
to the Holder's family member or trust for the benefit of an individual Holder,
(E) to an affiliated investment fund managed or co-managed by a Holder (its
partners or managing members of the general partner) or (F) to any controlled
affiliate of a Holder (its partners or managing members of the general partner);
provided the transferee will be subject to the terms of this Agreement to the
same extent as if such transferee were an original Holder hereunder.
(b) Each certificate representing Shares 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 this Agreement or any other agreement between
the Company and the holder of such certificate):
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, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR
UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED. SUCH SECURITIES ARE SUBJECT TO
AN AGREEMENT, A COPY OF WHICH IS AVAILABLE UPON REQUEST FROM
THE COMPANY, WHICH GRANTS THE COMPANY AND THE HOLDER CERTAIN
RIGHTS AND SUBJECTS THE COMPANY AND THE HOLDER TO CERTAIN
OBLIGATIONS.
(c) The Company shall be obligated to 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. The Company shall bear the costs of any such
reissuance, including the reasonable legal fees and expenses incurred in
connection with the rendering of the aforementioned legal opinion.
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(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.
2.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 2.2, if the
Company shall receive at any time following the earlier of (i) August 1, 2003,
or (ii) the Initial Offering, a written request from the Holders of twenty-five
percent (25%) or more of the Registrable Securities (excluding for the purposes
of such calculation any of the Employee Shares) then outstanding (the
"Initiating Holders") that the Company file a registration statement under the
Securities Act on Form S-1 (or any successor to Form S-1) or a similar long-form
registration statement covering the registration of Registrable Securities
having an aggregate offering price to the public in excess of $2,500,000, then
the Company shall, within thirty (30) days of the receipt thereof, give written
notice of such request to all Holders. An Investor requesting to include
Registrable Securities held by it in the requested registration shall be
considered an Initiating Holder for purposes of this Section 2.2. Subject to the
limitations of this Section 2.2, the Company shall use its best efforts to
effect, as soon as practicable, the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.2 and the Company shall include such information in the written
notice referred to in Section 2.2(a). In such event, the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by the Company and a majority in interest of the Initiating Holders and
such Holder) to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Board of
Directors of the Company). Notwithstanding any other provision of this
Agreement, if the underwriter advises the Company that marketing factors require
a limitation of the number of securities to be underwritten (including
Registrable Securities) then the Company shall so advise all Holders of
Registrable Securities that would otherwise be underwritten pursuant hereto, and
the number of Registrable Securities that may be included in the underwriting
shall be allocated to the Initiating Holders on a pro rata basis based on the
number of Registrable Securities held by all such Initiating Holders. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration. In no event will shares of any other selling
stockholder be included in such registration that would reduce the number of
shares that may be included by the Holders without the written consent of
Holders of not less than two-thirds (66-2/3%) of the Registrable Securities
proposed to be sold in the offering.
(c) The Company shall not be required to effect a registration
pursuant to this Section 2.2:
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(i) after the Company has effected four (4)
registrations pursuant to this Section 2.2, and each such registration has been
declared or ordered effective, subject to Section 2.2(d) below; or
(ii) if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 2.2, a certificate
signed by the Chairman of the Board 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 effected at
such time, in which event the Company shall have the right to defer commencing
to prepare such filing for a period of not more than one hundred eighty (180)
days after receipt of the request of the Initiating Holders; provided that if
the circumstances or event causing it to be detrimental to file a registration
statement ceases to exist, the right to defer such filing shall terminate, and
provided further such right to delay a request shall be exercised by the Company
not more than once in any twelve (12) month period and if the Company undertakes
a primary registration in connection with the issuance of its Common Stock
following such a delay, the Holders shall have "piggyback" rights under Section
2.3 hereof with respect to not less than one-third (1/3) of the number of shares
to be sold in such offering.
(d) Notwithstanding anything to the contrary contained in this
Section 2.2, Investors shall not be deemed to have used or forfeited their
rights to registration of their Registrable Securities under this Section 2.2,
if a registration of Registrable Securities is conducted pursuant to an
underwritten offering undertaken after the exercise of the Holders rights under
this Section 2.2 and the underwriters advise the Company and/or the Holders that
marketing factors require the Company to limit the number of Registrable
Securities to be sold in such offering to less than seventy-five percent (75%)
of the then outstanding Registrable Securities requested to be registered by the
persons exercising such demand right.
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities 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 or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) 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 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) Underwriting. If the registration statement under which
the Company gives notice under this Section 2.3 is for an underwritten offering,
the Company shall so advise the Holders
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of Registrable Securities. In such event, the right of any such Holder to be
included in a registration pursuant to this Section 2.3 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 by the
Company. Notwithstanding any other provision of the Agreement (except Section
2.2(b) above), 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; second, to the Holders on a pro rata basis based on the
total number of Registrable Securities held by the Holders desiring inclusion in
such registration; and third, to any other stockholder of the Company (other
than a Holder) 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, and 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 and such registration
does not include shares of any other selling stockholders (other than the
stockholder(s), if any, invoking the demand registration) in which event any or
all of the Registrable Securities of the Holders may be excluded in accordance
with the immediately preceding sentence. In no event will shares of any other
selling stockholder be included in such registration that would reduce the
number of shares that may be included by Holders without the written consent of
Holders of not less than two-thirds (66 2/3%) of the Registrable Securities
proposed to be sold in the offering.
(b) Right to Terminate Registration. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders representing at least twenty-five percent (25%) of the then
outstanding Registrable Securities a written request or requests that the
Company effect a registration on Form S-3 (or any successor to Form S-3) or any
similar short-form registration statement 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:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) 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
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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 2.4:
(i) if Form S-3 (or any successor or similar form) is
not available for such offering by the Holders, or
(ii) 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 less than $2,500,000, or
(iii) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors 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 one hundred eighty (180) days after
receipt of the request of the Holder or Holders under this Section 2.4;
provided, that such right to delay a request shall be exercised by the Company
not more than once, or
(iv) 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.
(c) 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.
2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein,
all Registration Expenses incurred in connection with the first four (4)
registrations, qualifications or compliances pursuant to Section 2.2 and all
Registration Expenses incurred in connection with any registration under Section
2.3 or Section 2.4 herein shall be borne by the Company. All Selling Expenses
incurred in connection with any registrations hereunder, shall be borne by the
holders of the securities so registered pro rata on the basis of the number of
shares so registered. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4,
the request of which has been subsequently withdrawn by the Initiating Holders
unless (a) the withdrawal is based upon material adverse information concerning
the Company of which the Initiating Holders were not aware, or should not have
reasonably been aware, at the time of such request, or (b) the Holders of a
majority of Registrable Securities agree to forfeit their right to one requested
registration pursuant to Section 2.2 or 2.4 as applicable, in which event such
right shall be forfeited by all Holders. If the Holders are required to pay the
Registration Expenses, such expenses shall be borne by the holders of securities
(including Registrable Securities) requesting such registration in proportion to
the number of shares for which registration was requested. If the Company is
required to pay the Registration Expenses of a withdrawn offering pursuant to
clause (a) above, then the Holders shall not forfeit their rights pursuant to
Section 2.2 or Section 2.4 to a demand registration.
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2.6 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 all reasonable efforts to
cause such registration statement to become 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 one hundred eighty (180)
days or, if earlier, until the Holder or Holders have completed the distribution
related thereto; provided that if for any reason the Holders are prohibited from
selling their Registrable Securities during that time, the Company will extend
the effective date of the registration statement for the length of time of any
such prohibition.
(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 all reasonable 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 a majority of the Holders
participating in the registration, 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
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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 if permitted by applicable accounting standards, to the Holders
requesting registration of Registrable Securities.
2.7 TERMINATION OF REGISTRATION RIGHTS. All of a Holder's registration
rights shall expire on the fifth anniversary of the Qualified Public Offering.
In addition, the right of any particular Holder shall expire when (i) such
Holder (together with its affiliates, partners, members and former partners and
members) holds less than 1% of the Company's outstanding Common Stock; and (ii)
all Registrable Securities held by and issuable to such Holder (and its
affiliates, partners, members and former partners and members) may be sold under
Rule 144 during any ninety (90) day period.
2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) 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 2.
(b) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 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.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 2.2 or Section 2.4 if, due to the
operation of subsection 2(b), the number of shares or the anticipated aggregate
offering price of the Registrable Securities to be included in the registration
does not equal or exceed the number of shares or the anticipated aggregate
offering price required to originally trigger the Company's obligation to
initiate such registration as specified in Section 2.2 or Section 2.4, whichever
is applicable.
2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers, directors and legal
counsel 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 Exchange Act, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under
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the Securities Act, the Exchange 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 Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange 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 2.9(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 that 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 Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers,
and legal counsel and each person, if any, who 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 Exchange 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 under an instrument duly executed by such Holder and stated to be
specifically 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 2.9(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 2.9
exceed the net proceeds from the offering received by such Holder.
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(c) Promptly after receipt by an indemnified party under this
Section 2.9 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 2.9, 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 liability to the
indemnified party under this Section 2.9 only to the extent it has been so
prejudiced, 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 2.9.
(d) If the indemnification provided for in this Section 2.9 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 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; provided, that in no event shall any contribution by a
Holder hereunder exceed the proceeds (net of commissions and discounts but not
of any other expenses) from the offering received by such Holder, and in no
event shall any contribution by a Holder hereunder exceed the amount such Holder
would have been obligated to pay pursuant to Section 2.9(b) had such clause been
enforceable.
(e) The obligations of the Company and Holders under this
Section 2.9 shall survive completion of any offering of Registrable Securities
in a registration statement. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 2 may be assigned by
a Holder to a transferee or assignee of Registrable Securities that (i) is a
subsidiary, parent or affiliated entity or general partner,
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limited partner, member or retired partner or member of a Holder, (ii) is a
Holder's family member or trust for the benefit of an individual Holder, or
(iii) acquires at least ten thousand (10,000) shares of Registrable Securities
(as adjusted for stock splits, combinations an the like); provided, however, (A)
the transferor shall, within ten (10) days before such transfer, furnish to the
Company 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 and (B) such transferee shall agree to be subject to all restrictions
set forth in this Agreement. Any such transferee or assignee shall be deemed an
"Investor" for purposes hereunder. In each case, such rights may only be
transferred together with the underlying Registrable Securities in a transfer
permitted by the Company's certificate of incorporation, this Agreement, the
Purchase Agreement and the Stockholders Agreement, as defined in the Purchase
Agreement.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2
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 and the Holders of at least fifty percent (50%)
of the Registrable Securities then outstanding. Any amendment or waiver effected
in accordance with this Section 2.11 shall be binding upon each Holder and the
Company. By acceptance of any benefits under this Section 2, Holders of
Registrable Securities hereby agree to be bound by the provisions hereunder.
2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of
this Agreement, the Company shall not, without the prior written consent of the
Holders of at least two-thirds in interest of the Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company that would grant such holder registration rights that (i) are more
favorable than the registration rights granted hereunder or (ii) would reduce
the number of shares of Registrable Securities includable by the Holders in any
registration under Sections 2.1, 2.2 or 2.3.
2.13 "MARKET STAND-OFF" AGREEMENT. If requested by the Company or the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall not sell or otherwise transfer or dispose of any
Common Stock (or other securities) of the Company held by such Holder (other
than transfers permitted by Section 2.1(a)(iii) and, except in the case of a
Qualified Public Offering, other than sales by non-participating Holders under
Rule 144 that comply with the volume restrictions under Rule 144 even if the
limitations do not apply by the terms of the rule ) for a period specified by
the representative of the underwriters not to exceed one hundred eighty (180)
days following the effective date of a registration statement of the Company
filed under the Securities Act (the "Lock Up Period"), provided that:
(i) such agreement shall apply only to the Company's
Initial Offering and any other offering requested by the Holders pursuant to
Section 2.2 hereof; and
(ii) all officers and directors of the Company and
holders of at least one percent (1%) of the Company's voting securities at the
time of the Initial Offering enter into similar agreements.
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The obligations described in this Section 2.13 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The obligations in this Section
2.13 shall only apply during the Lock Up Period. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
2.14 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC that may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and
other documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities,
furnish to such Holder forthwith upon request: a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144 of
the Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing it to sell any such securities without registration.
SECTION 3. COVENANTS OF THE COMPANY
3.1 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 ninety (90) days thereafter, the Company
will furnish each Investor a consolidated balance sheet of the Company, as at
the end of such fiscal year, and a consolidated statement of income and a
consolidated statement of cash flows of the Company, for such year, all of which
shall be prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year,
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all in reasonable detail. Such financial statements shall be audited by
independent public accountants of national standing selected by the Company's
Board of Directors.
(c) The Company will furnish each Investor, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, a current capitalization table setting forth the issued
and outstanding capital stock and derivative securities of the Company, a
consolidated balance sheet of the Company as of the end of each such quarterly
period, a consolidated statement of income and a consolidated statement of cash
flows of the Company for such period and for the current fiscal year to date,
all of which shall be prepared in accordance with generally accepted accounting
principles consistently applied and certified by the chief financial officer of
the Company (or the chief accounting officer if no chief financial officer is in
place), with the exception that no notes need be attached to such statements and
year-end audit adjustments may not have been made.
(d) The Company will furnish each Investor (i) at least thirty
(30) days prior to the beginning of each fiscal year an annual budget and
operating plans for such fiscal year as well as an updated five-year strategic
plan for the Company, in such manner and form as approved by the Board of
Directors of the Company (and as soon as available, any subsequent revisions
thereto); and (ii) copies of all press releases and other statements made
available generally by the Company to the public concerning material
developments in the Company's business, including copies of any reports or
communications delivered to the financial community. The Company will furnish to
each Investor holding 2% or more of the Company's outstanding capital stock
copies of all reports and other written material submitted to the Board of
Directors of the Company that such Investor shall reasonably request, provided,
however, that the Company shall not be obligated to provide information that the
Board of Directors determines in good faith is confidential and should not,
therefore, be disclosed.
3.2 INSPECTION RIGHTS. Each Investor shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, and to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, and to review such information as is reasonably
requested all at such reasonable times and as often as may be reasonably
requested; provided, however, that the Company shall not be obligated under this
Section 3.2 with respect to a competitor of the Company or with respect
disclosure which the Board of Directors determines in good faith could adversely
affect the Company.
3.3 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to use
its best efforts to insure that its authorized representatives use, the same
degree of care as such Investor uses to protect its own confidential information
to keep confidential any information furnished to it that the Company identifies
as being confidential or proprietary (so long as such information is not in the
public domain), except that such Investor may disclose such proprietary or
confidential information to any partner, subsidiary, member or parent of such
Investor for the purpose of evaluating its investment in the Company as long as
such partner, subsidiary, member or parent is advised of the confidentiality
provisions of this Section 3.3 or to the extent required by law. All
confidential disclosures between Intel Corporation and the Company shall not be
governed by this Section 3.3 and instead shall be governed solely by the terms
of the Corporate Non-Disclosure Agreement No.
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0283540 dated June 17, 1999, executed between the Company and Intel Corporation
and any related Confidential Information Transmittal Records provided in
connection therewith.
3.4 STOCK EQUIVALENT VESTING. Unless otherwise approved by the Board of
Directors, all stock options and other similar stock equivalents issued after
the date of this Agreement to employees, directors, consultants and other
service providers shall be subject to vesting in accordance with the terms of
any stock option plan or similar plan approved by the Board of Directors.
3.5 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall
require all officers, employees and consultants of the Company to execute and
deliver a Proprietary Information and Inventions Agreement in substantially the
form attached to the Purchase Agreement.
3.6 REAL PROPERTY HOLDING CORPORATION. The Company covenants that it
will operate in a manner such that it will not become a "United States real
property holding corporation" as that term is defined in Section 897(c)(2) of
the Internal Revenue Code of 1986, as amended, and the regulations thereunder
("FIRPTA") and shall, from time to time upon the request of any Purchaser,
confirm to such Purchaser that it is not a United States real property holding
corporation. If at any time in the future the Company should become a United
States real property holding corporation, the Company shall, as promptly as
possible, notify each Investor of such change in status.
3.7 OBSERVER RIGHTS. The Company shall allow one representative
designated by each Investor (that is not otherwise represented by a director and
that holds 2% or more of the Company's outstanding capital stock) to attend all
meetings of the Company's Board of Directors in a nonvoting capacity, and in
connection therewith, the Company shall give each such representative copies of
all notices, minutes, consents and other materials, financial or otherwise,
which the Company provides to its Board of Directors concurrently with the
delivery of such information to the Board of Directors.
3.8 MEETINGS OF THE BOARD OF DIRECTORS. The Board of Directors shall
meet at least six (6) times each calendar year in accordance with an agreed upon
schedule.
3.9 NOMINATING COMMITTEE. If the Board of Directors establishes a
nominating committee, at least one director who is designated by a Major
Investor shall serve on such committee.
3.10 EXPENSES; COMPENSATION. The reasonable travel expenses of each
director (or observer) incurred to attend Board or committee meetings shall be
reimbursed by the Company. If the Company adopts a program to compensate its
"outside" or "independent" directors generally either with cash or with stock
options, then it shall also extend the same compensation to the directors who
are designated by an Investor (unless any such representative is also an officer
or employee of the Company), and in the case of stock options, such options
shall be transferable by the individual Board members to the Investors they
represent.
3.11 COMPLIANCE. The Company shall, and shall cause each of its
subsidiaries to:
16
<PAGE> 21
(a) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material licenses,
authorization and permits necessary to the conduct of its businesses;
(b) maintain and keep its properties in good repair, working
order and condition, and from time to time make all necessary and desirable
repairs, renewals and replacements, so that its businesses may be properly and
advantageously conducted at all times;
(c) pay and discharge all taxes, assessments and governmental
charges imposed upon its properties or upon the income or profits therefrom (in
each case before the same becomes delinquent and before penalties accrue
thereon) and all claims for labor, materials or supplies to the extent to which
the failure to pay or discharge such obligations would reasonably be expected to
have a material adverse effect upon the financial condition, operating results,
assets, operations or business prospects of the Company and its subsidiaries
taken as a whole, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings and adequate reserves (as determined
in accordance with generally accepted accounting principles in the applicable
jurisdictions, consistently applied) have been established on its books with
respect thereto;
(d) comply with all other material obligations that it incurs
pursuant to any material contract or agreement, whether oral or written, express
or implied, as such obligations become due unless and to the extent that the
same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its books
with respect thereto;
(e) comply with all applicable laws, rules and regulations of
all governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company and
its subsidiaries taken as a whole; and
(f) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of such types and in such
amounts as are customary for corporations of similar size engaged in similar
lines of business.
3.12 BUSINESS PRACTICES. None of the Company, any Subsidiary (as
defined in the Purchase Agreement), any affiliate of the Company, or any person
acting on behalf of the Company, any Subsidiary or affiliate of the Company has
paid or delivered, or promised to pay or deliver, directly or indirectly through
any other person, any monies or anything of value to any government official or
employee of any political party, for the purpose of illegally or improperly
inducing or rewarding any action by the official favorable to the Company, any
Subsidiary or any affiliate of the Company.
3.13 TRANSACTIONS WITH AFFILIATES. The Company will not engage in any
transaction with any affiliate on terms more favorable to the affiliate than
would have been obtainable on an arm's-length basis in the ordinary course of
business unless approved by a majority of the unaffiliated members of the Board
of Directors.
17
<PAGE> 22
3.14 INDEMNIFICATION. The Company's Certificate of Incorporation and
Bylaws shall provide, to the maximum extent permitted by law, for elimination of
the liability of directors and for indemnification of directors and officers for
acts on behalf of the Company.
3.15 BOARD OF DIRECTOR APPROVAL. The Company shall not without the
approval of a majority of the Board of Directors, with all disinterested
Directors voting, incur debt, including without limitation, borrowings from any
bank or financial institution, in any twelve month period in excess of two
hundred fifty thousand dollars ($250,000.00).
3.16 ASSIGNMENT OF COMPANY'S RIGHTS. In the event the Company elects
not to exercise, in whole or in part, its right of first refusal set forth in
Section 1.3 of the Employee Stockholders Agreement, the Company shall assign to
the Investors the portion of such right that is not exercised. The Company shall
notify each Investor of such assignment promptly, but in no event later than ten
(10) days following the Company's receipt of a notice of proposed transfer from
a holder of Common Stock (a "Transferring Holder") pursuant to Section 1.2 of
the Employee Stockholders Agreement (the "Transfer Notice"). Each Investor shall
have the right and option to purchase its Pro Rata Share (as defined in Section
4.1 below) of the securities subject to such assigned right of first refusal.
Any purchases made by the Investors pursuant to the exercise of the foregoing
right shall be made in accordance with the terms set forth in Section 1.3 of the
Employee Stockholders Agreement.
3.17 RESTRICTIONS ON FUTURE ISSUANCES OF COMMON STOCK. With respect to
the issuance of any additional shares of Common Stock to employees of the
Company, the Company shall subject such shares to a right of first refusal
similar to that in Section 1 of the Employee Stockholders Agreement and a market
stand-off agreement similar to that set forth in Section 2.13 hereof.
3.18 COMPLIANCE WITH SMALL BUSINESS INVESTMENT ACT. The Company agrees
to provide each SBIC Purchaser with sufficient information to permit such
Purchasers to comply with their obligations under the Small Business Act. Within
90 days following the Closing (as defined in the Purchase Agreement) and within
90 days after the end of each calendar year during which the proceeds from the
sale of the Shares are being applied, the Company shall provide to each SBIC
Purchaser (as defined in the Purchase Agreement) a certificate of its chief
financial officer describing the use of such proceeds and verifying that the use
of such proceeds is in accordance with Section 3.18 below. The Company shall
provide each SBIC Purchaser and the Small Business Administration (the "SBA")
reasonable access to the Company's books and records for the purpose of
confirming the use of the proceeds received hereunder.
3.19 USE OF PROCEEDS. The Company agrees to use the investment proceeds
from each SBIC Purchaser for working capital purposes or to otherwise finance
the anticipated growth of the Company.
3.20 NON-DISCRIMINATION COMPLIANCE. So long as an SBIC Purchaser holds
any securities of the Company, the Company will at all times comply with the
non-discrimination requirements of 13 C.F.R. Parts 112, 113 and 117.
18
<PAGE> 23
3.21 TERMINATION OF COVENANTS. All covenants of the Company contained
in Section 3, other than Section 3.11, of this Agreement shall expire and
terminate as to each Investor on the earlier of (i) the consummation of the
Qualified Public Offering; and (ii) the first date on which no shares of
Preferred Stock are outstanding.
