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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER:
333-62797
BIRCH TELECOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1766929
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2020 BALTIMORE AVENUE 64108
KANSAS CITY, MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(816) 300-3000
--------------
Securities registered pursuant to Section 12(b) of the Act:
14% Senior Notes due 2008
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
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TABLE OF CONTENTS
<TABLE>
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE PAGE 13
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 39,745 $ 23,946
Pledged securities ................................................... 15,888 15,998
Accounts receivable, net ............................................. 4,039 8,037
Inventory ............................................................ 916 4,164
Prepaid expenses and other ........................................... 526 2,681
--------- ---------
Total current assets .................................................... 61,114 54,826
Property and equipment, net ............................................. 26,153 53,147
Pledged securities - noncurrent ......................................... 21,897 15,075
Goodwill, net ........................................................... 16,863 19,320
Other intangibles, net .................................................. 7,689 15,280
Other assets ............................................................ 433 365
--------- ---------
Total assets ............................................................ $ 134,149 $ 158,013
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease obligations ... $ 335 $ 1,200
Accounts payable ..................................................... 8,503 7,669
Accrued expenses ..................................................... 2,556 14,038
--------- ---------
Total current liabilities ............................................... 11,394 22,907
14% Senior Notes ........................................................ 114,681 114,706
Capital lease obligations, net of current maturities .................... 778 1,268
Other long-term debt, net of current maturities ......................... 332 321
Series B Redeemable Preferred Stock, 8,572,039 shares issued and
outstanding, (stated at redemption and aggregate liquidation value) .. 14,063 --
Series F Redeemable Preferred Stock, 13,333,334 shares issued and
outstanding (stated at redemption and aggregate liquidation value) ... -- 61,300
Stockholders' deficit:
Series B Preferred Stock, 8,572,039 shares issued and outstanding .... -- 8
Series C Preferred Stock, 8,492,749 and 6,270,527 shares issued and
outstanding, respectively ............................................ 8 6
Series D Preferred Stock, 2,222,222 shares issued and outstanding .... -- 2
Common stock, $.001 par value, 80,000,000 shares authorized, 5,016,889
and 5,333,676 shares issued and outstanding, respectively ............ 5 5
Warrants ............................................................. 337 337
Additional paid-in capital ........................................... 12,273 15,