SECTION 4. RIGHTS OF FIRST OFFER.
4.1 SUBSEQUENT OFFERINGS. Each Investor shall have a right of first
offer to purchase its Pro Rata Share, as defined below, of eighty percent (80%)
of all Equity Securities, as defined below, that the Company may, from time to
time, propose to sell and issue after the date of this Agreement, other than the
Equity Securities excluded by Section 4.6 hereof. Each Investor's Pro Rata Share
is equal to the ratio of (A) the number of shares of Registrable Securities that
such Investor is deemed to be a holder immediately prior to the issuance of the
Equity Securities to (B) the total number of shares of Registrable Securities
held by all Investors immediately prior to the issuance of the Equity
Securities. The term "Equity Securities" shall mean (i) any Common Stock, Class
B Common Stock, Preferred Stock or other security of the Company, (ii) any
security convertible, with or without consideration, into any Common Stock,
Class B Common Stock, Preferred Stock or other security (including any option to
purchase such a convertible security), (iii) any security carrying any warrant
or right to subscribe to or purchase any Common Stock, Class B Common Stock,
Preferred Stock or other security or (iv) any such warrant or right.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Investor written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. Each Investor shall have fifteen
(15) business days from the giving of such notice to agree to purchase its Pro
Rata Share of the Equity 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 Equity Securities to be purchased.
Notwithstanding the foregoing, the Company shall not be required to offer or
sell such Equity Securities to any Investor who would cause the Company to be in
violation of applicable federal securities laws by virtue of such offer or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of the
Investors elect to purchase their Pro Rata Share of the Equity Securities, then
the Company shall promptly notify in writing the Investors who do so elect and
shall offer such Investors the right to acquire such unsubscribed shares. The
Investors shall have ten (10) business days after receipt of such notice to
notify the Company of its election to purchase all or a portion thereof of the
unsubscribed shares. If the Investors fail to exercise in full their respective
rights of first offer, the Company shall have ninety (90) days thereafter to
sell the Equity Securities in respect of which the Investors' rights were not
exercised, at a price and upon general terms and conditions materially no more
favorable to the purchasers thereof than specified in the Company's notice to
the Investors pursuant to Section 4.2 hereof. If the Company has not sold such
Equity Securities within ninety (90) days of the notice provided pursuant to
Section 4.2, the Company shall not thereafter issue or sell any Equity
Securities, without first offering such securities to the Investors in the
manner provided above.
19
<PAGE> 24
4.4 TERMINATION OF RIGHTS OF FIRST OFFER. The rights of first offer
established by this Section 4 shall not apply to, and shall terminate upon the
earlier to occur of (i) the effective date of the registration statement
pertaining to the Company's Qualified Public Offering; and (ii) the date on
which no shares of Preferred Stock are outstanding.
4.5 TRANSFER OF RIGHTS OF FIRST OFFER. The rights of first offer of
each Investor under this Section 4 may be transferred to the same parties,
subject to the same restrictions, as any transfer of registration rights
pursuant to Section 2.10.
4.6 EXCLUDED SECURITIES. The rights of first offer established by this
Section 4 shall have no application to any of the following Equity Securities:
(a) 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 or any subsidiary, pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board of Directors;
(b) stock issued pursuant to any rights or agreements
outstanding as of the date of this Agreement, options and warrants outstanding
as of the date of this Agreement; and stock issued pursuant to any such rights
or agreements granted after the date of this Agreement, provided that the rights
of first offer established by this Section 4 applied with respect to the initial
sale or grant by the Company of such rights or agreements;
(c) any Equity Securities issued for consideration other than
cash pursuant to a merger, consolidation, acquisition or similar business
combination;
(d) shares of Common Stock or Class B Common Stock issued in
connection with any stock split, stock dividend or recapitalization by the
Company;
(e) shares of Preferred Stock issued pursuant to the Purchase
Agreement;
(f) shares of (i) Common Stock issued upon conversion of the
Class B Common Stock, Series A Preferred Stock, Series C Preferred Stock and/or
Series E Preferred Stock, and (ii) Class B Common Stock, Series A Preferred
Stock, Series C Preferred Stock and Series E Preferred Stock issued upon
conversion of the Series B Preferred Stock, Series D Preferred Stock and/or the
Series F Preferred Stock.
(g) any Equity Securities that are issued by the Company
pursuant to a registration statement filed under the Securities Act.
20
<PAGE> 25
SECTION 5. MISCELLANEOUS.
5.1 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 entered into and to be performed entirely within Colorado, except that
the General Corporation Law of the State of Delaware shall govern as to matters
of corporate law.
5.2 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.
5.3 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.
5.4 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.
5.5 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 the
holders of a majority in interest of the Registrable Securities; provided that
any amendment or modification to Section 3.3 affecting the confidential
disclosures between Intel and the Company requires the prior written approval of
Intel Corporation.
(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 the holders of at least a majority in interest
of the Registrable Securities.
5.6 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 construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of 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,
21
<PAGE> 26
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.
5.7 NOTICES. All notices required or permitted hereunder 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) three (3) business 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 communications shall be
sent to the party to be notified at the address as set forth on the signature
pages hereof or Exhibit A hereto or at such other address as such party may
designate by ten (10) days advance written notice to the other parties hereto.
5.8 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules
hereto, the Purchase Agreement and the other documents delivered pursuant
thereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof.
5.9 TERMINATION OF PRIOR AGREEMENT. Certain of the undersigned
Investors, who together constitute the requisite parties to terminate the Prior
Agreement, hereby terminate the Prior Agreement in its entirety and the Prior
Agreement shall be of no further force and effect.
5.10 ATTORNEYS' FEES. In the event that any dispute among the parties
to this Agreement should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses of enforcing any right of such prevailing party under or with respect
to this Agreement, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
5.11 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.12 COUNTERPARTS. This Agreement may be delivered via facsimile and
executed in any number of counterparts, each of which shall be an original, but
all of which together shall constitute one instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
22
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have executed this FOURTH
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT as of the date set forth in the
first paragraph hereof.
COMPANY: INVESTORS:
FORMUS COMMUNICATIONS, INC. CENTENNIAL FUND V, L.P.
BY: CENTENNIAL HOLDINGS V, L.P.
ITS: GENERAL PARTNER
By: By:
-------------------------------- --------------------------------------
Osmo Hautanen Steven C. Halstedt, A General Partner
Chief Executive Officer
CENTENNIAL ENTREPRENEURS FUND V, L.P.
BY: CENTENNIAL HOLDINGS V, L.P.
ITS: GENERAL PARTNER
By:
--------------------------------------
Steven C. Halstedt, A General Partner
CENTENNIAL FUND VI, L.P.
BY: CENTENNIAL HOLDINGS VI, LLC
ITS: GENERAL PARTNER
By:
--------------------------------------
Steven C. Halstedt, Managing Principal
CENTENNIAL ENTREPRENEURS FUND VI, L.P.
BY: CENTENNIAL HOLDINGS VI, LLC
ITS: GENERAL PARTNER
By:
--------------------------------------
Steven C. Halstedt, Managing Principal
CENTENNIAL HOLDINGS I, LLC
By:
--------------------------------------
Steven C. Halstedt, Chairman
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
23
<PAGE> 28
MILLENNIAL HOLDINGS LLC
By:
--------------------------------------
Laura I. Beller
Managing Member
TELECOM PARTNERS, L.P.
BY: TELECOM MANAGEMENT, L.L.C.
ITS: GENERAL PARTNER
By:
--------------------------------------
Mark D. Adolph
Chief Financial Officer
TELECOM PARTNERS II, L.P.
BY: TELECOM MANAGEMENT II, L.L.C.
ITS: GENERAL PARTNER
By:
--------------------------------------
Mark D. Adolph
Chief Financial Officer
SPECTRUM EQUITY INVESTORS, L.P.
BY: SPECTRUM EQUITY ASSOCIATES, L.P.
ITS: GENERAL PARTNER
By:
--------------------------------------
Kevin J. Maroni
Attorney-in-Fact
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 29
SPECTRUM EQUITY INVESTORS II, L.P.
BY: SPECTRUM EQUITY ASSOCIATES II, L.P.
ITS: GENERAL PARTNER
By:
--------------------------------------
Kevin J. Maroni
A General Partner
MEDIA/COMMUNICATIONS PARTNERS III LIMITED
PARTNERSHIP
BY: M/C III L.L.C., ITS GENERAL PARTNER
By:
--------------------------------------
Peter Claudy
Manager
M/C INVESTORS L.L.C.
By:
--------------------------------------
Peter Claudy
Manager
BARING COMMUNICATIONS EQUITY LIMITED
By:
--------------------------------------
Christopher Cochrane
Director
NORTHWOOD VENTURES LLC
By:
--------------------------------------
Peter G. Schiff
President
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 30
NORTHWOOD CAPITAL PARTNERS LLC
By:
--------------------------------------
Peter G. Schiff
President
CRESCENDO WORLD FUND, LLC
BY: CRESCENDO VENTURES - WORLD FUND, LLC
ITS: MANAGING MEMBER
By:
--------------------------------------
EAGLE VENTURES WF, LLC
By:
--------------------------------------
BANCBOSTON INVESTMENTS, INC.
By:
--------------------------------------
Lars A. Swanson, Vice-President
CIBC WOOD GUNDY CAPITAL CORP.
By:
--------------------------------------
Ian Kidson, Managing Director
By:
--------------------------------------
Robi Blumenstein, Managing Director
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 31
DOEG HILL I, LLC
By:
--------------------------------------
Dennis Patrick, Manager
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
Its: General Partners
By:
--------------------------------------
Michael R. Hannon, General Partner
HARBOURVEST INTERNATIONAL PRIVATE EQUITY
PARTNERS III-DIRECT FUND L.P.
BY: HIPEP III-DIRECT ASSOCIATES L.L.C.
ITS: GENERAL PARTNER
BY: HABOURVEST PARTNERS, L.L.C.
ITS: MANAGING MEMBER
By:
--------------------------------------
--------------------------------------
William J. Elsner
--------------------------------------
Frederick Vierra
--------------------------------------
Roxanne Vierra
--------------------------------------
Trygve Myhren
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 32
PART'COM
By:
--------------------------------------
Pierre de Fouquet
Managing Director
MEDIATEL CAPITAL FCP
BY: MEDIATEL MANAGEMENT S.A.
ITS: MANAGEMENT COMPANY
By:
--------------------------------------
Antoine Garrigues
Senior Advisor
CRI MEDIA PARTNERS, L.P.
By:
--------------------------------------
Ellen Berland Gibbs
President of General Partner
CRI MEDIA PARTNERS II, L.P.
By:
--------------------------------------
Ellen Berland Gibbs
President of General Partner
INTEL CORPORATION
BY:
--------------------------------------
NAME:
TITLE:
CITIZENS CAPITAL, INC.
BY:
--------------------------------------
GREGORY F. MULLIGAN
MANAGING DIRECTOR
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 33
JANCO CAPITAL, LP
BY: JANCO CAPITAL MANAGEMENT, LLC
ITS: GENERAL PARTNER
By:
--------------------------------------
Managing Member
--------------------------------------
Ronald D. Buckman
--------------------------------------
David L. Jones
--------------------------------------
Kenneth D. Moelis
--------------------------------------
Mark W. Lanigan
--------------------------------------
Laurence E. Paul
--------------------------------------
Jeffrey A. Raich
--------------------------------------
Susan C. Schnabel
--------------------------------------
David F. Posnick
--------------------------------------
Thomas C. Davidov
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 34
--------------------------------------
John S. Ehlinger
--------------------------------------
Randall L. Bort
--------------------------------------
Arpad Komjathy
--------------------------------------
Steven Rattner
--------------------------------------
David Miller
--------------------------------------
David Dennis
--------------------------------------
Warren C. Woo
HOOKS TRUST DATED NOVEMBER 4, 1998
By:
-----------------------------------
Michael K. Hooks, Trustee
--------------------------------------
Eric S. Swanson
--------------------------------------
Scott M. Honour
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 35
--------------------------------------
Donald S. Kinsey
--------------------------------------
Barry A. Sholem
--------------------------------------
Andrew R. Kassoy
--------------------------------------
Brian McLoughlin
--------------------------------------
James T. Sington
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 36
--------------------------------------
Dr. Michael Hoenig
--------------------------------------
Dr. Axel Diekmann
--------------------------------------
Angelika Diekmann
--------------------------------------
Simone Diekmann
--------------------------------------
Alexander Diekmann
--------------------------------------
Matthias Weber
TCB BETEILIGUNGS GMBH
By:
--------------------------------------
Dr. Thomas Kuhmann, Managing Director
CHASE CAPITAL PARTNERS (CCP) GERMANY B.V.
By:
--------------------------------------
Jonathan Meggs, Partner
CHASE EUROPEAN EQUITY ASSOCIATES II LLC
By:
--------------------------------------
Jonathan Meggs, Partner
(Signature Page for Formus Communications, Inc.
Fourth Amended and Restated Investors' Rights Agreement)
<PAGE> 37
SCHEDULE A
SCHEDULE OF INVESTORS
<PAGE> 38
SCHEDULE B
<PAGE> 1
EXHIBIT 10.1
Regulierungsbehorde fur Telekommunikation und Post
[Coat of Arms of the Federal Republic of Germany]
<PAGE> 2
License Certificate
LICENSE OF THE LICENSE CATEGORY 3
FOR THE OPERATION OF TRANSMISSION NETWORKS
FOR THE OFFERING OF PUBLIC TELECOMMUNICATIONS SERVICES
BY THE LICENSEE OR OTHERS
On the basis of the application of June 22, 1998, the Regulierungsbehorde fur
Telekommunikation und Post(1) (Reg TP, Licensor), pursuant to sec. 6 para. 1
no. 1, para. 2 no. 1 c) in conjunction with sec. 8 paragraphs 1 through 3 and
sec. 50 para. 2 sentence 1 of the 'Telekommunikationsgesetz' (TKG) [German
Telecommunications Act] of July 25, 1996 ('Bundesgesetzblatt' [Federal Law
Gazette] I, p. 1120), hereby grants
ARCIS MEDIACOM MANAGEMENT GMBH
TRIMBURGSTRASSE 2, 81249 MUNCHEN
(LICENSEE)
(hereinafter only referred to as Licensee) a license of the license category 3
for the operation of transmission networks for public telecommunications
services by the Licensee or others.
The application of June 22, 1998 is part of this License.
This License is registered under no. 98 03 0188.
- -----------
(1) FCC equivalent
<PAGE> 3
1 SUBJECT MATTER OF THE LICENSE
1.1 SUBSTANTIVE SCOPE OF APPLICATION
By this License, the Licensee is granted the right to operate in the
license territory, within the framework of the license category 3,
transmission networks via which public telecommunications services are
offered by the Licensee itself or by others, in compliance with the
'Telekommunikationsgesetz' and the legal ordinances based thereon.
This Licensee will be entitled to operate transmission networks also in
the form of radio links if and to the extent that it has been allocated
the frequences necessary therefor pursuant to sections 44 through 48
TKG and the frequency ordinances based thereon. These frequency
allocations will be part of this License.
This License does not grant the right of offer voice telephone
services (sec. 6 para. 2 no. 2 TKG) or to operate transmission
networks for public mobile or satellite system services (sec. 6 para.
2 no. 1 a) and b) TKG).
1.2 TERRITORIAL SCOPE OF APPLICATION
The license territory covers the following area:
1. FEDERAL STATE BAVARIA
2. FEDERAL STATE BADEN-WURTTEMBERG
3. FEDERAL STATE SCHLESWIG-HOLSTEIN
4. FEDERAL STATE BERLIN
5. FEDERAL STATE HANSEATIC CITY OF HAMBURG
6. FEDERAL STATE HANSEATIC CITY OF BREMEN INCLUDING BREMERHAVEN
7. IN THE FEDERAL STATE HESSE:
<TABLE>
<S> <C>
a. towns not belonging to Wiesbaden, Frankfurt am Main,
a county: Offenbach/Main, Darmstadt,
b. counties: Bergstrasse, Darmstadt-Dieburg, Gross-Gerau,
Hochtaunuskreis, Main-Kinzig-Kreis, Main-
Taunus-Kreis, Odenwaldkreis, Offenbach,
Rheingau-Taunus, Wetteraukreis
</TABLE>
<PAGE> 4
8. IN THE FEDERAL STATE RHINELAND-PALATINATE:
<TABLE>
<S> <C>
a. towns not belonging to Ludwigshafen am Rhein, Mainz, Frankenthal,
a county: Worms, Speyer
b. counties: Mainz-Bingen, Ludwigshafen, Alzey-Worms,
Bad Durkheim
</TABLE>
9. IN THE FEDERAL STATE LOWER SAXONY:
<TABLE>
<S> <C>
a. towns not belonging to Hannover, Braunschweig, Salzgitter,
a county: Wolfsburg
b. counties: Peine, Hildesheim, Hannover, Harburg, Stade
</TABLE>
10. IN THE FEDERAL STATE NORTH RHINE-WESTPHALIA
<TABLE>
<S> <C>
a. towns not belonging to Dusseldorf, Duisburg, Essen, Krefeld,
a county: Monchengladbach, Muhlheim a.d.Ruhr,
Oberhausen, Remscheid, Solingen, Wuppertal,
Bottrop, Gelsenkirchen, Koln, Leverkusen,
Dortmund, Bochum, Herne, Hagen
b. counties: Mettmann, Neuss, Ennepe-Ruhr-Kreis
</TABLE>
11. IN THE FEDERAL STATE SAXONY:
<TABLE>
<S> <C>
a. the cities Leipzig and Dresden
b. in the county Meissen: Cossebaude, Grossdittmannsdorf, Moritzburg,
Promnitztal, Radebeul, Reichenberg
c. in the county Sachsische Schweiz: Schonfeld-Weissig
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
d. in the county Kamenz: Amsdorf b. Radeberg, Grosserkmannsdorf,
Hermsdorf, Kleinrohrsdorf, Langebruck,
Medingen, Ottendorf-Okrilla, Radeberg,
Ullersdorf b. Radeberg, Wachau b. Radeberg,
Wallroda, Weixdorf
e. in the county Leipziger Land: Bienitz, Bohlitz-Ehrenberg, Borsdorf,
Engelsdorf, Grossdeuben, Grosslehna,
Grossposna, Holzhausen, Kitzen,
Kulkwitz, Liebertwolkwitz, Lindenthal,
Lutzschena-Stahmein, Markkleeberg,
Markranstadt, Miltitz, Molkau, Panitzsch,
Podelwitz, Schkeuditz, Seehausen, Taucha,
Wiederitzsch, Zwenkau
</TABLE>
12. IN THE FEDERAL STATE BRANDENBURG:
a. the City of Potsdam.
2 USE OF PUBLIC ROADS AND WAYS
The Licensor grants the Licensee the right, pursuant to sec. 50 para. 2
sentence 1 TKG, to gratuitously use public roads and ways for
telecommunication connections (sec. 3 no. 20 TKG), which the Licensee
needs to exercise the license rights, in accordance with sections 50
through 58 TKG if and to the extent that the purpose of dedication of
the public roads and ways is not permanently limited thereby.
3 COLLATERAL PROVISIONS
3.1 CHANGE IN THE COMMERCIAL REGISTER
The Licensor must immediately be notified of any change in the
Commercial Register with a certified excerpt from the Commercial
Register to be attached to the notification. This information is
necessary in order to be able to assess whether the basis for the
license pursuant to sec. 8 para. 3 sentence 2 no. 2 TKG continues to
exist
<PAGE> 6
and to ensure the fulfillment of the obligations in case of a change
of the Licensee and/or a change in ownership pursuant to sec. 9 TKG.
3.2 OFFER OF TRANSMISSION NETWORKS
The Licensor must immediately be notified of the offering of
transmission channels pursuant to Annex II to the 'Council Directive
92/44/EEC of June 05, 1992 concerning the Introduction of Unbundled
Network Access in Case of Lease Lines' (O.J. EC no. L 165 of June 19,
1992, p. 27), amended by the Commission decision 94/439/EEC of June 15,
1994 (O.J. EC no. L 181 of July 15, 1994, p. 40). This information is
necessary in order to determine the market share regarding the
obligation to provide universal services pursuant to sec. 18 para. 1
TKG.
3.3 SAFETY OFFICER AND DOCUMENTS PURSUANT TO SEC. 87 PARA. 2 TKG
The Licensee is hereby directed to designate the safety officer until
the start of operations, to submit the documents referred to in sec.
87 para. 2 TKG and to make the declaration pursuant to sec. 87 para. 2
sentence 2 TKG.
4 INFORMATION
4.1 TECHNICAL IMPLEMENTATION OF CONTROL MEASURES PURSUANT TO SEC. 88 TKG
Since no time schedule for the submission of the concept for the
implementation of the control measures prescribed by law and for the
implementation of the control technology was attached to the license
application, it is hereby pointed out that the technical configuration
of the systems for the implementation of telecommunications control
measures required by law pursuant to sec. 88 para. 2 sentence 1
requires the permit of the Regulierungsbehorde. The putting into
operation of the telecommuni-cations system before furnishing the
proof, that is to be provided within the framework of the acceptance,
that the prerequisites of licensing are fulfilled is illegal pursuant
to sec. 88 para. 2 sentence 4 in conjunction with sec. 96 para. 1 no.
13 and no. 14 and may, in conjunction with sec. 15 TKG, lead to the
revocation of the license
4.2 LIABILITY TO PAY A FEE
The grant of the license is subject to a fee pursuant to sec. 16 para.
1 sentence 1 TKG. The fee will be assessed by separate notice on the
basis of the 'Telekommunikations-Lizenzgebuhrenverordnung' (TKLGebV)
[Telecommunications License Fee Ordinance] of July 28, 1997 (BGBl. I,
p. 1936).
4.3 LIABILITY TO PAY FEES AND CONTRIBUTIONS IN CASE OF ALLOCATION OF
FREQUENCIES
The allocation of frequencies, if any, for the operation of
transmission channels in the form of radio links is subject to fees
and contributions pursuant to sec. 48 TKG and pursuant to the
'Frequenzgebuhrenverordnung' (FGebV) [Frequency Fee Ordinance] of
<PAGE> 7
May 21, 1997 (BGBl. I, p. 1126) and the
'Frequenznutzungsbeitragsverordnung' (FBeitrV) [Ordinance relative to
the Frequency Use Contribution] of November 19, 1996 (BGBl. I, p.
1790) which have been issued on the basis of sec. 48 TKG. Frequency
allocation fees and frequency use contributions are assessed by
separate notice. Modifications of the allocation and the new
allocation of frequencies are made by separate administrative acts.
4.4 TRANSMISSION OF RADIO BROADCASTS
In case of operation of transmission channels for which frequencies for
the transmission of radio broadcasts must be allocated, reference is
hereby made to sec. 47 para. 3 TKG which is applicable within the
framework of the frequency allocation.
4.5 ADDITIONAL COLLATERAL PROVISIONS
Pursuant to sec. 8 para. 2 sentence 2 TKG, additional collateral
provisions may be issued for this License also after this License has
been granted.
4.6 OTHER
It is hereby pointed out that also the further provisions of the TKG
must be complied with.
<PAGE> 8
INSTRUCTIONS AS TO LEGAL REMEDIES
Within one (1) month from notification, a complaint may be filed against this
administrative act with the Verwaltungsgericht Koln [Administrative Court
Cologne], Appellhofplatz, 50667 Koln, in writing or on the record of the clerk
of the court. The plaintiff, the defendant and the subject of the complaint must
be indicated in the complaint. The complaint is to contain a specific petition.
The facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy. The complaint has
no suspensive effect.
Regulierungsbehorde fur
Telekommunikation und Post Mainz, September 08, 1998
i.A. (Signature) Zufall [Seal of
Regulierungsbehorde fur
Telekommunikation und Post]
<PAGE> 9
NOTICE OF CHANGE
REGARDING THE LICENSE NO. 98 03 0188
FOR THE OPERATION OF TRANSMISSION NETWORKS
FOR THE OFFERING OF PUBLIC TELECOMMUNICATIONS SERVICES
BY THE LICENSEE OR OTHERS
(LICENSE CATEGORY 3)
The license granted to
ARCIS MEDIACOM MANAGEMENT GMBH
TRIMBURGSTRASSE 2, 81249 MUNCHEN
(LICENSEE)
on September 08, 1998 on the basis of sec. 6 para. 1 no. 1, para. 2 no. 1 c) in
conjunction with sec. 8 paragraphs 1 through 3 and sec. 50 para. 2 sentence 1 of
the 'Telekommunikationsgesetz' (TKG) [German Telecommunications Act) of July
25, 1996 ('Bundesgesetzblatt' [Federal Law Gazette] I, p. 1120), is hereby
changed as follows by the Regulierungsbehorde fur Telekommunikation and Post(1)
pursuant to sec. 8 para. 1 TKG as per request of February 12, 1999:
The territorial scope of application pursuant to para. 1.2 of the license
no. 98 03 0188 is hereby extended
to the FEDERAL REPUBLIC OF GERMANY.
The provisions of the license notice concerning the license no. 98 03 0188 of
September 08, 1998 continue to be valid if and to the extent that no changes or
further measures are required in this Notice of Change.
This Notice of Change with respect to the above-mentioned license is subject to
fee pursuant to sec. 16 para. 1 sentence 1 TKG. The fee will be assessed by
separate notice on the basis of the 'Telekommunikations-
Lizenzgebuhrenverordnung' (TKLGebV) [Telecommunications License Fee Ordinance]
of July 28, 1997 issued on the basis of sec. 16 para. 1 sentence 2 TKG (BGBl. I,
p. 1936).
This Notice of Change is registered under no. 98 03 0188A.
- ----------
(1) FCC equivalent
<PAGE> 10
INSTRUCTIONS AS TO LEGAL REMEDIES
Within one (1) month from notification, a complaint may be filed against this
notice with the Verwaltungsgericht Koln [Administrative Court Cologne],
Appellhofplatz, 50667 Koln, in writing or on the record of the clerk of the
court. The plaintiff, the defendant and the subject of the complaint must be
indicated in the complaint. The complaint is to contain a specific petition. The
facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy. The complaint has
no suspensive effect.
Regulierungsbehorde fur
Telekommunikation und Post Mainz, March 24, 1999
i.A. (Signature) Zufall [Seal of
Regulierungsbehorde fur
Telekommunikation und Post]
<PAGE> 1
EXHIBIT 10.2
Regulierungsbehorde fur Telekommunikation und Post
[Coat of Arms of the Federal Republic of Germany]
License Certificate
<PAGE> 2
LICENSE OF THE LICENSE CATEGORY 4
FOR VOICE TELEPHONE SERVICES
ON THE BASIS OF AUTOMATICALLY OPERATED TELECOMMUNICATIONS NETWORKS
On the basis of the application of January 08, 1998, the Regulierungsbehorde fur
Telekommunikation und Post(1) (Reg TP, Licensor), pursuant to sec. 6 para. 1
no. 2, para. 2 no. 2 in conjunction with sec. 8 paragraphs 1 through 3 of the
'Telekommunikationsgesetz' (TKG) [German Telecommunications Act] of July 25,
1996 ('Bundesgesetzblatt' [Federal Law Gazette] I, p. 1120), hereby grants
ARCIS MEDIA COM MANAGEMENT GmbH
TRIMBURGSTRABE 2, 81249 MUNCHEN
(LICENSEE)
(hereinafter only referred to as Licensee) a license of the license category 4
for the offer of voice telephone services on the basis of automatically operated
telecommunications networks.
The application of January 08, 1998 is part of this License.
This License is registered under no. 98 04 0578.
- ----------
(1) FCC equivalent
<PAGE> 3
1 SUBJECT MATTER OF THE LICENSE
1.1 SUBSTANTIVE SCOPE OF APPLICATION
By this License, the Licensee is granted the right to offer voice
telephone services on the basis of automatically operated
telecommunications networks in the license territory within the
framework of the license category 4 in compliance with the
Telekommunika-tionsgesetz and the legal ordinances based thereon.
This License does not include the right to operate transmission
networks.
1.2 TERRITORIAL SCOPE OF APPLICATION
The license territory is the area of the City of Munich.
2 COLLATERAL PROVISIONS
2.1 CHANGE IN THE COMMERCIAL REGISTER
The Licensor must immediately be notified of any change in the
Commercial Register with a certified excerpt from the Commercial
Register to be attached to the notification. This information is
necessary in order to be able to assess whether the basis for the
license pursuant to sec. 8 para. 3 sentence 2 no. 2 TKG continues to
exist and to ensure the fulfillment of the obligations in case of a
change of the Licensee and/or a change in ownership pursuant to sec. 9
TKG.
2.2 SAFETY OFFICER AND DOCUMENTS PURSUANT TO SEC. 87 PARA. 2 TKG
The Licensee is hereby directed to designate the safety officer until
the start of operations, to submit the documents referred to in sec.
87 para. 2 TKG and to make the declaration pursuant to sec. 87 para. 2
sentence 2 TKG.
3 INFORMATION
3.1 TECHNICAL IMPLEMENTATION OF CONTROL MEASURES PURSUANT TO SEC. 88 TKG
Since no time schedule for the submission of the concept for the
implementation of the control measures prescribed by law and for the
implementation of the control technology was attached to the license
application, it is hereby pointed out that the technical configuration
of the systems for the implementation of telecommunications control
measures required by law pursuant to sec. 88 para. 2 sentence 1
requires the permit of the Regulierungsbehorde. The putting into
operation of the telecommunications
<PAGE> 4
system before furnishing the proof, that is to be provided within the
framework of the acceptance, that the prerequisites of licensing are
fulfilled is illegal pursuant to sec. 88 para. 2 sentence 4 in
conjunction with sec. 96 para. 1 no. 13 and no. 14 and may, in
conjunction with sec. 15 TKG, lead to the revocation of the license
3.2 LIABILITY TO PAY A FEE
The grant of the license is subject to a fee pursuant to sec. 16 para.
1 sentence 1 TKG. The fee will be assessed by separate notice on the
basis of the 'Telekommunikations-Lizenzgebuhrenverordnung' (TKLGebV)
[Telecommunications License Fee Ordinance] of July 28, 1997 (BGBl. I,
p. 1936).
3.3 ADDITIONAL COLLATERAL PROVISIONS
Pursuant to sec. 8 para. 2 sentence 2 TKG, additional collateral
provisions may be issued for this License also after this License has
been granted.
3.4 OTHER
It is hereby pointed out that also the further provisions of the TKG
must be complied with.
<PAGE> 5
INSTRUCTIONS AS TO LEGAL REMEDIES
Within one (1) month from notification, a complaint may be filed against this
administrative act with the Verwaltungsgericht Munchen [Administrative Court
Munich], Bayerstrass 30, 80335 Munchen, in writing or on the record of the
clerk of the court. The plaintiff, the defendant and the matter in dispute must
be indicated in the complaint. The complaint is to contain a specific petition.
The facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy.
Regulierungsbehorde fur
Telekommunikation und Post Mainz, March 31, 1998
i.A. (Signature) Zufall [Seal of
Regulierungsbehorde fur
Telekommunikation und Post]
<PAGE> 6
NOTICE OF CHANGE
REGARDING THE LICENSE NO. 98 04 0578
FOR VOICE TELEPHONE SERVICES
ON THE BASIS OF AUTOMATICALLY OPERATED TELECOMMUNICATIONS NETWORKS
(LICENSE CATEGORY 4)
The license of the license category 4 granted to
ARCIS MEDIACOM MANAGEMENT GmbH
TRIMBURGSTRABE 2, 81249 MUNCHEN
(LICENSEE)
on March 31, 1998 on the basis of sec. 6 para. 1 no. 2, para. 2 no. 2 in
conjunction with sec. 8 paragraphs 1 through 3 of the 'Telekommunikationsgesetz'
(TKG) [German Telecommunications Act) of July 25, 1996 ('Bundesgesetzblatt'
[Federal Law Gazette] I, p. 1120) is hereby changed as follows by the
Regulierungsbehorde fur Telekommunikation and Post(1) as per request of June 22,
1998.
The license territory described in para. 1.2 of the license no. 98 04 0578 is
hereby extended
to the Federal Republic of Germany.
The provisions of the license notice concerning the license no. 98 04 0578 of
March 31, 1998 continue to be valid if and to the extent that no changes or
further measures are required in this Notice of Change.
This Notice of Change with respect to the above-mentioned license is subject to
fee pursuant to sec. 16 para. 1 sentence 1 TKG. The fee will be assessed by
separate notice on the basis of the 'Telekommunikations-
Lizenzgebuhrenverordnung' (TKLGebV) [Telecommunications License Fee Ordinance]
of July 28, 1997 issued on the basis of sec. 16 para. 1 sentence 2 TKG
(BGBl. I, p. 1936).
This Notice of Change is registered under no. 98 04 0578A.
- -----------
(1) FCC equivalent
<PAGE> 7
INSTRUCTIONS AS TO LEGAL REMEDIES
Within one (1) month from notification, a complaint may be filed against this
notice with the Verwaltungsgericht Koln [Administrative Court Cologne],
Appellhofplatz, 50667 Koln, in writing or on the record of the clerk of the
court. The plaintiff, the defendant and the subject of the complaint must be
indicated in the complaint. The complaint is to contain a specific petition. The
facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy. The complaint has
no suspensive effect.
Regulierungsbehorde fur
Telekommunikation und Post Mainz, July 22, 1998
i.A. (Signature) Zufall [Seal of
Regulierungsbehorde fur
Telekommunikation und Post]
<PAGE> 1
EXHIBIT 10.3
REGULIERUNGSBEHORDE FUR TELEKOMMUNIKATION UND POST
Certificate
Provisional Frequency Allocation
Allocation No. 98370188
On the basis of sec. 47 para. 1 and para. 5 of the 'Telekommunikationsgesetz'
[TKG - German Telecommunications Act] of July 25, 1996 (BGBl. [Federal Law
Gazette] I, p. 1120),
CALLINO GMBH
PF 66 23 06
81220 MUNCHEN
is hereby provisionally allocated the frequencies set out in the attached
Frequency Use Sheet B in the coverage area
STEINBURG G002
for the operation of point-to-multipoint radio systems (PMP, consisting of base
stations and pertaining terminal stations) to realize subscriber's connections
for ISDN quality voice telephone services (additional text, data and online
services are permissible).
The coverage area is the territory described in the attached Frequency Use
Sheet B.
The base stations and the connected terminal stations may be put into operation
only after an application has been filed therefor with the Regulierungsbehorde
fur Telekommunikation und Post (Reg TP)(1) and the Reg TP granted the
application by transmitting the frequency use sheet Z. The transmitted frequency
use sheets Z providing for the technical features of the base stations will be
part of the frequency allocation.
The number of terminal stations supplied by a base station is unlimited. The
equipment used for the terminal stations must have been approved for the purpose
of use and provide for an approval number, and its technical features must match
the base stations.
The PMP radio systems (base stations and connected terminal stations) must be
operated in such a manner that the power flux density set out in the attached
frequency use sheet B will not be exceeded at a distance of fifteen (15)
kilometers from the border of the coverage area.
In addition, also the provisions of the appendices attached to this Certificate
must be complied with.
Instructions as to Legal Remedies
Within one (1) month from notification, a complaint may be filed against this
notice with the Verwaltungs-gerichtshof Koln [Higher Administrative Court
Cologne], Appellhofplatz, 50667 Koln, in writing or on the record of the clerk
of the court. The plaintiff, the defendant and the subject of the complaint must
be indicated in the complaint. The complaint is to contain a specific petition.
The facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy. The complaint has
no suspensive effect.
Berlin, July 21, 1999 [Official seal APPENDICES
i.A. (Signature) Regulierungsbehorde fur Frequency Use Sheet B
Kling Telekommunikation und Post] file no.:
98/37/N/0188/1/98
Collateral Provisions
- --------
(1) FCC equivalent
<PAGE> 2
- --------------------------------------------------------------------------------
Reg TP 136-5 FREQUENCY USE B File no.
Mauerstr. 69-75 PMP 98/37/N/0188/1/98
10117 Berlin as of: July 21, 1999
Tel.: 030-22480- 365 Fax: -379 Ref. ID:
- --------------------------------------------------------------------------------
Allocation holder: Callino GmbH limited until:
Pf 66 23 06
81220 Munchen
- --------------------------------------------------------------------------------
Transmit Frequency Receive Frequency
frequencies of 3410.000 - 3424.000 3510.000 - 3524.000
base stations (mcps) 3438.000 - 3452.000 3538.000 - 3552.000
maximum channel 14,000000
band width (mcps)
- --------------------------------------------------------------------------------
COVERAGE AREA
Name STEINBURG G002 Reg TP-GEBID 2486
Corners [EP] of
the Outlined Polygon
EP01 E 09 31 00.8 N 53 43 27.1 EP17 E 09 51 28.3 N 54 00 51.5
EP02 E 09 12 09.2 N 53 53 48.1 EP18 E 09 38 40.6 N 53 52 52.3
EP03 E 08 58 08.4 N 53 53 38.4 EP19 E 09 40 49.5 N 53 50 55.7
EP04 E 08 49 55.6 N 54 01 51.2 EP20 E 09 38 34.4 N 53 46 31.4
EP05 E 08 50 43.9 N 54 15 32.8 EP21
EP06 E 09 02 19.7 N 54 22 28.2 EP22
EP07 E 09 23 25.6 N 54 17 19.0 EP23
EP08 E 09 56 26.7 N 54 38 05.7 EP24
EP09 E 10 01 45.5 N 54 38 34.4 EP25
EP10 E 10 09 48.0 N 54 26 29.8 EP26
EP11 E 09 59 40.0 N 54 20 22.6 EP27
EP12 E 10 06 16.2 N 54 14 53.9 EP28
EP13 E 10 07 33.6 N 54 08 46.7 EP29
EP14 E 09 59 27.4 N 54 09 09.0 EP30
EP15 E 09 55 34.0 N 54 06 04.7 EP31
EP16 E 09 56 35.4 N 54 01 16.0 EP32
number of inhabitants 522000
as of June 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Maximum power flux density at a distance of 15 kilometers -122
from the border of the coverage area (dB W/(mcps) sq. meter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Remarks
- --------------------------------------------------------------------------------
<PAGE> 3
REGULIERUNGSBEHORDE FUR TELEKOMMUNIKATION UND POST
Certificate
Frequency Allocation
Allocation No. 98370059
On the basis of sec. 47 para. 1 and para. 5 of the 'Telekommunikationsgesetz'
[TKG - German Telecommunications Act] of July 25, 1996 (BGBl. [Federal Law
Gazette] I, p. 1120),
CALLINO GMBH
PF 66 23 06
81220 MUNCHEN
is hereby allocated the frequencies set out in the attached Frequency Use Sheet
B in the coverage area
LANDSHUT G001
for the operation of point-to-multipoint radio systems (PMP, consisting of base
stations and pertaining terminal stations) to realize subscriber's connections
for ISDN quality voice telephone services (additional text, data and online
services are permissible).
The coverage area is the territory described in the attached Frequency Use
Sheet B.
The base stations and the connected terminal stations may be put into operation
only after an application has been filed therefor with the Regulierungsbehorde
fur Telekommunikation und Post (Reg TP)(1) and the Reg TP granted the
application by transmitting the frequency use sheet Z. The transmitted frequency
use sheets Z providing for the technical features of the base stations will be
part of the frequency allocation.
The number of terminal stations supplied by a base station is unlimited. The
equipment used for the terminal stations must have been approved for the purpose
of use and provide for an approval number, and its technical features must match
the base stations.
The PMP radio systems (base stations and connected terminal stations) must be
operated in such a manner that the power flux density set out in the attached
frequency use sheet B will not be exceeded at a distance of fifteen (15)
kilometers from the border of the coverage area.
In addition, also the provisions of the appendices attached to this Certificate
must be complied with.
Instructions as to Legal Remedies
Within one (1) month from notification, a complaint may be filed against this
notice with the Verwaltungs-gerichtshof Koln [Higher Administrative Court
Cologne], Appellhofplatz, 50667 Koln, in writing or on the record of the clerk
of the court. The plaintiff, the defendant and the subject of the complaint must
be indicated in the complaint. The complaint is to contain a specific petition.
The facts and the evidence serving to substantiate the complaint are to be
indicated. A sufficient number of copies is to be attached to the complaint and
the exhibits so that all parties involved can be given a copy. The complaint has
no suspensive effect.
Berlin, August 02, 1999 [Official seal APPENDICES
i.A. (Signature) Regulierungsbehorde fur Frequency Use Sheet B
Telekommunikation und Post] file no.:
98/37/N/0058/1/98
Collateral Provisions
- --------
(1) FCC equivalent
<PAGE> 4
- --------------------------------------------------------------------------------
Reg TP 136-5 FREQUENCY USE B File no.
Mauerstr. 69-75 PMP 98/37/N/0058/1/98
10117 Berlin as of: August 02, 1999
Tel.: 030-22480-365 Fax: -379 Ref. ID:
- --------------------------------------------------------------------------------
Allocation holder: Callino GmbH limited until:
Pf 66 23 06
81220 Munchen
- --------------------------------------------------------------------------------
Transmit Frequency Receive Frequency
frequencies of 24717.000 - 24745.000 25725.000 - 25753.000
base stations (mcps) 24745.000 - 24773.000 25753.000 - 25781.000
maximum channel 28,000000
band width (mcps)
- --------------------------------------------------------------------------------
COVERAGE AREA
Name LANDSHUT G001 Reg TP-GEBID 60
Corners [EP] of
the Outlined Polygon
EP01 E 12 01 11.0 N 48 30 48.0 EP17
EP02 E 12 01 29.0 N 48 31 29.0 EP18
EP03 E 12 06 36.0 N 48 32 52.0 EP19
EP04 E 12 07 28.0 N 48 34 20.0 EP20
EP05 E 12 08 01.0 N 48 34 37.0 EP21
EP06 E 12 09 44.0 N 48 33 21.0 EP22
EP07 E 12 14 47.0 N 48 35 40.0 EP23
EP08 E 12 16 16.0 N 48 35 48.0 EP24
EP09 E 12 17 07.0 N 48 35 30.0 EP25
EP10 E 12 16 42.0 N 48 34 59.0 EP26
EP11 E 12 13 40.0 N 48 31 58.0 EP27
EP12 E 12 09 25.0 N 48 30 48.0 EP28
EP13 E 12 07 42.0 N 48 30 47.0 EP29
EP14 E 12 05 21.0 N 48 30 52.0 EP30
EP15 E 12 01 32.0 N 48 30 27.0 EP31
EP16 E EP32
number of inhabitants 59000
as of June 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Maximum power flux density at a distance of 15 kilometers -110
from the border of the coverage area (dB W/(mcps) sq. meter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Remarks
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.4
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
NOTE: Cover letter- original document in Polish
Ministry of Communications
Department of Regulations and Development
Pl. Malachowskiego 2
00-940 Warszawa
Formus Polska Sp. z o.o
ul. Kopernika 28/25
00-336 Warszawa
DRR-ZK-4501-537/2678/97 1997-Nov-03
The Department of Regulation and Development of the Ministry of
Communications informs that the Minister of Communications, after reviewing the
application by "FORMUS POLSKA: Sp.z o.o. on October 31, 1997, decided to issue
the concession to provide telecommunication services and the permission to
deploy and use of the telecommunications equipment.
One copy of the above concession Nr. 300/97/TI is attached.
Director
Department of Regulations and Development
(hand signature)
Wojciech Halka, Eng.
Notification to:
National Telecommunications and Postal Inspection
ul. Obrzezna 7
02-691 Warzawa
(a copy of concession attached)
Telekomunikacja Polska S.A. (TP S.A.)
ul. Swietokrzyska 3
00-945 Warszawa
(without attachment)
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 2
<PAGE> 2
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
National Seal of Poland
Republic of Poland
Minister of Communications
CONCESSION Nr. 300/97/TI
to provide telecommunications services
and
PERMISSION
to deploy and use telecommunication equipment
dated October 31, 1997
(new page #2)
In accordance with:
(listing of laws and regulations, listed below by Polish identifiers)
[ ] art. 104 par. 1 ust. dated June 14, 1960, Administrative Action Code
(Dz.U. 19980 Nr. 9, poz. 26 with later changes),
[ ] art. 12; art. 14 ust. 1,2,3; art 14a ust. 2 pkt. 3; art. 15; art. 17, art.
20a ust. 1,2,3 ust. dated Nov. 23, 1990, regarding communications (Dz.U.
1995, Nr. 117, poz. 564, changes Dz.U. 1996. Nr. 106, poz. 497 and Dz.U.
1997, Nr. 43, poz. 272, Nr. 88 poz. 554, Nr. 106, poz. 675 and Dz.U.
Nr. 121, poz. 770),
after a review
of the application by "Formus Polska" Sp. z o.o. dated August 14, 1997
it is decided to issue
to "Formus Polska" a limited liability Company with its seat in Warsaw at
Kopernika 28/25, called further Operator
the concession
for providing telecommunication services
and
the permission
to build/deploy and use a telecommunications network.
(new page #3)
1. Object of activity
Concession covers provisioning of:
(Operator is allowed by this concession to enter activities which include
provisioning of)
a). services to access Internet network,
b). services of data transmission,
c). phone services
Permission covers deployment/building and use of telecommunication equipment and
telecommunication network (assuring connectivity type point-point and
point-multipoint) designated to
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 3
<PAGE> 3
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
provide above listed telecommunication services as well as telecommunication
lines interconnecting those equipment to the subscriber's equipment in the
(geographical) area of activity.
2. THE AREA OF ACTIVITY
The (geographical) area of activity covered by this Concession and Permission
is defined as a territory of the cities: Warsaw, Lodz, Gdansk, Gdynia, Sopot,
Poznan, Wroclaw, Krakow, Szczecin, Bydgoszcz, and Katowice, as defined by their
administrative borders existing on the day of issuing of these Concession and
Permission.
3. SCOPE OF THE ACTIVITIES
3.1. Concession, together with Permission, covers deployment/installation and
use of the data transmission network in the areas as specified in point 2, with
a purpose of providing of services, as per listed by part 1a) and 1b) of this
Concession and Permission, for any subscriber without limitations. Service
named in 1a) will be implemented with use of networks of other authorized
operators.
3.2. Concession covers provisioning of services as listed in 1c) through a
network constructed accordingly to Permission, as stated in point 1, dedicated
to a limited group of users, it means with a total number of subscriber
termination points not higher than 1000, designated to serve:
- - business entities involved in financial and insurance services
- - entities and branches of government administration (this provision is a very
broad; it include any activity or enterprise owned or governed by the State,
what spans a very broad range of industries due to a very limited
privatization; this provision can be changed or expended by a simple
administrative process to apply to any but specific group of users).
4. DATE OF COMMENCEMENT OF ACTIVITIES.
The date to commence the activity (business activity by the Operator) is the
date of the date of acceptance of this Concession and Permission.
5. VALIDITY PERIOD FOR CONCESSION AND PERMISSION
Concession and Permission are issued for the period of 10 (ten) years, counting
from the date of the delivery of this Concession and Permission. Operator can
submit an application for an extension for a specified period as of six months
before the expiration date of Concession and Permission.
(new page #4)
6. RIGHTS RESULTING FROM THE CONCESSION AND PERMISSION CAN NOT BE TRANSFERRED
FROM OPERATOR TO ANY OTHER PARTY.
7. Operator's capital structure
7.1. "Formus Polska" limited liability Company has the initial investment
capital in the amount of 5,000 PLN (five thousand polish zloty) which consists
of 100 (hundred) shares of a nominal value of 100 PLN (hundred zloty) [NOTE:
error by the Ministry] each.
Accordingly to the notary act dated August 01, 1997 - Reportorium A 14434/97 -
prepared by the Notary Office in Warsaw, at ul. Dluga 31, the shares are owned
by:
1. Formus International - Poland Inc.
with the seat in USA, State of Deleware Wilmington 49 shares or 49%
2. Elmedia Sp. z o.o. with the seat in Warsaw 51 shares or 51%
7.2 Operator is obligated to report to the Minister of Communication any case
that a single shareholder has a share packet which entitles to over 10% of
votes during the Shareholders Meeting of the Operator.
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 4
<PAGE> 4
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
7.3. Operator is obligated to petition to the Minister of Communication,
on behalf of any person (party) who intends to acquire shares or rights to
shares of the Operator, for a permission to purchase shares or rights to shares
as required by the Telecommunication Law, and pass the decision to the
interested party.
7.4. Operator is obligated to inform the Minister of Communication about:
- -termination of activities under provisions of Concession and Permission
- -occurrence of any of the following in relation to ""Formus Polska" Sp. z o.o.:
a) petition to declare bankruptcy
b) decision regarding dissolution of the company,
c) change to status (Deed) of the Company,
d) change of location,
The information about listed above events should be submitted in written in 14
days, after the date of the occurrence of a given event.
8. Detailed requirements regarding allowed activities are described in the
Attachment to these Concession and Permission, which is the integral of
Concession and Permission.
(new page #5)
JUSTIFICATION
Considering the following:
- an application by "Formus Polska" Sp. z o.o. dated August 14, 1997, for
issuing a concession to provide telecommunication services and for a permission
for deployment and use of the telecommunications equipment or network;
- a copy of the notary act dated August 01, 1997, Company Deed for limited
liability Company under the name "Formus Polska" Sp. z o.o. - Repertorium A
14435/97, issued by the Notary Office in Warsaw, at ul. Dluga 31 for
Repertorium A 14435/97;
- a copy of current commercial registration document for "Formus Polska"
Sp. z o.o. issued on August 12, 1997, by the Regional Court for the City of
Warsaw, Commercial Court Branch XVI Commercial-Register Court, Section B Nr.
51078;
- a letter from "Formus Polska" Sp. z o.o. dated October 15, 1997,
clarifying object and scope of the application;
- a copy of the notary act dated May 19, 1997 Company deed, for limited
liability Company under the name "ELMEDIA" Sp. z o.o. - Repertorium A 4123/97,
issued by the Notary Office in Warsaw, at ul. Galczynskiego 4 for Repertorium A
4126/97;
- a copy of current commercial registration document for "ELMEDIA" Sp.
z o.o. issued on June 13, 1997, by the Regional Court for the City of Warsaw,
Commercial Court Branch XVI Commercial-Register Court, Section B Nr.
50506;
- a letter from "Formus Polska" Sp. z o.o. dated October 21, 1997 (no
reference number), regarding the number of subscriber termination terminals;
it was decided, that accordingly to the standing law and regulations as stated
by the ruling dated November 23, 1990 regarding communications, "Formus Polska"
Sp. z o.o. (is being issued) Concession and Permission as described in the
beginning (of this document).
Because the term "agglomeration" is not an administrative term, the area of
"aglomeration" is limited to "the territory of the city of Katowice,"
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 5
<PAGE> 5
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
The fee for the issuing of the concession is collected in polish zlotys, in the
amount equivalent to 414,000 ECU (four-hundred fourteen thousand ECU),
converted using the mean exchange rate for ECU issued by the National Bank of
Poland on the date of payment. The payment was made to the account:
MINISTRY OF COMMUNICATIONS
NBP O/O WARSAW
ACCOUNT NR. 10101010-5526-223-1
The concession fee was determined accordingly to the paragraph 1. ust.1 of the
ruling of the Minister of Communication dated October 9, 1995, regarding the
amount of the fee and method of payment for issuing the concession for
providing telecommunication and postal services and for the access to the
tender documentation ..........
(new page #6)
..........(Dz.U. Nr.118, poz. 572 with changes in 1997, Dz.U. Nr. 116, poz. 748)
as stated in ust.1 pkt.4, ust.3 pkt.1 and ust.8 attachment Nr.1 to the above
ruling - using the following split:
- - accordingly to ust.1 pkt.4 of above mentioned attachment, for issuing
Concession for providing data transmission services over the territory of the
cities: Warszawa, Lodz, Gdansk, Gdynia, Sopot, Poznan, Wroclaw, Krakow,
Szczecin, Bydgoszcz, Katowice - 313,800 ECU (three-hundred-thirteen thousand
eight-hundred ECU),
- - accordingly to ust. 3 pkt. 1 of above mentioned attachment, for issuing
Concession for providing telephone services in the dedicated network - 100,000
ECU (one-hundred thousand ECU),
- - accordingly to ust. 8 of above mentioned attachment, for issuing Concession
for providing Internet network access using telecommunication networks of
authorized operators - 200 ECU (two-hundred ECU).
The treasury fee for the issuing of the Permission in the amount of 500 PLN
(five hundred zlotys) - accordingly to par. 50 pkt.1 ruling by the Minister of
Finance, dated December 09, 1994, regarding the treasury fees (Dz.U. Nr. 136,
poz. 705, changes DzU. Nr. 82 in 1996, poz. 381).
THIS DECISION IS FINAL UNDER THE PROCEDURES ON THE ADMINISTRATIVE PROCEEDINGS.
Unsatisfied, regarding this decision, party may submit an application to the
Minister of Communication to review the issue again. The application must be
submitted in 14 days from the date of delivery of this Concession and Permission
(art. 127 par. 3 and art. 129 par. 2 of the Administrative Law Code). This
decision issued as a result of second review of the issues, as stated by art.
127 par. 3 Administrative Law Code, can be contested by an action filed with the
Superior Administrative Court in Warsaw no later than 30 days from the date of
delivery of this decision, art. 35 ust.1 regarding art. 34 ust.1 ruling dated
May 11, 1995, about Superior Administrative Court (Dz.U. Nr. 74 poz. 368,
changes Dz.U. Nr. 104, poz. 515).
SEAL OF MINISTER OF COMMUNICATION
(ORIGINAL SIGNATURE BY PROF. DR. INZ. ANDRZEJ ZIELINSKI, MINISTER OF
COMMUNICATIONS AS OF THE DATE OCTOBER 31, 1997)
(end of page #6)
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 6
<PAGE> 6
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This is a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
(page #7)
Attachment
to the Concession Nr. 300./97/TI
and to Permission by the Minister of Communication
dated October 31, 1997.
1. CONDITIONS FOR PERFORMING ACTIVITIES
1.1. TYPE AND SIZE OF NETWORK
1.1.1. Operator's network should be a digital or analog telecommunication
network built accordingly to the Local Multipoint Distribution System (LMDS),
based on equipment deployed in compliance to point 1 of this Concession and
Permission and on the (telecommunications) links leased from the authorized
operators.
1.1.2. Operator is obligated to inform National Telecommunications and Postal
Inspection authorities about locations of its telecommunications equipment
(network elements) no later than 7 days from its activation.
1.2. Conditions for providing services (fairness of business practices)
1.2.1. Operator is obligated to enter into a contract to provide services
without any conditions to the other party for accepting or fulfilling any other
obligation not related to the object of the contract, which will be not
acceptable to the other party if it had a choice (of service provider).
1.2.2. Operator is obligated to enter into a contract to provide services
without any conditions to the other party regarding a purchase of any assets
from any persons or entities.
1.2.3. Operator providing telecommunication services which are not public
services is obligated to define and publish the scope and specific conditions
of that activity as well as define the questioning process.
1.2.4. Operator has the right to independently determine the fees for the
telecommunication services which are the subject of Concession, with the
restrictions imposed by the telecommunications law. The information about the
fees should be published.
1.2.5. Operator is obligated to inform National Telecommunications and Postal
Inspection about the fees and their changes for the telecommunication services.
(new page #8)
1.2.6. Operator is obligated to provide to the Minister of Communications or to
authorized entities, the space, equipment and documents to facilitate any
inspection as provided by the law.
1.2.7. Per Minister of Communications' request, Operator is obligated to
provide all information needed to determine if the principles of fair
competition between the operators operating in the same market are not
violated, and in a case of violation, to immediate correction.
1.2.8. Provisioning of any international telecommunication services to
Operator's subscribers can be achieved only through the telecommunication
networks which belong to operators who are authorized to provide those services.
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 7
<PAGE> 7
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
1.2.9. Operator is obligated to submit, per request of the entities authorized
by the Minister of Communication, any information regarding its activities as
in accordance of this Concession and Permission, which has the merits to an
assessment if the Operator is complying with the laws and regulations and the
provisions of this Concession. All that information, if so stated by the
Operator, will be considered proprietary and confidential.
1.2.10. Operator should keep, if it is possible, a separate books (accounting)
regarding costs and revenues related to each of telecommunication service as
provided.
1.2.11. Operator is obligated to conduct activities in accordance of the law and
regulations of the Republic of Poland, and in the case of lack of them,
accordingly to the guidelines and recommendations of the International
Telecommunication Union (ITU) and ETSI norms.
1.3. BASIC TECHNICAL REQUIREMENTS REGARDING TELECOMMUNICATION NETWORK.
1.3.1. Synchronization of the Operator's network should be based on internal
clock, with the capability to switch to a synchronization based on a central
clock of the telecommunication network in the Republic of Poland, when that
network's synchronization will be implemented.
1.3.2. Attributes for the interconnection between Operator's equipment and other
operators' equipment regarding transmission should be implemented in accordance
of standard interconnection points as defined by the regulations of the Republic
of Poland, and in a case of their lacking, by recommendations of ITU and ETSI
norms.
(new page #9)
1.3.3. Signaling used in the Operator's network should be implemented in
accordance of requirements as defined by the regulations of the Republic of
Poland, and in a case of their lacking, by recommendations of ITU and ETSI
norms. Other types of signaling can be implemented at the interconnection
points to other networks, as required by the needs and accordingly to
agreements between the operators.
1.3.4. Operator's telecommunication network should be equipped in equipment
providing for automatic supervision and network management. This equipment
should allow to monitor the network and to control the telecommunication
traffic, with provisioning for cooperation, accordingly to the standards as
defined by the regulations of the Republic of Poland for that cooperation,
with other operator's control and management centers.
1.3.5. Telecommunication equipment which is part of the stationary (fixed)
telecommunication network should fulfill appropriate technical and operational
requirements established by the rulings of the Minister of Communication.
2. CONDITIONS FOR COOPERATION WITH PUBLIC TELECOMMUNICATION NETWORKS
Operator will reach agreements with other operators regarding cooperation
between telecommunication networks, billing, and will enter into appropriate
contractual arrangements, which will be presented to the Minister of
Communication shortly after their execution.
3. OBLIGATIONS TOWARD DEFENSE AND SECURITY OF THE STATE.
3.1. Operator's activity can not be conducted in any manner violating any
current regulations regarding defense and security of the State or in a manner
endangering defense and security interests of the State or public order.
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 8
<PAGE> 8
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
3.2 Operator is obligated to perform tasks and provide telecommunication
services in support of defense and security of the State, as well as during the
natural disasters or extraordinary endangerment, accordingly to the law and
regulations of the republic of Poland.
3.3 By separate agreements and contracts entered in with appropriate entities of
the Departments of Defense, Interior, and Administration, as well as the Office
of State Protection, which the Operator is not allow to refuse, the detailed
conditions of performing duties and providing services in support of the
security and defense of the State and of assisting those entities will be
determined, in particular:
(new page #10)
- -type and range of performed duties,
- -type and range of provided services,
- -method of providing assistance,
- -organizational and technical requirements for cooperation,
- -principles and procedures of cooperation,
- -principles of payment for the services.
3.4 Operator is obligated to provide services and assistance to the efforts of
(State) attorney general or the court accordingly to the provisions of the
Criminal Code.
3.5 In all phases of network development (planning, construction, operation)
Operator is obligated to assure organizational and technical solutions
facilitating implementing in its network tasks and services on behalf of the
security and defense of the State, beginning on the day of commencement of
services covered by the Concession.
3.6 Operator is obligated to maintain its network readiness to support the
security and defense needs of the State, giving the first priority to the
maintenance of equipment and communication links related to the operations in
support of security and defense of the State.
3.7 During the crisis situation related to the security and defense of the
State, Operator will assure appropriate cooperation to manage the network with
authorized entities as defined in point 3.3.
4. ASSIGNMENT AND USE OF FREQUENCY:
4.1 Operator has the right, as a first user, to use for its LMDS system
equipment, 1,000 MHz of radio spectrum from the 28 GHz frequency band spanning
27.5 - 29.5 GHz, for the point-multipoint links as well as for interconnection
of base stations in the network. The equipment for point-to-point links will be
able to operate in the bands designated for those services. (This provision
shall be interpreted that the Operator has the right to request any spectrum
which is designated for point-to-point links on as-needed basis. Also, it
should be added that the Ministry of Communications agreed that the Operator
can petition for the allocation of an additional 300 MHz of spectrum from the
28 GHz band, through an administrative process during which the period of 7
days after the delivery of Concession. Formus Polska is executing this option).
4.2 This Concession does not contain radio frequency assignment nor the
permission for installation/deployment and use of transmit-receive
radiocommunication equipment. This decision will be issued based on a separate
application by the Operator.
(new page #10)
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 9
<PAGE> 9
FORMUS POLSKA - CONCESSION AND PERMISSION NO. 300/97/TI
NOTE: This a "word-by-word" translation of the original (in Polish)
of the Concession as received. Added text, including comments
and clarification remarks, is indicated by italic.
- --------------------------------------------------------------------------------
5. FEES PAYABLE BY THE OPERATOR
5.1. Operator is obligated to pay fees stated in the telecommunication law, in
particular to pay the annual fees for use of radio-lines, equipment and
telecommunication networks, to the account:
PANSTWOWA INSPEKCJA TELEKOMUNIKACYJNA I POCZTOWA
NBP O/O WARSZAWA, PL. POWSTANCOW WARSZAWY 4,
ACCOUNT NR. 10101010-6350-223-1
Independently of the above, Operator is obligated to pay separate fees for use
of radiocommunication equipment deployed accordingly with the permissions
issued through other proceeding as well as for frequency assignment to that
equipment, accordingly to the invoices issued by the National
Radiocommunication Agency (PAR), National Board, in Warsaw, to the accounts as
indicated by PAR.
5.2. Operator will be informed about any changes in the bank accounts or
changes regarding principles of fee payment by the National Telecommunication
and Postal Inspection as well as by the National Radiocommunication Agency.
SEAL OF THE MINISTER OF COMMUNICATION
(ORIGINAL SIGNATURE BY PROF. DR. INZ. ANDRZEJ ZIELINSKI, MINISTER OF
COMMUNICATIONS AS OF THE DATE OCTOBER 31, 1997)
(end of page #11)
(END OF CONCESSION AND PERMISSION DOCUMENT)
- --------------------------------------------------------------------------------
FORMUS POLSKA - PROPRIETARY AND CONFIDENTIAL PAGE 10
<PAGE> 10
RZECZPOSPOLITA POLSKA
MINISTER OF COMUNICATION
DRR-ZK-4501-537/1088/98
FORMUS POLSKA Sp.z.o.o
Ul. Kopernika 28/26
00-336 Warsaw
DECISION NUMBER T-585/K-300(1)/98
With reference to the article 155 statute, dated June 14th, 1960, under the
procedural administration code (Dz. U. Z 1980r.Nr 9, poz.26 z pozn. Zm.) and
also article 17 statute 1 p. 1 and article 2 p. 5 statute dated November 23rd
1990, relating to communications (Dz. U. Nr 117 z 1995r., poz.. 564 zm, Dz. U.
Z 1996r. Nr 106, poz.496 zm. Dz. U. Z 1997r. Nr 43, poz272, Dz. U. Nr88,
poz.554, Dz.U. 106, poz.675, Dz. U. Nr 121, poz.770), after due consideration
of the submission by Formus Polska Sp. z o.o., dated November 20th 1997,
(without the reference) concerning amendments to the contents of concession Nr.
300/97/TI for providing telecommunication services in addition to permission
for installation and utilization of telecommunication equipment dated October
31st 1997, relating to the extension to the radio spectrum from 100MHz to
1300MHz within the bandwidth 27,5-29,5 GHz, the following changes have been
introduced to concession Nr.300/97/TI in addition to the award being granted by
the Minister of Communication dated October 31st 1997.
In addition to concession Nr. 300/97/TI, and permission of the Minister of
Communication dated October 31st 1997 point 4.1 has been amended as follows:
"4.1 Operator, as the first user, has the right to utilize his LMDS equipment
for the system he provides, in a 1300MHz radio spectrum within the bandwidth
27,5-29,5 GHz. This applies to point and multi-point connection, in addition to
between the base stations which work within the network. Equipment design for
the radio communication type point to point, will be able to work in bandwidth
prepared for this system.
<PAGE> 11
JUSTIFICATION
1. The Minister of Communications gave Formus Polska Sp.z.o.o. a concession
Nr. 300/87/TI for providing telecommunication services and for installation
and utilization of telecommunication equipment, dated October 31st 1997.
2. Formus Polska applied to the Minster of Communications with a request to
extend the radio spectrum from 1000MHz to 1300Mhz within the bandwidth
27,5-29,5 GHz, dated November 20th 1997.
3. The opinion of the National Radiocommunication Agency refers to extension
of the bandwidth up to 1300MHz (print nr. DSR-LRS-52625/296/98 dated
03.19.1998)
Under consideration of the present laws, and bearing in mind the rationale of
the actual proposal above mentioned application this decision has been made
accordingly.
This decision is final and actual as ordered by the present administration.
The fiscal fee for changes to the concession and permissions has been charged
at (250PLN - two hundred and fifty zloty). Based on the article - *56 referring
to *50 pkt. 1 relating to the Minister of Treasury decision dated December 9th
1994, about the fiscal fee (Dz.U.z 1994r. Nr. 136, poz 705 zm. Dz.U.z 1996r. Nr
82, poz. 381)
An unsatisfied party may turn to the Minister of Communication with a
suggestion to review the case. The proposal must be submitted within 14 days
from the day of receiving the concession and permission (article 127 *3 and
article 129 *2 K.p.a.)
<PAGE> 12
The party has the right to commence legal proceeding in the Main Administration
Court in Warsaw, after the decision to review the case has been made. The
parties then have 30 days from the date of delivery of the decision-article 35
passage 1 statute dated May 11th 1995 related to the Main Administration Court
(Dz. U. Nr 74, poz. 368 z pozn. Zm.)
Mark Zdrojewski
Minister of Communication
<PAGE> 1
EXHIBIT 10.5
FORMUS COMMUNICATIONS, INC.
EQUITY INCENTIVE PLAN
EFFECTIVE APRIL 15, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - INTRODUCTION 1
1.1......Establishment 1
1.2......Purposes 1
ARTICLE II - DEFINITIONS 1
2.1......Definitions 1
2.2......Gender and Number 3
ARTICLE III - PLAN ADMINISTRATION 3
ARTICLE IV - STOCK SUBJECT TO THE PLAN 4
4.1......Number of Shares 4
4.2......Other Shares of Stock 4
4.3......Adjustments for Stock Split, Stock Dividend, Etc. 4
4.4......Other Distributions and Changes in the Stock 5
4.5......General Adjustment Rules 5
4.6......Determination by the Committee, Etc. 5
ARTICLE V - CORPORATE REORGANIZATION 6
5.1......Reorganization 6
5.2......Required Notice 6
5.3......Acceleration of Exercisability 6
5.4......Limitation on Payments 7
ARTICLE VI - PARTICIPATION 7
ARTICLE VII - OPTIONS 8
7.1......Grant of Options 8
7.2......Stock Option Certificates 8
7.3......Restrictions on Incentive Options 11
7.4......Stockholder Privileges 11
ARTICLE VIII - RESTRICTED STOCK AWARDS 12
8.1......Grant of Restricted Stock Awards 12
8.2......Restrictions 12
8.3......Privileges of a Stockholder, Transferability 12
8.4......Enforcement of Restrictions 12
ARTICLE IX - OTHER COMMON STOCK GRANTS 13
ARTICLE X - CHANGE IN CONTROL 13
10.1.....In General 13
10.2.....Definition 13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE XI - RIGHTS OF PARTICIPANTS 14
11.1.....Services 14
11.2.....Nontransferability 14
11.3.....No Plan Funding 14
ARTICLE XII - GENERAL RESTRICTIONS 14
12.1.....Investment Representations 14
12.2.....Compliance with Securities Laws 15
12.3.....Changes in Accounting Rules 15
ARTICLE XIII - OTHER EMPLOYEE BENEFITS 15
ARTICLE XIV 15
ARTICLE XV - WITHHOLDING 16
15.1.....Withholding Requirement 16
15.2.....Withholding With Stock 16
ARTICLE XVI - REQUIREMENTS OF LAW 16
16.1.....Requirements of Law 16
16.2.....Federal Securities Law Requirements 16
16.3.....Governing Law 17
ARTICLE XVII - DURATION OF THE PLAN 17
</TABLE>
ii
<PAGE> 4
FORMUS COMMUNICATIONS, INC.
EQUITY INCENTIVE PLAN
ARTICLE I
INTRODUCTION
1.1 Establishment. Effective April 15, 1997 (the "Effective Date"),
Formus Communications, Inc., a Delaware corporation (hereinafter referred to,
together with its Affiliated Corporations (as defined in subsection 2.1(a)) as
the "Company" except where the context otherwise requires), hereby establishes
the Formus Communications, Inc. Equity Incentive Plan (the "Plan") for certain
key employees of the Company, consultants to the Company, and non-employee
members of the Board of Directors of the Company, subject to approval of the
Plan by the Company's stockholders. If the Plan is not approved within twelve
months of the Effective Date, the Plan will automatically terminate. The Plan
permits the grant of stock options, restricted stock awards and other stock
grants to participants in the Plan.
1.2 Purposes. The purposes of the Plan are to provide those
individuals selected for participation in the Plan with added incentives to
continue in the service of the Company and to create in such individuals a more
direct interest in the future success of the operations of the Company by
relating incentive compensation to the achievement of long-term corporate
economic objectives, so that the income of those participating in the Plan is
more closely aligned with the income of the Company's stockholders. The Plan is
also designed to attract, retain and motivate the most qualified individuals by
providing an opportunity for investment in the Company.
ARTICLE II
DEFINITIONS
2.1 Definitions. The following terms shall have the meanings set
forth below:
(a) "Affiliated Corporation" means any corporation or other
entity (including but not limited to a partnership) that is affiliated with
Formus Communications, Inc. through stock ownership or otherwise and is treated
as a common employer under the provisions of Sections 414(b) and (c) of the
Code, together with any parent or subsidiary of the Company as defined in
Section 424 of the Code.
(b) "Award" means an Option, a Restricted Stock Award, grants
of Stock pursuant to Article X or other issuances of Stock hereunder.
(c) "Board" means the Board of Directors of the Company.
<PAGE> 5
(d) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(e) "Committee" means a committee consisting of members of
the Board who are empowered hereunder to take actions in the administration of
the Plan. The Committee shall be so constituted at all times as to permit the
Plan to comply with Section 162(m) of the Code and Rule 16b-3 or any successor
rule promulgated under the Securities Exchange Act of 1934 (the "1934 Act").
Members of the Committee shall be appointed from time to time by the Board,
shall serve at the pleasure of the Board and may resign at any time upon
written notice to the Board.
(f) "Disabled" or "Disability" shall have the meaning given
to such terms in Section 22(e)(3) of the Code.
(g) "Eligible Consultants" means those consultants providing
services to the Company who are determined by the Committee to be individuals
whose services are important to the Company and who are eligible to receive
Awards, other than Incentive Options, under the Plan.
(h) "Eligible Employees" means those key employees
(including, without limitation, officers and directors who are also employees)
of the Company or any division thereof, upon whose judgment, initiative and
efforts the Company is, or will become, largely dependent for the successful
conduct of its business.
(i) "Fair Market Value" of a share of Stock shall be the last
reported sale price of the Stock on the Nasdaq National Market on the day the
determination is to be made, or if no sale took place on such day, the average
of the closing bid and asked prices of the Stock on the Nasdaq National Market
on such day, or if the market is closed on such day, the last day prior to the
date of determination on which the market was open for the transaction of
business, as reported by Nasdaq. If, however, the Stock should be listed or
admitted for trading on a national securities exchange, the Fair Market Value
of a share of the Stock shall be the last sales price, or if no sales took
place, the average of the closing bid and asked prices on the day the
determination is to be made, or if the market is closed on such day, the last
day prior to the date of determination on which the market was open for the
transaction of business, as reported in the principal consolidated transaction
reporting system for the principal national securities exchange on which the
Stock is listed or admitted for trading. If the Stock is not listed or traded
on Nasdaq or on any national securities exchange, the Fair Market Value for
purposes of the grant of Options under the Plan shall be determined by the
Committee in good faith in its sole discretion.
(j) "Incentive Option" means an Option designated as such and
granted in accordance with Section 422 of the Code.
(k) "Non-Employee Directors" means those individuals who (a)
are members of the Board and (b) are not employees of the Company. For purposes
of the Plan, an employee is an individual whose wages are subject to the
withholding of federal income tax under section 3401 of the Internal Revenue
Code of 1986, as amended from time to time (the "Code").
<PAGE> 6
(l) "Non-Qualified Option" means any Option other than an
Incentive Option.
(m) "Option" means a right to purchase Stock at a stated or
formula price for a specified period of time. Options granted under the Plan
shall be either Incentive Options or Non-Qualified Options.
(n) "Option Certificate" shall have the meaning given to such
term in Section 7.2 hereof.
(o) "Option Holder" means a Participant who has been granted
one or more Options under the Plan.
(p) "Option Price" means the price at which shares of Stock
subject to an Option may be purchased, determined in accordance with subsection
7.2(b).
(q) "Participant" means a Non-Employee Director, an Eligible
Consultant, or an Eligible Employee designated by the Committee from time to
time during the term of the Plan to receive one or more of the Awards provided
under the Plan.
(r) "Restricted Stock Award" means an award of Stock granted
to a Participant pursuant to Article VIII that is subject to certain
restrictions imposed in accordance with the provisions of such Section.
(s) "Share" means a share of Stock.
(t) "Stock" means the common stock of the Company.
2.2 Gender and Number. Except when otherwise indicated by the
context, the masculine gender shall also include the feminine gender, and the
definition of any term herein in the singular shall also include the plural.
<PAGE> 7
ARTICLE III
PLAN ADMINISTRATION
The Plan shall be administered by the Committee. In accordance with
the provisions of the Plan, the Committee shall, in its sole discretion, select
the Participants from among the Eligible Employees, Eligible Consultants and
Non-Employee Directors, determine the Awards to be made to the Participants
pursuant to the Plan, the number of shares of Stock to be issued thereunder and
the time at which such Awards are to be made, fix the Option Price, period and
manner in which an Option becomes exercisable, establish the duration and
nature of Restricted Stock Award restrictions, and establish such other terms
and requirements of the various compensation incentives under the Plan as the
Committee may deem necessary or desirable and consistent with the terms of the
Plan; provided, however, that any Award granted to a Non-Employee Director must
first be approved by the Board. The Committee shall determine the form or forms
of the agreements with Participants that shall evidence the particular
provisions, terms, conditions, rights and duties of the Company and the
Participants with respect to Awards granted pursuant to the Plan, which
provisions need not be identical except as may be provided herein. The
Committee may from time to time adopt such rules and regulations for carrying
out the purposes of the Plan as it may deem proper and in the best interests of
the Company. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or in any agreement entered into
hereunder in the manner and to the extent it shall deem expedient and it shall
be the sole and final judge of such expediency. No member of the Committee
shall be liable for any action or determination made in good faith. The
determinations, interpretations and other actions of the Committee pursuant to
the provisions of the Plan shall be binding and conclusive for all purposes and
on all persons.
ARTICLE IV
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. The number of shares of Stock that are
authorized for issuance under the Plan in accordance with the provisions of the
Plan and subject to such restrictions or other provisions as the Committee may
from time to time deem necessary shall not exceed two million two hundred fifty
thousand (2,250,000). This authorization may be increased from time to time by
approval of the Board and by the stockholders of the Company if, in the opinion
of counsel for the Company, stockholder approval is required. Shares of Stock
that may be issued upon exercise of Options, that are issued as Restricted
Stock Awards and that are issued as incentive compensation or other stock
grants under the Plan shall be applied to reduce the maximum number of shares
of Stock remaining available for use under the Plan. The Company shall at all
times during the term of the Plan and while any Options are outstanding retain
as authorized and unissued Stock at least the number of shares from time to
time required under the provisions of the Plan, or otherwise assure itself of
its ability to perform its obligations hereunder.
<PAGE> 8
4.2 Other Shares of Stock. Any shares of Stock that are subject to an
Option that expires, or that is forfeited or for any reason is terminated
unexercised, and any shares of Stock withheld for the payment of taxes or
received by the Company as payment of the exercise price of an Option shall
automatically become available for use under the Plan.
4.3 Adjustments for Stock Split, Stock Dividend, Etc. If the Company
shall at any time increase or decrease the number of its outstanding shares of
Stock or change in any way the rights and privileges of such shares by means of
the payment of a stock dividend or any other distribution upon such shares
payable in Stock, or through a stock split, subdivision, consolidation,
combination, reclassification or recapitalization involving the Stock, then in
relation to the Stock that is affected by one or more of the above events, the
numbers, rights and privileges of the following shall be increased, decreased
or changed in like manner as if they had been issued and outstanding, fully
paid and nonassessable at the time of such occurrence: (i) the shares of Stock
as to which Awards may be granted under the Plan and (ii) the shares of the
Stock then included in each outstanding Award granted hereunder.
4.4 Other Distributions and Changes in the Stock. If
(a) the Company shall at any time distribute with respect to
the Stock assets or securities of persons other than the Company (excluding
cash or distributions referred to in Section 4.3), or
(b) the Company shall at any time grant to the holders of its
Stock rights to subscribe pro rata for additional shares thereof or for any
other securities of the Company, or
(c) there shall be any other change (except as described in
Section 4.3) in the number or kind of outstanding shares of Stock or of any
stock or other securities into which the Stock shall be changed or for which it
shall have been exchanged, and if the Committee shall in its discretion
determine that the event described in subsection (a), (b), or (c) above
equitably requires an adjustment in the number or kind of shares subject to an
Option or other Award, an adjustment in the Option Price or the taking of any
other action by the Committee, including without limitation, the setting aside
of any property for delivery to the Participant upon the exercise of an Option
or the full vesting of an Award, then such adjustments shall be made, or other
action shall be taken, by the Committee and shall be effective for all purposes
of the Plan and on each outstanding Option or Award that involves the
particular type of stock for which a change was effected. Notwithstanding the
foregoing provisions of this Section 4.4, pursuant to Section 8.3 below, a
Participant holding Stock received as a Restricted Stock Award shall have the
right to receive all amounts, including cash and property of any kind,
distributed with respect to the Stock upon the Participant's becoming a holder
of record of the Stock.
4.5 General Adjustment Rules. No adjustment or substitution provided
for in this Article IV shall require the Company to sell a fractional share of
Stock under any Option, or otherwise issue a fractional share of Stock, and the
total substitution or adjustment with respect to each Option and other Award
shall be limited by deleting any fractional share. In the case of any such
substitution or adjustment, the total Option Price for the shares of Stock then
subject to an Option shall remain unchanged but the Option Price per share
under each such Option shall be
<PAGE> 9
equitably adjusted by the Committee to reflect the greater or lesser number of
shares of Stock or other securities into which the Stock subject to the Option
may have been changed, and appropriate adjustments shall be made to other
Awards to reflect any such substitution or adjustment.
4.6 Determination by the Committee, Etc. Adjustments under this
Article IV shall be made by the Committee, whose determinations with regard
thereto shall be final and binding upon all parties thereto.
ARTICLE V
CORPORATE REORGANIZATION
5.1 Reorganization. Upon the occurrence of any of the following
events, if the notice required by Section 5.2 shall have first been given, the
Plan and all Options then outstanding hereunder shall automatically terminate
and be of no further force and effect whatsoever, and other Awards then
outstanding shall be treated as described in Sections 5.2 and 5.3, without the
necessity for any additional notice or other action by the Board or the
Company: (a) the merger or consolidation of the Company with or into another
corporation or other reorganization (other than a reorganization under the
United States Bankruptcy Code) of the Company (other than a consolidation,
merger, or reorganization in which the Company is the continuing corporation
and which does not result in any reclassification or change of outstanding
shares of Stock); or (b) the sale or conveyance of the property of the Company
as an entirety or substantially as an entirety (other than a sale or conveyance
in which the Company continues as holding company of an entity or entities that
conduct the business or businesses formerly conducted by the Company); or (c)
the dissolution or liquidation of the Company.
5.2 Required Notice. At least 30 days' prior written notice of any
event described in Section 5.1 shall be given by the Company to each Option
Holder and Participant unless (a) in the case of the events described in
clauses (a) or (b) of Section 5.1, the Company, or the successor or purchaser,
as the case may be, shall make adequate provision for the assumption of the
outstanding Options or the substitution of new options for the outstanding
Options on terms comparable to the outstanding Options except that the Option
Holder shall have the right thereafter to purchase the kind and amount of
securities or property or cash receivable upon such merger, consolidation,
other reorganization, sale or conveyance by a holder of the number of Shares
that would have been receivable upon exercise of the Option immediately prior
to such merger, consolidation, sale or conveyance (assuming such holder of
Stock failed to exercise any rights of election and received per share the kind
and amount received per share by a majority of the non-electing shares), or (b)
the Company, or the successor or purchaser, as the case may be, shall make
adequate provision for the adjustment of outstanding Awards (other than
Options) so that such Awards shall entitle the Participant to receive the kind
and amount of securities or property or cash receivable upon such merger,
consolidation, other reorganization, sale or conveyance by a holder of the
number of Shares that would have been receivable with respect to such Award
immediately prior to such merger, consolidation, other reorganization, sale or
<PAGE> 10
conveyance (assuming such holder of Stock failed to exercise any rights of
election and received per share the kind and amount received per share by a
majority of the non-electing shares). The provisions of this Article V shall
similarly apply to successive mergers, consolidations, reorganizations, sales
or conveyances. Such notice shall be deemed to have been given when delivered
personally to a Participant or when mailed to a Participant by registered or
certified mail, postage prepaid, at such Participant's address last known to
the Company.
5.3 Acceleration of Exercisability. Participants notified in
accordance with Section 5.2 may exercise their Options at any time before the
occurrence of the event requiring the giving of notice (but subject to
occurrence of such event), regardless of whether all conditions of exercise
relating to length of service, attainment of financial performance goals or
otherwise have been satisfied. Upon the giving of notice in accordance with
Section 5.2, all restrictions with respect to Restricted Stock and other Awards
shall lapse immediately. Any Options that are not assumed or substituted under
clauses (a) or (b) of Section 5.2 that have not been exercised prior to the
event described in Section 5.1 shall automatically terminate upon the
occurrence of such event.
5.4 Limitation on Payments. If the provisions of this Article V would
result in the receipt by any Participant of a payment within the meaning of
Section 280G of the Code and the regulations promulgated thereunder and if the
receipt of such payment by any Participant would, in the opinion of independent
tax counsel of recognized standing selected by the Company, result in the
payment by such Participant of any excise tax provided for in Sections 280G and
4999 of the Code, then the amount of such payment shall be reduced to the
extent required, in the opinion of independent tax counsel, to prevent the
imposition of such excise tax; provided, however, that the Committee, in its
sole discretion, may authorize the payment of all or any portion of the amount
of such reduction to the Participant.
<PAGE> 11
ARTICLE VI
PARTICIPATION
Participants in the Plan shall be those Non-Employee Directors,
Eligible Employees and Eligible Consultants who, in the judgment of the
Committee, are performing, or during the term of their incentive arrangement
will perform, vital services in the management, operation and development of
the Company or an Affiliated Corporation, and significantly contribute, or are
expected to significantly contribute, to the achievement of long-term corporate
economic objectives. Participants may be granted from time to time one or more
Awards; provided, however, that the grant of each such Award shall be
separately approved by the Committee or the Board, whichever is appropriate,
and receipt of one such Award shall not result in automatic receipt of any
other Award. All Awards granted to Non-Employee Directors must first be
approved by the Board and Awards granted to Eligible Employees and Eligible
Consultants shall be approved by the Committee. Upon determination by the
Committee or the Board, as the case may be, that an Award is to be granted to a
Participant, written notice shall be given to such person, specifying the
terms, conditions, rights and duties related thereto. Each Participant shall,
if required by the Committee, enter into an agreement with the Company, in such
form as the Committee shall determine and which is consistent with the
provisions of the Plan, specifying such terms, conditions, rights and duties.
Awards shall be deemed to be granted as of the date specified in the grant
resolution of the Committee or the Board, which date shall be the date of any
related agreement with the Participant. In the event of any inconsistency
between the provisions of the Plan and any such agreement entered into
hereunder, the provisions of the Plan shall govern.
ARTICLE VII
OPTIONS
7.1 Grant of Options. Coincident with or following designation for
participation in the Plan, a Participant may be granted one or more Options.
The Committee in its sole discretion shall designate whether an Option is an
Incentive Option or a Non-Qualified Option; provided, however that only
Eligible Employees may receive Incentive Options, and further provided that the
Board must approve any grant of Options to Non-Employee Directors. The
Committee may grant both an Incentive Option and a Non-Qualified Option to an
Eligible Employee at the same time or at different times. Incentive Options and
Non-Qualified Options, whether granted at the same time or at different times,
shall be deemed to have been awarded in separate grants and shall be clearly
identified, and in no event shall the exercise of one Option affect the right
to exercise any other Option or affect the number of shares for which any other
Option may be exercised, except as provided in subsection 7.2(j). An Option
shall be considered as having been granted on the date specified in the grant
resolution.
7.2 Stock Option Certificates. Each Option granted under the Plan
shall be evidenced by a written stock option certificate (an "Option
Certificate"). An Option Certificate
<PAGE> 12
shall be issued by the Company in the name of the Participant to whom the
Option is granted (the "Option Holder") and in such form as may be approved by
the Committee. The Option Certificate shall incorporate and conform to the
conditions set forth in this Section 7.2 as well as such other terms and
conditions that are not inconsistent as the Committee or the Board may consider
appropriate in each case.
(a) Number of Shares. Each Option Certificate shall state
that it covers a specified number of shares of Stock, as determined by the
Committee or the Board.
(b) Price. The price at which each share of Stock covered by
an Option may be purchased shall be determined in each case by the Committee or
the Board and set forth in the Option Certificate, but in no event shall the
price of an Incentive Option be less than 100 percent of the Fair Market Value
of the Stock on the date the Option is granted.
(c) Duration of Options; Restrictions on Exercise. Each
Option Certificate shall state the period of time, determined by the Committee
or the Board, within which the Option may be exercised by the Option Holder
(the "Option Period"). The Option Period must end, in all cases, not more than
ten years from the date the Option is granted. The Option Certificate shall
also set forth any installment or other restrictions on Option exercise during
such period, if any, as may be determined by the Committee or the Board;
however, no Option may be exercised for at least six months after the date of
grant. Each Option shall become exercisable (vest) over such period of time, if
any, or upon such events, as determined by the Committee or the Board.
(d) Termination of Services, Death, Disability, Etc. The
Option Certificate may specify the period, if any, after which an Option may be
exercised following termination of the Option Holder's services. The effect of
this subsection 7.2(d) shall be limited to determining the consequences of a
termination and nothing in this subsection 7.2(d) shall restrict or otherwise
interfere with the Company's discretion with respect to the termination of any
individual's services. If the Option Certificate does not otherwise specify,
the following shall apply:
(i) If the Option Holder's services terminate for
any reason other than death or Disability within six months after the
date the Option is granted or if the Option Holder's services are
terminated within the Option Period for "cause", as determined by the
Company, the Option shall thereafter be void for all purposes. As used
in this subsection 7.2(d), "cause" shall mean a gross violation, as
determined by the Company, of the Company's established policies and
procedures.
(ii) If the Option Holder becomes Disabled, the
Option may be exercised by the Option Holder, or in the case of death
by the persons specified in subsection (iii) of this subsection
7.2(d), within one year following his or her Disability (provided that
such exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only as to
the shares as to which the Option had become exercisable on or before
the date of the Option Holder's termination of services because of
Disability.
<PAGE> 13
(iii) If the Option Holder dies during the Option
Period while still providing services to the Company or within the one
year period referred to in (ii) above or the three-month period
referred to in (iv) below, the Option may be exercised by those
entitled to do so under the Option Holder's will or by the laws of
descent and distribution within one year following the Option Holder's
death, (provided that such exercise must occur within the Option
Period), but not thereafter. In any such case, the Option may be
exercised only as to the shares as to which the Option had become
exercisable on or before the date of the Option Holder's death.
(iv) If the Option Holder's services to the Company
(or an Affiliated Corporation) are terminated within the Option Period
for any reason other than cause, Disability or the Option Holder's
death, and such termination occurs more than six months after the
Option is granted, the Option may be exercised by the Option Holder
within three months following the date of such termination (provided
that such exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only as to
the shares as to which the Option had become exercisable on or before
the date of termination of services.
(e) Transferability. Each Option shall not be transferable by
the Option Holder except by will or pursuant to the laws of descent and
distribution. Each Option is exercisable during the Option Holder's lifetime
only by him or her, or in the event of disability or incapacity, by his or her
guardian or legal representative.
(f) Consideration for Grant of Option. Each Option Holder
agrees to remain in the employment of the Company or to continue to provide
services to the Company, at the pleasure of the Company, for a continuous
period of at least one year after the date the Option is granted, at the salary
or compensation rate in effect on the date of such agreement or at such changed
rate as may be fixed, from time to time, by the Company. Nothing in this
paragraph shall limit or impair the Company's right to terminate the employment
of any employee or to terminate the services of any Participant.
<PAGE> 14
(g) Exercise, Payments, Etc.
(i) Manner of Exercise. The method for exercising
each Option granted hereunder shall be by delivery to the Company of
written notice specifying the number of Shares with respect to which
such Option is exercised. The purchase of such Shares shall take place
at the principal offices of the Company within thirty days following
delivery of such notice, at which time the Option Price of the Shares
shall be paid in full by any of the methods set forth below or a
combination thereof. Except as set forth in the next sentence, the
Option shall be exercised when the Option Price for the number of
shares as to which the Option is exercised is paid to the Company in
full. If the Option Price is paid by means of a broker's loan
transaction described in subsection 7.2(g)(ii)(D), in whole or in
part, the closing of the purchase of the Stock under the Option shall
take place (and the Option shall be treated as exercised) on the date
on which, and only if, the sale of Stock upon which the broker's loan
was based has been closed and settled, unless the Option Holder makes
an irrevocable written election, at the time of exercise of the
Option, to have the exercise treated as fully effective for all
purposes upon receipt of the Option Price by the Company regardless of
whether or not the sale of the Stock by the broker is closed and
settled. A properly executed certificate or certificates representing
the Shares shall be delivered to or at the direction of the Option
Holder upon payment therefor. If Options on less than all shares
evidenced by an Option Certificate are exercised, the Company shall
deliver a new Option Certificate evidencing the Option on the
remaining shares upon delivery of the Option Certificate for the
Option being exercised.
(ii) The exercise price shall be paid by any of the
following methods or any combination of the following methods at the
election of the Option Holder, or by any other method approved by the
Committee upon the request of the Option Holder:
(A) in cash;
(B) by certified, cashier's check or other
check acceptable to the Company, payable to the order of the Company;
(C) by delivery to the Company of
certificates representing the number of shares then owned by the
Option Holder, the Fair Market Value of which equals the purchase
price of the Stock purchased pursuant to the Option, properly endorsed
for transfer to the Company; provided however, that no Option may be
exercised by delivery to the Company of certificates representing
Stock, unless such Stock has been held by the Option Holder for more
than six months; for purposes of this Plan, the Fair Market Value of
any shares of Stock delivered in payment of the purchase price upon
exercise of the Option shall be the Fair Market Value as of the
exercise date; the exercise date shall be the day of delivery of the
certificates for the Stock used as payment of the Option Price; or
<PAGE> 15
(D) by delivery to the Company of a
properly executed notice of exercise together with irrevocable
instructions to a broker to deliver to the Company promptly the amount
of the proceeds of the sale of all or a portion of the Stock or of a
loan from the broker to the Option Holder required to pay the Option
Price.
(h) Date of Grant. An Option shall be considered as having
been granted on the date specified in the grant resolution of the Committee or
the Board.
(i) Withholding.
(i) Non-Qualified Options. Upon exercise of an
Option, the Option Holder shall make appropriate arrangements with the
Company to provide for the amount of additional withholding, if any,
required by Sections 3102 and 3402 of the Code and applicable state
income tax laws, including payment of such taxes through delivery of
shares of Stock or by withholding Stock to be issued under the Option,
as provided in Article XVI.
(ii) Incentive Options. If an Option Holder makes a
disposition (as defined in Section 424(c) of the Code) of any Stock
acquired pursuant to the exercise of an Incentive Option prior to the
expiration of two years from the date on which the Incentive Option
was granted or prior to the expiration of one year from the date on
which the Option was exercised, the Option Holder shall send written
notice to the Company at its principal office in Englewood, Colorado
(Attention: Chief Financial Officer) of the date of such disposition,
the number of shares disposed of, the amount of proceeds received from
such disposition and any other information relating to such
disposition as the Company may reasonably request. The Option Holder
shall, in the event of such a disposition, make appropriate
arrangements with the Company to provide for the amount of additional
withholding, if any, required by Sections 3102 and 3402 of the Code
and applicable state income tax laws.
7.3 Restrictions on Incentive Options.
(a) Initial Exercise. The aggregate Fair Market Value of the
Shares with respect to which Incentive Options are exercisable for the first
time by an Option Holder in any calendar year, under the Plan or otherwise,
shall not exceed $100,000. For this purpose, the Fair Market Value of the
Shares shall be determined as of the date of grant of the Option.
(b) Ten Percent Stockholders. Incentive Options granted to an
Option Holder who is the holder of record of 10% or more of the outstanding
Stock of the Company shall have an Option Price equal to 110% of the Fair
Market Value of the Shares on the date of grant of the Option and the Option
Period for any such Option shall not exceed five years.
7.4 Stockholder Privileges. No Option Holder shall have any rights as
a stockholder with respect to any shares of Stock covered by an Option until
the Option Holder becomes the holder of record of such Stock, and no
adjustments shall be made for dividends or other
<PAGE> 16
distributions or other rights as to which there is a record date preceding the
date such Option Holder becomes the holder of record of such Stock, except as
provided in Article IV.
ARTICLE VIII
RESTRICTED STOCK AWARDS
8.1 Grant of Restricted Stock Awards. Coincident with or following
designation for participation in the Plan, the Committee may grant a
Participant one or more Restricted Stock Awards consisting of Shares of Stock.
The number of Shares granted as a Restricted Stock Award shall be determined by
the Committee.
8.2 Restrictions. A Participant's right to retain a Restricted Stock
Award granted to him under Section 8.1 shall be subject to such restrictions,
including but not limited to his continuous employment by or provision of
services to the Company or an Affiliated Corporation for a restriction period
specified by the Committee or the attainment of specified performance goals and
objectives, as may be established by the Committee with respect to such Award.
The Committee may in its sole discretion require different periods of service
or different performance goals and objectives with respect to different
Participants, to different Restricted Stock Awards or to separate, designated
portions of the Stock shares constituting a Restricted Stock Award. In the
event of the death or Disability of a Participant, or the retirement of a
Participant in accordance with the Company's established retirement policy, all
employment or service periods and other restrictions applicable to Restricted
Stock Awards then held by him shall lapse with respect to a pro rata part of
each such Award based on the ratio between the number of full months of service
completed at the time of termination of services from the grant of each Award
to the total number of months of service required for such Award to be fully
nonforfeitable, and such portion of each such Award shall become fully
nonforfeitable. The remaining portion of each such Award shall be forfeited and
shall be immediately returned to the Company. In the event of a Participant's
termination of services for any other reason, any Restricted Stock Awards as to
which the service period or other restrictions have not been satisfied (or
waived or accelerated as provided herein) shall be forfeited, and all shares of
Stock related thereto shall be immediately returned to the Company.
8.3 Privileges of a Stockholder, Transferability. A Participant shall
have all voting, dividend, liquidation and other rights with respect to Stock
in accordance with its terms received by him as a Restricted Stock Award under
this Article VIII upon his becoming the holder of record of such Stock;
provided, however, that the Participant's right to sell, encumber, or otherwise
transfer such Stock shall be subject to the limitations of Section 11.2.
8.4 Enforcement of Restrictions. The Committee shall cause a legend
to be placed on the Stock certificates issued pursuant to each Restricted Stock
Award referring to the restrictions provided by Sections 8.2 and 8.3 and, in
addition, may in its sole discretion require one or more of the following
methods of enforcing the restrictions referred to in Sections 8.2 and 8.3:
<PAGE> 17
(a) Requiring the Participant to keep the Stock certificates,
duly endorsed, in the custody of the Company while the restrictions remain in
effect; or
(b) Requiring that the Stock certificates, duly endorsed, be
held in the custody of a third party while the restrictions remain in effect.
ARTICLE IX
OTHER COMMON STOCK GRANTS
From time to time during the duration of this Plan, the Board may, in
its sole discretion, adopt one or more incentive compensation arrangements for
Participants pursuant to which the Participants may acquire shares of Stock,
whether by purchase, outright grant, or otherwise. Any such arrangements shall
be subject to the general provisions of this Plan and all shares of Stock
issued pursuant to such arrangements shall be issued under this Plan.
ARTICLE X
CHANGE IN CONTROL
10.1 In General. The Committee may elect to provide for modification
of the terms of any or all Options granted hereunder to take effect upon a
change of control of the Company (as defined by the Committee from time to
time). Any such provisions shall be set forth in the agreements evidencing the
particular provisions, terms, conditions, rights and duties of the Company and
the applicable Participants. Such provisions need not be included in all such
agreements and, where included, need not identical.
ARTICLE XI
RIGHTS OF PARTICIPANTS
11.1 Services. Nothing contained in the Plan or in any Award granted
under the Plan shall confer upon any Participant any right with respect to the
continuation of his services by the Company or any Affiliated Corporation, or
interfere in any way with the right of the Company or any Affiliated
Corporation, subject to the terms of any separate employment agreement or
consulting agreement to the contrary, at any time to terminate such services or
to increase or decrease the compensation of the Participant from the rate in
existence at the time of the grant of an Award. Whether an authorized leave of
absence, or absence in military or government service, shall constitute a
termination of service shall be determined by the Committee at the time.
11.2 Nontransferability. No right or interest of any Participant in
an Option, a Restricted Stock Award (prior to the completion of the restriction
period applicable thereto), or
<PAGE> 18
other Award granted pursuant to the Plan, shall be assignable or transferable
during the lifetime of the Participant, either voluntarily or involuntarily, or
subjected to any lien, directly or indirectly, by operation of law, or
otherwise, including execution, levy, garnishment, attachment, pledge or
bankruptcy. In the event of a Participant's death, a Participant's rights and
interests in Options, Restricted Stock Awards, other Awards shall, to the
extent provided in Articles VII, VIII, and IX, be transferable by will or the
laws of descent and distribution, and payment of any amounts due under the Plan
shall be made to, and exercise of any Options may be made by, the Participant's
legal representatives, heirs or legatees. If in the opinion of the Committee, a
person entitled to payments or to exercise rights with respect to the Plan is
disabled from caring for his affairs because of mental condition, physical
condition or age, payment due such person may be made to, and such rights shall
be exercised by, such person's guardian, conservator or other legal personal
representative upon furnishing the Committee with evidence satisfactory to the
Committee of such status.
11.3 No Plan Funding. Obligations to Participants under the Plan will
not be funded, trusteed, insured or secured in any manner. The Participants
under the Plan shall have no security interest in any assets of the Company or
any Affiliated Corporation, and shall be only general creditors of the Company.
ARTICLE XII
GENERAL RESTRICTIONS
12.1 Investment Representations. The Company may require any person
to whom an Option, Restricted Stock Award, or other Award is granted, as a
condition of exercising such Option or receiving such Restricted Stock Award or
other Award, to give written assurances in substance and form satisfactory to
the Company and its counsel to the effect that such person is acquiring the
Stock for his own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with Federal and
applicable state securities laws.
12.2 Compliance with Securities Laws. Each Option, Restricted Stock
Award and Stock grant shall be subject to the requirement that, if at any time
counsel to the Company shall determine that the listing, registration or
qualification of the shares subject to such Option, Restricted Stock Award, or
Stock grant upon any securities exchange or under any state or federal law, or
the consent or approval of any governmental or regulatory body, is necessary as
a condition of, or in connection with, the issuance or purchase of shares
thereunder, such Option, Restricted Stock Award, or Stock grant may not be
accepted or exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained on
conditions acceptable to the Committee. Nothing herein shall be deemed to
require the Company to apply for or to obtain such listing, registration or
qualification.
12.3 Changes in Accounting Rules. Notwithstanding any other provision
of the Plan to the contrary, if, during the term of the Plan, any changes in
the financial or tax accounting rules applicable to Options, Restricted Stock
Awards, or other Awards shall occur which, in the
<PAGE> 19
sole judgment of the Committee, may have a material adverse effect on the
reported earnings, assets or liabilities of the Company, the Committee shall
have the right and power to modify as necessary, any then outstanding and
unexercised Options, outstanding Restricted Stock Awards, and other outstanding
Awards as to which the applicable service or other restrictions have not been
satisfied.
ARTICLE XIII
OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by a Participant
as a result of the exercise of an Option, the sale of shares received upon such
exercise, the vesting of any Restricted Stock Award, or the grant of Stock
shall not constitute "earnings" or "compensation" with respect to which any
other employee benefits of such employee are determined, including without
limitation benefits under any pension, profit sharing, life insurance or salary
continuation plan.
ARTICLE XIV
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time to time may amend
or modify the Plan provided, however, that no amendment or modification may
become effective without approval of the amendment or modification by the
stockholders if stockholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if the Company, on the
advice of counsel, determines that stockholder approval is otherwise necessary
or desirable.
No amendment, modification or termination of the Plan shall in any
manner adversely affect any Options, Restricted Stock Awards, Stock or other
Award theretofore granted under the Plan, without the consent of the
Participant holding such Options, Restricted Stock Awards, Stock or other
Awards.
ARTICLE XV
WITHHOLDING
15.1 Withholding Requirement. The Company's obligations to deliver
shares of Stock upon the exercise of any Option, the vesting of any Restricted
Stock Award, or the grant of Stock shall be subject to the Participant's
satisfaction of all applicable federal, state and local income and other tax
withholding requirements.
15.2 Withholding With Stock. At the time the Committee grants an
Option, Restricted Stock Award, or other Award, it may, in its sole discretion,
grant the Participant an election to
<PAGE> 20
pay all such amounts of tax withholding, or any part thereof, by electing to
transfer to the Company, or to have the Company withhold from shares otherwise
issuable to the Participant, shares of Stock having a value equal to the amount
required to be withheld or such lesser amount as may be elected by the
Participant. All elections shall be subject to the approval or disapproval of
the Committee. The value of shares of Stock to be withheld shall be based on
the Fair Market Value of the Stock on the date that the amount of tax to be
withheld is to be determined (the "Tax Date"). Any such elections by
Participants to have shares of Stock withheld for this purpose will be subject
to the following restrictions:
(a) All elections must be made prior to the Tax Date.
(b) All elections shall be irrevocable.
(c) If the Participant is an officer or director of the
Company within the meaning of Section 16 of the 1934 Act ("Section 16"), the
Participant must satisfy the requirements of such Section 16 and any applicable
Rules thereunder with respect to the use of Stock to satisfy such tax
withholding obligation.
ARTICLE XVI
REQUIREMENTS OF LAW
16.1 Requirements of Law. The issuance of Stock and the payment of
cash pursuant to the Plan shall be subject to all applicable laws, rules and
regulations.
16.2 Federal Securities Law Requirements. If a Participant is an
officer or director of the Company within the meaning of Section 16, Awards
granted hereunder shall be subject to all conditions required under Rule 16b-3,
or any successor rule promulgated under the 1934 Act, to qualify the Award for
any exception from the provisions of Section 16(b) of the 1934 Act available
under that Rule. Such conditions shall be set forth in the agreement with the
Participant which describes the Award or other document evidencing or
accompanying the Award.
16.3 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
<PAGE> 21
ARTICLE XVII
DURATION OF THE PLAN
Unless sooner terminated by the Board of Directors, the Plan shall
terminate on April 14, 2007 and no Option, Restricted Stock Award, or other
Award shall be granted after such termination. Options, Restricted Stock
Awards, other Awards outstanding at the time of the Plan termination may
continue to be exercised, or become free of restrictions, or paid, in
accordance with their terms.
Dated: , 1997
-----------------------
FORMUS COMMUNICATIONS, INC.,
a Delaware corporation
ATTEST:
By: By:
--------------------------------- -------------------------------
Secretary ............ President
<PAGE> 22
AMENDMENT
TO
FORMUS COMMUNICATIONS, INC.
EQUITY INCENTIVE PLAN
(as Effective April 15, 1997)
RECITALS:
Effective as of April 15, 1997, Formus Communications, Inc., a Delaware
corporation (the "Company"), established the Formus Communications, Inc. Equity
Incentive Plan (the "Plan"). Article XIV of the Plan permits the Company to
amend the Plan at any time in its discretion. In accordance with that right and
power, the Plan is hereby amended as set forth below, effective as of
___________________, 1997:
AMENDMENT:
1. Section 4.1 is hereby amended to provide in its entirety as follows:
"4.1 Number of Shares. The number of shares of Stock that are
authorized for issuance under the Plan in accordance with the
provisions of the Plan and subject to the restrictions or other
provisions as the Committee may from time to time deem necessary shall
not exceed 4,000,000. This authorization may be increased
from time to time by approval of the Board and by the stockholders of
the Company if, in the opinion of counsel for the Company, stockholder
approval is required. Shares of Stock that may be issued upon exercise
of Options, that are issued as Restricted Stock Awards and that are
issued as incentive compensation or other stock grants under the Plan
shall be applied to reduce the maximum number of shares of Stock
remaining available for use under the Plan. The Company shall at all
times during the term of the Plan and while any Options are outstanding
retain as authorized and unissued Stock at least the number of shares
from time to time required under the provisions of the Plan, or
otherwise assure itself of its ability to perform its obligations
hereunder."
IN WITNESS WHEREOF, the foregoing amendment has been adopted this _____
day of ____________________, 1997, to be effective as set forth above.
FORMUS COMMUNICATIONS, INC.
By:
-----------------------
ATTEST:
- --------------------------
<PAGE> 23
AMENDMENT
TO
FORMUS COMMUNICATIONS, INC.
EQUITY INCENTIVE PLAN
(as Effective April 15, 1997)
RECITALS:
Effective as of April 15, 1997, Formus Communications, Inc., a Delaware
corporation (the "Company"), established the Formus Communications, Inc. Equity
Incentive Plan (the "Plan"). Article XIV of the Plan permits the Company to
amend the Plan at any time in its discretion. In accordance with that right and
power, the Plan is hereby amended as set forth below, effective as of August
___, 1998:
AMENDMENT:
1. Section 4.1 is hereby amended to provide in its entirety as follows:
"4.1 Number of Shares. The number of shares of Stock that are
authorized for issuance under the Plan in accordance with the
provisions of the Plan and subject to the restrictions or other
provisions as the Committee may from time to time deem necessary shall
not exceed five million (5,000,000). This authorization may be
increased from time to time by approval of the Board and by the
stockholders of the Company if, in the opinion of counsel for the
Company, stockholder approval is required. Shares of Stock that may be
issued upon exercise of Options, that are issued as Restricted Stock
Awards and that are issued as incentive compensation or other stock
grants under the Plan shall be applied to reduce the maximum number of
shares of Stock remaining available for use under the Plan. The Company
shall at all times during the term of the Plan and while any Options
are outstanding retain as authorized and unissued Stock at least the
number of shares from time to time required under the provisions of the
Plan, or otherwise assure itself of its ability to perform its
obligations hereunder."
IN WITNESS WHEREOF, the foregoing amendment has been adopted this _____
day of September, 1998, to be effective as set forth above.
FORMUS COMMUNICATIONS, INC.
By:
------------------------
James R. Downs
ATTEST: Chief Financial Officer
- --------------------------
<PAGE> 1
EXHIBIT 10.6
FORMUS COMMUNICATIONS, INC.
EQUITY INCENTIVE PLAN
FORM OF STOCK OPTION AGREEMENT
THIS AGREEMENT made as of this ____ day of __________, _____, between
FORMUS COMMUNICATIONS, INC., a Delaware corporation (together with its
Affiliated Corporations, except where the context otherwise requires, the
"Company"), and ____________ (the "Option Holder").
1. GRANT OF OPTION. Pursuant to the Formus Communications, Inc. Equity
Incentive Plan (the "Plan") and subject to the terms and conditions of this
Agreement, the Company hereby grants to the Option Holder an option (the
"Option") to purchase ________ shares of the $0.001 par value common stock of
the Company (the "Stock") at an exercise price per share of $____, which price
shall be the "Option Price." The grant is made and the Option is effective as of
____________, (the "Effective Date"). The Option is intended to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
2. REQUIREMENTS FOR EXERCISE; VESTING. The Option shall become
exercisable in __% increments, with __% becoming exercisable on _______________,
an additional __% becoming exercisable on _____________, an additional __%
becoming exercisable on ________________ and the entire Option becoming
exercisable on ______________, provided the Option Holder is in the employ of
the Company on such dates.
<TABLE>
<CAPTION>
Percentage of Option That Shall Shares
Employment Vesting Date Become Exercisable on Each Date Exercisable
----------------------- ------------------------------- -----------
<S> <C> <C>
------------------- % ----------
------------------- % ----------
------------------- % ----------
------------------- % ----------
</TABLE>
If the Option Holder's service terminates other than for cause (as described in
subsection 6(a)) after _________, an additional ____ of the total number of
shares subject to the Option shall become exercisable on the date the Option
Holder's employment ends for each additional month of continuous service
completed since the most recent_________.
If at any time the number of shares of Stock that are covered by the
vested portion of the Option includes a fractional share, the number of shares
of Stock as to which the Option shall be actually exercisable shall be rounded
down to the next whole share of Stock.
Except as set forth in Section 5 hereof, the Option shall not be
exercisable as to any shares of Stock as to which the vesting requirement shall
not have been satisfied, regardless of the circumstances under which the Option
Holder's employment by the Company shall be terminated. The number of shares of
Stock as to which the Option may be exercised shall be cumulative, so that once
the Option shall become exercisable as to any shares of Stock it shall
<PAGE> 2
continue to be exercisable as to such shares until expiration or termination of
the Option as provided in Section 6 hereof.
3. METHOD FOR EXERCISING THE OPTION. The Option may be exercised only
by delivery of written notice of exercise, together with payment of the Option
Price as provided below, in person or through certified or registered mail, fax
or overnight delivery to the Company at the following address: Formus
Communications, Inc., 720 South Colorado Boulevard, Suite 600 North, Denver,
Colorado 80246, or such other address as shall be furnished in writing to the
Option Holder by the Company. Such written notice shall specify that the Option
is being exercised and the number of shares of Stock with respect to which the
Option is exercised, and shall be accompanied by payment of the Option Price.
The purchase of such Stock shall take place at the address of the
Company set forth above upon delivery of the notice of exercise, at which time
the Option Price for the Stock shall be paid in full by certified or cashier's
check payable to the Company's order, or by wire transfer to such account as may
be specified by the Company for this purpose, or by delivery to the Company of
certificates representing the number of shares of Stock then owned by the Option
Holder, the Fair Market Value of which equals the Option Price of the Stock to
be purchased pursuant to the Option, properly endorsed for transfer to the
Company; provided, however, that no Option may be exercised by delivery to the
Company of certificates representing Stock, unless such Stock has been held by
the Option Holder for more than six months. For purposes of this Option, the
Fair Market Value of any shares of Stock delivered in payment of the Option
Price upon exercise of the Option shall be the Fair Market Value as of the
exercise date; the exercise date shall be the day of delivery of the
certificates for the Stock used as payment of the Option Price.
Upon such notice to the Company and payment of the Option Price, the
exercise of the Option shall be deemed to be effective, and a properly executed
certificate or certificates representing the Stock so purchased shall be issued
by the Company and delivered to the Option Holder.
4. ADJUSTMENT OF THE OPTION.
(a) ADJUSTMENT BY STOCK SPLIT, STOCK DIVIDEND, ETC. If at any
time the Company increases or decreases the number of its outstanding shares of
Stock, or changes in any way the rights and privileges of such shares, by means
of the payment of a stock dividend or the making of any other distribution on
such shares payable in Stock, or through a Stock split or subdivision of shares,
or a consolidation or combination of shares, or through a reclassification or
recapitalization involving the Stock, the numbers, rights and privileges of the
shares of Stock included in the Option shall be increased, decreased or changed
in like manner as if such shares had been issued and outstanding, fully paid and
non-assessable at the time of such occurrence.
2
<PAGE> 3
(b) OTHER DISTRIBUTIONS AND CHANGES IN THE STOCK. If the
Company shall at any time distribute with respect to the Stock assets or
securities of persons other than the Company (excluding cash or distributions
referred to in subsection (a)) or grant to the holders of its Stock rights to
subscribe pro rata for additional shares thereof or for any other securities of
the Company or there shall be any other change (except as described in
subsection (a)) in the number or kind of outstanding shares of Stock or of any
stock or other securities into which the Stock shall be changed or for which it
shall have been exchanged, and if the Committee shall in its discretion
determine that the event equitably requires an adjustment in the number or kind
of shares subject to an Option, an adjustment to the Option Price, or the taking
of any other action by the Committee, including without limitation, the setting
aside of any property for delivery to the Option Holder upon the exercise of the
Option, then such adjustment shall be made, or other actions taken, by the
Compensation Committee and shall be effective for all purposes of this
Agreement. In the case of a distribution of rights to subscribe pro rata to
additional shares of Stock, any adjustments or distributions to the Option
Holder shall only apply with respect to such portion of the Option that has been
exercised on or prior to the date of the expiration of such rights or warrants.
This Section 4 shall not be construed as an anti-dilution provision, and there
shall be no adjustment in the number of shares covered under the Option in the
event of the sale of additional shares of Stock to third parties for
consideration.
(c) APPORTIONMENT OF OPTION PRICE. Upon any occurrence
described in the preceding subsections (a) and (b), the aggregate Option Price
for the shares of Stock then subject to the Option shall remain unchanged and
shall be apportioned ratably over the increased or decreased number or changed
kinds of securities or other properties subject to the Option.
5. REORGANIZATION.
(a) REORGANIZATION. Upon the occurrence of any of the
following events, if the notice required by subsection 5(b) shall have first
been given, the Option shall automatically terminate and be of no further force
and effect whatsoever, without the necessity for any additional notice or other
action by the Board or the Company: (i) the merger or consolidation of the
Company with or into another corporation (other than a consolidation or merger
in which the Company is the continuing corporation and which does not result in
any reclassification or change of outstanding shares of Stock); or (ii) the sale
or conveyance of all or substantially all of the property and assets of the
Company (other than a sale or conveyance in which the Company continues as a
holding company of an entity or entities that conduct the business or businesses
formerly conducted by the Company); or (iii) the dissolution or liquidation of
the Company.
(b) REQUIRED NOTICE. At least 30 days' prior written notice of
any event described in subsection 5(a) shall be given by the Company to the
Option Holder, unless in the case of the events described in clauses (i) or (ii)
of subsection 5(a), the Company, or the successor or purchaser, as the case may
be, shall make adequate provision for the assumption of the Option or the
substitution of new options for the Option on terms comparable to the Option
except that the Option Holder shall have the right thereafter to purchase the
kind and amount of shares of stock or other securities or property or cash
receivable upon such merger, consolidation, sale or conveyance by a holder of
the number of shares of Stock that would have been receivable upon exercise of
the Option immediately prior to such merger, consolidation, sale or conveyance
(assuming such holder of Stock failed to exercise any rights of election and
received per share the
3
<PAGE> 4
kind and amount received per share by a majority of the non-electing shares).
The provisions of this Section 5 shall similarly apply to successive mergers,
consolidations, sales or conveyances. Such notice shall be deemed to have been
given when delivered personally to the Option Holder or when mailed to the
Option Holder by registered or certified mail, postage prepaid, at the Option
Holder's address last known to the Company.
(c) ACCELERATION OF VESTING. Subject to subsection 5(d), if
the Option Holder is notified, in accordance with subsection 5(b), of a
transaction with a third party, he may exercise his Option at any time before
the occurrence of the event requiring the giving of notice (but subject to
occurrence of such event), regardless of whether all conditions of exercise
relating to length of service have been satisfied.
(d) CHANGE IN CONTROL. If a Change in Control (as defined
below) occurs, the Option shall become exercisable in full, regardless of
whether all conditions of exercise relating to continuous service have been
satisfied and notwithstanding any provision to the contrary in this Section 5.
A"Change in Control" is deemed to have occurred if (i) the holders of the
Company's outstanding Stock as of April 15, 1997 cease to beneficially own,
directly or indirectly, at least 51% of the Common Stock, par value $.001 per
share at any time, and (ii) individuals who constitute the directors of the
Company at the beginning of any 24-month period cease to constitute at least
two-thirds of all directors at any time during such period, excluding any new
directors, the nomination of whom was approved by a vote of at least a majority
of the members of the Company's Board of Directors in office immediately prior
to such period.
6. EXPIRATION AND TERMINATION OF THE OPTION. The Option shall expire
ten (10) years from the Effective Date (the period from the Effective Date to
the expiration date is the "Option Period") or prior to such time as follows:
(a) If the employment of the Option Holder by the Company is
terminated for "cause" within the Option Period, the Option shall terminate in
its entirety immediately upon the termination of employment of the Option
Holder. For purposes of this Agreement, cause shall be defined as either of the
following: (i) gross negligence by the Option Holder in the performance of his
duties as determined by the Company; or (ii) the Option Holder is engaging in
activities that materially adversely affect the Company or that involve illegal
or materially unethical behavior counter to the best interests of the Company
(for example, conveying trade secrets to a competitor).
(b) If the employment of the Option Holder by the Company is
terminated voluntarily by the Option Holder (without cause for such termination
existing) within the Option Period, the Option may be exercised by the Option
Holder within three months following the date of such termination (provided that
such exercise must occur within the Option Period), but not thereafter. In any
such case, the Option may be exercised only as to the shares of Stock as to
which the Option had become exercisable on or before the date of the Option
Holder's termination of employment.
(c) If the employment of the Option Holder by the Company is
terminated by the Company within the Option Period for any reason other than
cause, Disability (as defined in
4
<PAGE> 5
Section 22(e)(3) of the Internal Revenue Code) or death, the Option may be
exercised by the Option Holder within three months following the date of such
termination (provided that such exercise must occur within the Option Period),
but not thereafter. In any such case, the Option may be exercised only as to the
shares of Stock as to which the Option had become exercisable on or before the
date of the Option Holder's termination of employment.
(d) If the Option Holder dies within the Option Period, while
employed by the Company, the Option may be exercised by those entitled to do so
under his will or by the laws of descent and distribution within one year
following his death (provided that such exercise must occur within the Option
Period), but not thereafter. In any such case, the Option may be exercised only
as to the shares of Stock as to which the Option had become exercisable on or
before the date of the Option Holder's death.
(e) If the Option Holder becomes disabled (within the meaning
of Section 22(e)(3) of the Internal Revenue Code) within the Option Period and
while employed by the Company, the Option may be exercised within one (1) year
following his termination of employment (provided that such exercise must occur
within the Option Period), but not thereafter. In any such case the Option may
be exercised only as to the shares of Stock as to which the Option had become
exercisable on or before the date of the Option Holder's Disability.
7. TRANSFERABILITY. The Option may not be transferred except by will or
pursuant to the laws of descent and distribution, and it shall be exercisable
during the Option Holder's life only by him, or in the event of Disability or
incapacity, by his guardian or legal representative, and after his death, only
by those entitled to do so under his will or the applicable laws of descent and
distribution. Except as specifically provided herein, upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of the Option or any
right or privilege granted hereunder, or upon the levy of any attachment or
similar process upon the rights and privileges herein conferred, the Option and
the rights and privileges hereunder shall become immediately null and void.
8. AGREEMENT TO CONTINUE IN EMPLOYMENT. In consideration of the
granting of the Option, the Option Holder agrees to remain in the employ of the
Company at the pleasure of the Company for a continuous period of at least one
year from the Effective Date at the salary rate in effect at the date of this
Agreement or at such changed rate as may be fixed from time to time by the
Company. The Option Holder hereby agrees to use his best efforts to provide
services to the Company in a workmanlike manner and to promote the Company's
interests. Nothing in this Agreement shall offset or impair the Company's right
to terminate the employment of the Option Holder.
9. AGREEMENT TO RETAIN STOCK. In consideration of the granting of the
Option, the Option Holder agrees to retain, as the sole legal owner, at least
10% of the shares of Stock acquired hereunder so long as the Option Holder is
employed by the Company or by an Affiliated Corporation; provided, however, that
the Compensation Committee, in its sole discretion, may authorize the Option
Holder in a writing signed by a representative of the Compensation Committee to
transfer all or any portion of such Stock that is otherwise required to be
retained by the Option Holder to a trust for the benefit of the Option Holder or
to such other persons or entities as may be specifically approved by the
Compensation Committee. Upon request by the
5
<PAGE> 6
Compensation Committee, the Option Holder shall submit evidence satisfactory to
the Compensation Committee at least once each calendar year demonstrating
compliance with the requirements of this Section. In its sole discretion, the
Compensation Committee may require the Option Holder to deliver to the Company
and to leave in the custody of the Company stock certificates representing the
number of shares of Stock required to be retained by the Option Holder in
accordance with the requirements of this Section 9. In the event that the Option
Holder should violate the requirements of this Section, the Option shall
immediately terminate and become null and void.
10. NOTICE OF DISPOSITION; WITHHOLDING. The Option Holder shall notify
the Company if Stock acquired pursuant to this Option is "disposed of" (within
the meaning of Section 422 of the Code) within two (2) years after the date of
the grant of this Option, or within one year after the transfer of such Stock to
the Option Holder. If the Option Holder does "dispose of" any such Stock within
such period, the Option Holder shall make appropriate arrangements with the
Company to provide for the amount of any withholding required by Sections 3401
and 3402 of the Internal Revenue Code and applicable state income tax laws.
11. LIMITATION OF RIGHTS. The Option Holder or his successor shall have
no rights as a stockholder with respect to the shares of Stock covered by this
Option until the Option Holder or his successors become the holder of record of
such shares.
12. STOCK RESERVE. The Company shall at all times during the term of
this Agreement reserve and keep available such number of shares of Stock as will
be sufficient to satisfy the requirements of this Agreement, and the Company
shall pay all original issue taxes (if any) on the exercise of the Option, and
all other fees and expenses necessarily incurred by the Company in connection
therewith.
13. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted to be given
under this Agreement shall be in writing and shall be given by first class
registered or certified mail, postage prepaid, or by personal delivery to the
appropriate party, addressed:
(i) If to the Company, to 720 South Colorado
Boulevard, Suite 600 North, Denver Colorado 80246, or at such other
address as may have been furnished to the Option Holder in writing by
the Company; or
(ii) If to the Option Holder, to
_____________________________, or at such other address as may have
been furnished to the Company by the Option Holder.
Any such notice shall be deemed to have been given as of the second day after
deposit in the United States mails, postage prepaid, properly addressed as set
forth above, in the case of mailed notice, or as of the date delivered in the
case of personal delivery.
(b) AMENDMENT. Except as provided herein, this Agreement may
not be amended or otherwise modified unless evidenced in writing and signed by
the Company and the Option Holder.
6
<PAGE> 7
(c) DEFINED TERMS. Capitalized terms shall have the meaning
set forth in the Plan or herein, as the case may be.
(d) COMPLIANCE WITH SECURITIES LAWS. This Agreement shall be
subject to the requirement that if at any time counsel to the Company shall
determine that the listing, registration or qualification of the shares of Stock
subject to the Option upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental or regulatory body, is
necessary as a condition of, or in connection with, the issuance or purchase of
such shares thereunder, the Option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained on conditions acceptable to the Compensation
Committee. Nothing herein shall be deemed to require the Company to apply for or
obtain such listing, registration or qualification.
(e) CONSTRUCTION; SEVERABILITY. It is intended that this
Option shall qualify as an incentive stock option under Section 422 of the Code,
and all the terms and provisions of the Option shall be construed and
interpreted in a manner consistent with such provisions. The section headings
contained herein are for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, and each
other provision of this Agreement shall be severable and enforceable to the
extent permitted by law.
(f) WAIVER. Any provision contained in this Agreement may be
waived, either generally or in any particular instance, by the Compensation
Committee appointed under the Plan, but only to the extent permitted under the
Plan.
(g) BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and the Option Holder and their respective
heirs, executors, administrators, legal representatives, successors and assigns.
(h) RIGHTS TO EMPLOYMENT. Nothing contained in this Agreement
shall be construed as giving the Option Holder any right to be retained in the
employ of the Company and this Agreement is limited solely to governing the
rights and obligations of the Option Holder with respect to the Stock and the
Option.
(i) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
FORMUS COMMUNICATIONS, INC.
By
----------------------------------------
Chief Financial Officer
OPTION HOLDER
------------------------------------------
8
<PAGE> 1
EXHIBIT 10.7
[FORMUS COMMUNICATIONS, INC. LETTERHEAD]
July 1, 1998
Mr. Osmo A. Hautanen
1304 Chatsworth Court E.
Colleyville, Texas 76034
Dear Mr. Hautanen:
1) Introduction. Formus Communications, Inc. (the "Company") has offered to
you and you have accepted the position of Chief Executive Officer of the
Company with full control and responsibility over all aspects of the
business and affairs of the Company, reporting directly to the board of
directors of the Company. This letter describes the terms of your
employment, which will begin July 6, 1998. You have been elected to the
board of directors of the Company.
2) Salary, Benefits. You will be compensated at a rate of $400,000 per annum
payable semi-monthly. We will review your performance and compensation
annually. Annual bonuses of up to $50,000 may be granted in the sole
discretion of the Board of Directors.
You will be reimbursed for reasonable business expenses and automobile
mileage incurred on behalf of the Company on submission of reimbursement
requests according to Company policy. You will be entitled to four weeks
paid vacation annually and sick leave in accordance with Company policy.
The Company offers a benefit package that includes medical, prescription,
life, AD&D and long term disability insurance at no cost to you. The
Company also offers spouse and dependent coverage for these benefits and
shares a significant portion of the insurance costs with the employee. A
voluntary dental plan is available for a nominal cost. In addition, through
the tax saver plan, you will be able to deduct your portion of the premiums
on a pre-tax basis. You will be entitled to participate in the Company's
401(k) Plan when it is instituted on the terms available to other executive
employees of the Company.
3) Options. You will receive a common stock option grant for 1,000,000 shares
on the terms and conditions of the attached Stock Option Agreement (the
<PAGE> 2
Mr. Osmo Hautanen
July 1, 1998
Page 2
"Option Agreement"). You will also become a party to the Company's standard
form of Employee Stockholder Agreement. The Compensation Committee of the
Board of Directors will consider the grant of additional options to
purchase common stock of the Company annually.
4) Severance. If your employment is terminated without cause (as defined in
paragraph 6(a) of the Option Agreement) you will be entitled to
continuation of the salary and benefits described in paragraph 2 above for
nine months (but all options shall terminate and be exercisable following
termination as provided in the Option Agreement). No severance will be
payable if your employment is terminated for cause (as such term is defined
in subsection 6(a) of the Stock Option Agreement between you and the
Company) or if you resign.
5) Relocation Allowance. The Company will pay to you on request a lump-sum in
an amount to be agreed, approximating the sales commission and closing
costs paid on the sale of your home in Dallas, the closing costs on the
purchase of a home in the Denver metropolitan area, your reasonable moving
expenses to Denver, the costs of your counsel in connection with the
negotiation of this agreement and the costs of temporary housing in Denver
for 90 days. The payment will be structured so as to minimize the tax
effect to you on receipt of those payments.
6) Certain Agreements. As a condition to your employment, and by signing below
and returning a copy of this letter to the Company, you hereby agree with
the Company to comply with the following obligations.
(a) Confidentiality.
(i) Any information or documentation concerning the Company or any of
its affiliates that is marked as confidential or is disclosed to
you as confidential or that is of such a nature that you are
aware that it should be treated as confidential by Company
employees and that develops or is provided during the term of
your employment with the Company (including without limitation,
data, agreements, business plans or proposals) is confidential
and proprietary to the Company (the "Confidential Information")
(ii) You will not disclose any Confidential Information to anyone
outside of Company or its affiliates or agents, except to the
extent properly necessary to further the business activities of
the Company; and
<PAGE> 3
Mr. Osmo Hautanen
July 1, 1998
Page 3
(iii) You will never use any Confidential Information for any personal
purpose or advantage, but only in the performance of your duties
to the Company from time to time. If the Company publicly
discloses any particular information or documentation that was
Confidential Information, then that particular information or
documentation shall cease to be Confidential Information within
the meaning of this Agreement. You also agree that following the
termination of your employment, you shall return promptly to the
Company all Confidential Information (regardless of form) and all
other property of the Company in your possession and you shall
continue to comply with the provisions of this paragraph
indefinitely.
(b) Competition. During the term of your employment with the Company and
for a period of 12 months thereafter, you will not individually, with
third parties or on behalf of third parties, investigate or develop
business opportunities with respect to, or enter into negotiations,
agreements, consulting contracts or partnerships with any company or
individual for the purpose of pursuing the specific business of
wireless broadband communication as operator, in any market in which
the Company is pursuing or has an interest in pursuing development of
wireless broadband communication as operator as of the date of the
termination of this Agreement. You agree that the provisions of this
paragraph are reasonable and are intended to protect Confidential
Information of the Company to which you become privy and preclude its
use by you to develop a competitive business in such markets.
(c) Discoveries. You agree to inform the Company promptly and fully by
written report of all patents, processes, discoveries, intellectual
property and other proprietary information, and all records (in
whatever form) related thereto (collectively, "Discoveries") made,
originated, developed, conceived, improved or perfected to any degree
by you that pertain in any manner to the Company's expertise or
business, whether or not during working hours or with the use of the
Company's facilities, materials or personnel, either solely or jointly
with others during the Term of this Agreement or within 12 months
thereafter. You agree that the written reports shall set forth in
detail the procedures employed and the results achieved. Any such
Discoveries shall be the sole and exclusive property of the Company,
and you hereby agree to assign, and do hereby assign, to the Company
any and all of your right, title and interest therein and thereto,
including, without limitation, all trade secret rights, copyrights,
<PAGE> 4
Mr. Osmo Hautanen
July 1, 1998
Page 4
patent rights and other intellectual property rights of whatever kind
or character.
You agree upon the request of and at the sole cost and expense of the
Company, to do at all times such acts and execute and deliver promptly
to the Company such papers, instruments and documents, as from time to
time may be necessary, advisable or useful to register, apply for,
secure, maintain, transfer, extend or defend the Company's rights in
such Discoveries so as to secure to the Company the full benefits of
such Discoveries or otherwise carry out into full force and effect the
assignment set out above.
You acknowledge that all existing Discoveries held by you which you
wish excluded from the operation of this Agreement will be disclosed in
writing on the attached Appendix A, to Formus prior to the date of your
employment, and there are no other currently existing Discoveries that
you wish to exclude from the operation of this Agreement. You hereby
represent that there is no other assignment or contract to assign
Discoveries that is now in existence between you and any other person
(including any business or government entity).
(d) Non-solicitation. During the term of this agreement and for a period of
12 months after termination of this agreement, you shall not, without
the Company's prior written consent, directly or indirectly: (a) cause
or attempt to cause any employee, agent or contractor of the Company or
any of its affiliates, to terminate his or her employment, agency or
contractor relationship with the Company or any such affiliate; (b)
interfere or attempt to interfere with the relationship between the
Company or any such affiliate and any employee, contractor or agent of
the Company; (c) hire or attempt to hire any employee, agent or
contractor of the Company or any such affiliate unless such person is
at the time no longer employed by the Company and was not induced by
you to leave; (d) solicit business from any customer or client served
by the Company or any such affiliate at any point during the term of
this agreement; or (e) interfere or attempt to interfere with any
transaction, agreement or business relationship in which the Company or
any affiliate was involved at any point during the term of this
agreement.
7) At-Will Employee. You will be an employee-at-will of the Company and this
letter does not constitute a contract of employment for any specific period
of time. This letter, the Option Agreement and the Employee Stockholder
<PAGE> 5
Mr. Osmo Hautanen
July 1, 1998
Page 5
Agreement represent the complete understanding between you and the Company
with respect to the subject matter hereof and supersedes any and all
discussions or prior writings to the extent inconsistent with the terms
hereof. The agreement between you and the Company as set forth herein may
only be modified or terminated by a written instrument signed by both
parties. It will be governed by the laws of Colorado.
Enclosed are two copies of this letter. Please acknowledge your agreement and
acceptance of the terms of this letter by signing both copies where indicated
and returning one copy to me at the above address.
Sincerely,
FORMUS COMMUNICATIONS, INC.
- --------------------------------------
By: William J. Elsner
Title: Chairman of the Board
Agreed and Acknowledged:
- -----------------------------
By: Osmo A. Hautanen
Date: July 1, 1998
<PAGE> 6
APPENDIX A
Please list Discoveries held by you which you wish excluded from the operation
of this Agreement:
- -----------------------------------------
By: Osmo A. Hautanen
Date: July 1, 1998
<PAGE> 1
EXHIBIT 10.8
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into this 1st day of May, 1999 (the "Effective
Date"), between Formus Communications, Inc., a Colorado corporation (the
"Company"), and Vernon F. Kenley ("Executive").
The Company wishes to provide Executive with a severance benefit to be
paid following termination of Executive's employment with the Company under
certain defined circumstances.
1. Definitions.
(A) "Change in Control" shall have the same definition as it has in two
Stock Option Agreements dated April 15, 1997 and July 15, 1998, between the
Executive and the Company, (the "Option Agreements").
(B) "Date of Termination" means the last day on which the Executive
performs services for the Company.
(C) "Disability" means any physical or mental condition that renders
Executive unable to substantially perform Executive's duties with the Company
for a period exceeding six consecutive months or for a period exceeding four
months if a physician selected by the Company determines in good faith that
Executive will be permanently unable to substantially perform Executive's duties
with the Company.
(D) A termination by the Company shall be deemed to be "For Cause" if
Executive commits a fraud, embezzlement, felony or financial dishonesty against
the Company; if Executive commits a breach of a confidentiality obligation owed
to the Company; if Executive refuses to obey directions of the Board of
Directors or a superior officer of the Company (so long as such directions do
not involve illegal or immoral acts); or if Executive commits an act of moral
turpitude bringing harm or disgrace to the Company.
(E) A termination by Executive shall be deemed to be "For Good Reason"
if within three months prior to the termination there is (i) a reduction in
Executive's base salary or stock option grants; or (ii) a reduction in
Executive's aggregate level of benefits under the Company's health, accident,
disability, retirement or life insurance plans or programs, other than an across
the board reduction which applies to all similarly situated Executives.
(F) "IPO" shall mean the date of an initial public offering of the stock
of the Company on any recognized stock exchange.
(G) "Monthly Salary" means one-twelfth of Executive's total compensation
for the one year period immediately preceding Executive's Date of Termination.
2. Entitlement to Severance Benefit. Executive shall be entitled to receive a
severance benefit as provided in Section 3 if Executive's employment terminates
under the following circumstances:
<PAGE> 2
(A) Executive has executed a General Release of Legal Rights in the form
of Exhibit A at least 28 days prior to the commencement of the severance
benefit; and
(B) The Company terminates Executive for any Reason other than
Executive's death or Disability, or For Cause, or Executive terminates his
employment with the Company For Good Reason, provided however, no severance
benefit shall be payable if Executive terminates his employment with the Company
within twelve months of the execution of this Agreement. Notwithstanding the
foregoing, if Executive terminates his employment with the Company within twelve
months of the execution of this Agreement due to Disability, the Executive shall
be entitled to receive the benefits provided in paragraphs 3(B) and 3(C) below.
3. Amount of Benefit. The severance benefit payable pursuant to this
Agreement shall consist of the following:
(A) Monthly Compensation. Continuation of Executive's Monthly
Compensation for a period of 12 months after termination. Payment of Monthly
Compensation shall be made at the same time or times as Executive would have
received salary payments at the time of Executive's termination of employment.
Notwithstanding the foregoing, if termination occurs either six months before a
Change in Control or twelve months after a Change in Control, payment of any
remaining portion of the Monthly Compensation severance benefit shall be made in
a single lump sum to be paid within five days after the date of the Change in
Control. The Company shall withhold on such Monthly Compensation in accordance
with applicable law.
(B) COBRA Benefits. Continuation of group medical benefits pursuant to
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA" coverage);
provided that for the first twelve months of such coverage, the Company shall
pay the portion of the Executive's COBRA coverage expense under the same terms
as those benefits were in effect at the Date of Termination.
(C) Stock Options. The Company and the Executive have previously
executed the Option Agreements which are incorporated herein by reference. Other
than as expressly modified in this paragraph, all provisions of those agreements
shall remain in full force and effect. The parties agree to the following
modifications:
(D) Vested Options. If an IPO has occurred, the exercise period shall be
unaffected. If no IPO has occurred, the exercise period for any vested stock
options issued by the Company and held by Executive pursuant to the Option
Agreements as of the Date of Termination shall be extended to the date that is
the earlier of: (a) five (5) years from the Date of Termination; or (b) 90 days
after the date on which executive may legally exercise his vested options
following an IPO.
2
<PAGE> 3
(E) Unvested Options. If Executive holds unvested stock options issued
by the Company and held by Executive pursuant to the Option Agreements on the
Executive's Date of Termination, and a Change in Control occurs within 365 days
following the Executive's Date of Termination, the vesting of those unvested
stock options shall be accelerated in accordance with the following schedule:
<TABLE>
<CAPTION>
CHANGE IN CONTROL OCCURRING IN UNVESTED STOCK OPTIONS ELIGIBLE FOR
MONTHS AFTER DATE OF TERMINATION ACCELERATION:
- -------------------------------- -----------------------------------
<S> <C>
1 12/12ths
2 11/12ths
3 10/12ths
4 9/12ths
5 8/12ths
6 7/12ths
7 6/12ths
8 5/12ths
9 4/12ths
10 3/12ths
11 2/12ths
12 1/12ths
13 or more 0
</TABLE>
1. Confidential Information, Covenant Not to Compete and Non-Solicitation.
Executive acknowledges that on October 21, 1997 he executed a letter agreement
(the "Letter Agreement"), which is incorporated by reference herein, with the
Company in which he agreed to certain obligations. The parties hereto agree that
the terms of the Letter Agreement survive the termination of Executive's
employment.
2. Nondisparagement. For a period of one (1) year following Executive's Date
of Termination, neither party shall disparage the other party. As used in this
section, "disparage" shall include, in addition to its common law meaning,
negative comments regardless of truth concerning either party's past or present
business ethics management decisions or the quality or effectiveness of products
or services, or their desirability as a partner or similar status as a party to
any transactions; provided, however, that disparagement shall not include any
statement required to made to comply with any legal requirement.
3
<PAGE> 4
3. References. Following Executive's Date of Termination, Executive shall
list only Osmo Hautanen or Derek Van Keuren as references in connection with
efforts to find alternative employment. In the event that Executive lists any
other person as a reference, he shall be deemed to have agreed that the person
so listed is a personal reference, and that the Company shall not be liable with
respect to information provided by them concerning Executive.
4. Indemnification. The Company shall indemnify and defend Executive in
connection with any litigation that arises after the Date of Termination in
which Executive is named as a party by virtue of his position as a former
officer or director of the Company, provided that Executive was acting in good
faith in the performance of his duties. The Company reserves the right to deny
indemnification of Executive in connection with a claim of bad faith (other than
a claim alleging a breach of fiduciary duty) or gross negligence on the part of
Executive. This indemnity shall include any claims, losses, damages, and
expenses of any nature, other than those specifically excepted, including
reasonable attorneys fees.
5. Confidentiality. The parties agree that this Agreement is confidential and
that they shall not disclose to any person the existence of this Agreement or
its terms; provided, that the Executive may disclose the Agreement to his
spouse, tax consultant or legal advisor, and the Company may disclose the
Agreement to its auditors and to potential investors in connection with their
due diligence investigations.
6. Integration and Merger. Other than as specifically stated herein, this
Agreement contains the entire understanding of the parties and supersedes all
prior agreements and understandings between the parties relating to the subject
matter hereof.
7. Amendment. This Agreement may be amended only by a document executed by
both the Company and Executive.
8. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective personal representatives,
successors and assigns. Notwithstanding the foregoing, this Agreement may not be
assigned by either party without the written consent of the other; provided,
however, that the Company may assign this Agreement to a successor (whether such
succession is direct or indirect by purchase, merger, consolidation or
otherwise;) to all or substantially all of the business and/or assets of the
Company. Upon Executive's request, the Company shall obtain an agreement to
expressly assume this Agreement from any successor (whether such succession is
direct or indirect by purchase, merger, consolidation or otherwise) to
substantially all of the business and/or assets of the Company or a controlling
portion of the Company's stock).
9. No Reliance. The parties to this Agreement acknowledge that they are not
relying on an information provided to them by the other party or on any
obligation of the other party to provide information to them, in connection with
the decision to execute this Agreement. The parties assume all risk that the
facts and law may be different than understood by them.
4
<PAGE> 5
10. Governing Law. This Agreement shall be governed by and construed in all
respects in accordance with the laws of the State of Colorado, without regard to
the conflict of laws principles of such State. Each party hereby submits to
personal jurisdiction in the State of Colorado for all actions instituted in
connection with this Agreement.
11. Counterparts. This Agreement may be executed and delivered in
counterparts, each of which, when so executed and delivered, shall be an
original, but such counterparts together shall constitute on instrument.
Signatures made via facsimile shall be binding.
12. Severability. In the event that any material provision of this Agreement
is found to be invalid or unenforceable, the remainder of this Agreement shall
be fully enforceable.
13. Arbitration. Every dispute concerning, relating to or involving the
enforcement, interpretation or effect of this Agreement shall be resolved
through binding arbitration to be conducted in the Denver, Colorado metropolitan
area, pursuant to the rules of the American Arbitration Association. Judgment on
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
FORMUS COMMUNICATIONS, INC.
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
EXECUTIVE
--------------------------------------
Vernon F. Kenley
Date:
---------------------------------
5
<PAGE> 1
EXHIBIT 10.9
June 25, 1999
Dear , Formus Communications, Inc. (the "Company") would like to extend to you
an offer of employment as a [ ]. This
position reports to the [ ] of Formus Communications,
Inc. You will be compensated at a bimonthly rate of $ (pay dates are the 15th
and last day of each month). This compensation accumulates to an annual total of
$.
Subject to the Board of Directors Compensation Committee approval, you will
receive a common stock option grant for shares. This grant will be at the fair
market value and subject to the terms and conditions of the stock option
agreement.
The Company offers a benefit package which includes Medical, Prescription, Life,
AD&D and Long Term Disability with no premium cost to you. The Company also
offers a Dental plan and spouse and dependent coverage for certain benefits and
shares a significant portion of the insurance costs with the employee. You may
enroll in the 401(k) plan the first quarter after hire. In addition, through the
IRS 125 tax saver and flexible-spending plan, you will be able to deduct your
portion of the premiums as well as certain medical and dependent care expenses
on a pre-tax basis.
Confidential Page 1
<PAGE> 2
As a condition to your employment with Formus Communications, Inc., and by
signing below and returning a copy of this letter to the Company, you hereby
agree with the Company to comply with the obligations specified herein.
You acknowledge and agree: (1) that any information or documentation concerning
the Company or any of its affiliates that develops or is provided during the
term of your employment with the Company (including without limitation, data,
agreements, business plans or proposals) is confidential and proprietary to the
Company (the "Confidential Information"); (2) not to disclose any Confidential
Information to anyone outside of Company or its affiliates, except to the extent
properly necessary to further the business activities of the Company; and (3)
never to use any Confidential Information for any personal purpose or advantage,
but only in the performance of your duties to the Company from time to time. If
the Company publicly discloses any particular information or documentation that
was Confidential Information, then that particular information or documentation
shall cease to be Confidential Information within the meaning of this Agreement.
You also agree that following the termination of your employment, you shall
return promptly to the Company all Confidential Information (regardless of form)
and all other property of the Company in your possession and you shall continue
to comply with the provisions of this paragraph indefinitely.
During the term of your employment with the Company and for a period of 12
months thereafter, you will not individually, with third parties or on behalf of
third parties, investigate or develop business opportunities with respect to, or
enter into negotiations, agreements, consulting contracts or partnerships with
any company or individual for the purpose of pursuing the specific business of
LMDS, in any market in which the Company has an interest in pursuing as of the
date of the termination of this Agreement. You agree that the provisions of this
paragraph are reasonable and are intended to protect Confidential Information of
the Company to which you become privy and preclude its use by you to develop a
competitive business in such markets.
If this paragraph or any other provision in this Agreement is too broad in
temporal, geographical or other scope to be fully enforceable as written, then
such scope shall be reduced by the minimum reduction necessary to render it
enforceable.
You agree to inform the Company promptly and fully by written report of all
patents, processes, discoveries, intellectual property and other proprietary
information, and all records (in whatever form) related thereto (collectively,
"Discoveries") made, originated, developed, conceived, improved or perfected to
any degree by you that pertain in any manner to the Company's expertise or
business, whether or not during working hours or with the use of the Company's
facilities, materials or personnel, either solely or jointly with others during
the
Confidential Page 2
<PAGE> 3
Term of this Agreement or within twelve (12) months thereafter. You agree that
the written reports shall set forth in detail the procedures employed and the
results achieved. Any such Discoveries shall be the sole and exclusive property
of the Company, and you hereby agree to assign, and do hereby assign, to the
Company any and all of your right, title and interest therein and thereto,
including, without limitation, all trade secret rights, copyrights, patent
rights and other intellectual property rights of whatever kind or character.
You agree upon the request of and at the sole cost and expense of the Company,
to do at all times such acts and execute and deliver promptly to the Company
such papers, instruments and documents, as from time to time may be necessary,
advisable or useful to register, apply for, secure, maintain, transfer, extend
or defend the Company's rights in such Discoveries so as to secure to the
Company the full benefits of such Discoveries or otherwise carry out into full
force and effect the assignment set out above.
You acknowledge that all existing Discoveries held by you which you wish
excluded from the operation of this Agreement will be disclosed in writing on
the attached Appendix A, to Formus prior to the date of your employment, and
there are no other currently existing Discoveries that you wish to exclude from
the operation of this Agreement. You hereby represent that there is no other
assignment or contract to assign Discoveries that is now in existence between
you and any other person (including any business or government entity).
During the term of this agreement and for a period of 12 months after
termination of this agreement, you shall not, without the Company's prior
written consent, directly or indirectly: (a) cause or attempt to cause any
employee, agent or contractor of the Company or any of its affiliates, to
terminate his or her employment, agency or contractor relationship with the
Company or any such affiliate; (b) interfere or attempt to interfere with the
relationship between the Company or any such affiliate and any employee,
contractor or agent of the Company; (c) hire or attempt to hire any employee,
agent or contractor of the Company or any such affiliate; (d) solicit business
from any customer or client served by the Company or any such affiliate at any
point during the term of this agreement; or (e) interfere or attempt to
interfere with any transaction, agreement or business relationship in which the
Company or any affiliate was involved at any point during the term of this
agreement.
You agree that you will not contravene any laws of any country or violate any
regulations or established rules of conduct in the performance of your duties on
behalf of the Company. Without limiting the generality of the foregoing, you
will not make any payment or give anything of value, directly or indirectly, to
any government official (including any director, employee or agent of any
government department, agency or instrumentality) to influence any of his or its
decisions, or to gain any other advantage. You will not take any other
Confidential Page 3
<PAGE> 4
action that could result in any violation of the Foreign Corrupt Practices Act
of the United States of America.
You acknowledge that the Company would be irreparably harmed if you violated
this agreement, so that they would be entitled to an injunction or other
equitable relief, in addition to any other available remedies, if you breached
or threatened to breach any of the foregoing provisions.
You are currently an employee-at-will of the Company and this letter does not
constitute a contract of employment. There is no agreement, expressed or
implied, for any specific period, length or term of employment. This letter
represents the complete understanding between you and the Company with respect
to the subject matter hereof, and supersedes any and all discussions or prior
writings to the extent inconsistent with the terms hereof. The agreement between
you and the Company as set forth herein may only be modified by a written
instrument signed by both parties.
Formus requires a routine background check to verify employment, education and
other statements you have made on your application and resume. Formus reserves
the right to withdraw this offer, or move to immediate termination for
falsification of information or in the event of an unsuccessful conclusion on
any part of this background review process.
The above-referenced Agreement represents Formus' employment offer and
applicable contingencies. If your understanding of the offer differs from what
is presented above, please contact me for clarification. This offer of
employment is valid until noon on , , and is contingent upon your starting
employment with Formus on or before,.
Enclosed are two copies of this letter. Please acknowledge your agreement and
acceptance of the terms of this letter by signing both copies where indicated
and returning one copy to Human Resources by .
We are certain you will be an asset to Formus and look forward to your
contributions to the Company.
Sincerely,
Agreed and Acknowledged: ___________________________ Date: ________
Confidential Page 4
<PAGE> 5
APPENDIX A
Please list Discoveries held by you which you wish excluded from the operation
of this Agreement:
- -------------------------------
By:
Date:__________________________
Confidential Page 5
<PAGE> 1
EXHIBIT 21.1
FORMUS SUBSIDIARIES
Formus International, Inc., a Delaware corporation
Formus International-Poland, Inc., a Delaware corporation
Formus Communications - Ecuador, LLC, a Colorado limited liability company
Formus Communications - New Zealand, LLC, a Colorado limited liability company
Formus Communications - Romania, LLC, a Colorado limited liability company
Formus Communications - Czech Republic, LLC, a Colorado limited liability
company
Formus Communications - Oceania, LLC, a Colorado limited liability company
Formus Communications - Germany, LLC, a Colorado limited liability company
Communications-Ecuador Holdings, LLC, a Colorado limited liability company
Quicksat S.A., an Ecuadorian corporation
Nexsatel S.A., an Ecuadorian corporation
Formus Polska Sp. z o.o., a Polish limited liability company
Hinet Limited, a New Zealand corporation
Formus Interactive (Formus Interactiva del Ecuador) F.I.E. Cia. Ltda., an
Ecuadorian limited liability company
Formus Telecom Hungary Ltd., a Hungarian limited liability company
Formus Communications-Europe, B.V., a Netherlands company
Formus Communications Interactive S.R.L., a Romanian limited liability society
Callino GmbH, a German GmbH
Formus Communications-Germany, B.V.
Formus Communications France SAS, a French corporation
Formus Communications Ireland Limited, an Irish corporation
Formus Communications Finland Oy, a Finnish limited liability company
Formus Communications Iberica, S.A., a Spanish corporation
Formus Communications-Italia S.p.A., an Italian corporation
Formus Communications Sweden AB, a Swedish corporation
Beheer- en Beleggingsmaatschappij Apeko B.V., a Netherlands company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 8, 1999 (and to all references to our Firm) included in or
made a part of this registration statement.
Arthur Andersen LLP
Denver, Colorado
October 4, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated September 30, 1999 (and to all references to our Firm) included in
or made a part of this registration statement.
Arthur Andersen LLP
Denver, Colorado
October 4, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants, we hereby consent to the use of our report
about:
- the balance sheets as of June 30, 1999, December 31, 1998 and December
31, 1997,
- the statements of income and accumulated deficit, the statements of cash
flows and the statements of stockholders' equity for the period July
7 - December 31, 1997, period January 1 - June 30, 1998, period January
1 - December 31, 1998 and period January 1 - June 30, 1999 and
- the notes to the financial statements with report of independent
accountants
of Callino GmbH (formerly ARCIS MEDIACOM Management GmbH), Munich, dated July
27, 1999 (and to all references to our Firm) included in or made a part of this
registration statement.
Munich, Germany
October 5, 1999
Haarmann, Hemmelrath & Partner GmbH
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft
<TABLE>
<S> <C>
/s/ ZELGER /s/ PPA. GOBEL
--------------------- --------------------
Zelger ppa. Gobel
Wirtschaftsprufer Wirtschaftsprufer
</TABLE>
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Osmo A. Hautanen, Bernard G. Dvorak and
John F. Knoeckel, and each of them, his or her attorneys-in-fact, with full
power of substitution, for him or her in any and all capacities, to sign a
registration statement to be filed with the Securities and Exchange Commission
(the "Commission") on Form S-1 in connection with the offering by Formus
Communications, Inc., a Delaware corporation (the "Company"), of securities
("Securities"), and all amendments (including post-effective amendments)
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Commission; and to sign all documents in
connection with the qualification and sale of the Securities with Blue Sky
authorities and with the National Association of Securities Dealers, Inc.;
granting unto said attorneys-in-fact full power and authority to perform any
other act on behalf of the undersigned required to be done in the premises,
hereby ratifying and confirming all that said attorneys-in-fact may lawfully do
or cause to be done by virtue hereof.
Date: , 1999 /s/ Osmo A. Hautanen
------------ ---------------------------------
Osmo A. Hautanen
Date: , 1999 /s/ William J. Elsner
------------ ---------------------------------
William J. Elsner
Date: , 1999 /s/ Steven C. Halstedt
------------ ---------------------------------
Steven C. Halstedt
Date: , 1999 /s/ Michael R. Hannon
------------ ---------------------------------
Michael R. Hannon
Date: , 1999 /s/ Dr. Michael Hoenig
------------ ---------------------------------
Dr. Michael Hoenig
Date: , 1999 /s/ William A. Johnston
------------ ---------------------------------
William A. Johnston
Date: , 1999 /s/ Ian Kidson
------------ ---------------------------------
Ian Kidson
Date: , 1999 /s/ Kevin J. Maroni
------------ ---------------------------------
Kevin J. Maroni
<PAGE> 2
Date: , 1999 /s/ Trygve E. Myhren
------------ ---------------------------------
Trygve E. Myhren
Date: , 1999 /s/ Frederick A. Vierra
------------ ---------------------------------
Frederick A. Vierra
Date: , 1999 /s/ James F. Wade
------------ ---------------------------------
James F. Wade
Date: , 1999 /s/ Bernard G. Dvorak
------------ ---------------------------------
Bernard G. Dvorak
Date: , 1999 /s/ Eric B. Alexander
------------ ---------------------------------
Eric B. Alexander
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 22,887 52,389
<SECURITIES> 0 7,842
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 25,799 62,234
<PP&E> 4,804 7,895
<DEPRECIATION> 413 909
<TOTAL-ASSETS> 53,394 85,198
<CURRENT-LIABILITIES> 4,154 6,935
<BONDS> 0 0
56,870 82,006
0 0
<COMMON> 3 3
<OTHER-SE> (18,197) (10,149)
<TOTAL-LIABILITY-AND-EQUITY> 53,394 85,198
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 16,699 21,990
<OTHER-EXPENSES> 0 339
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17 8
<INCOME-PRETAX> (15,662) 2,855
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (15,662) 2,855
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,470) 8,785
<EPS-BASIC> (4.98) 2.90
<EPS-DILUTED> (4.98) .27
</TABLE>
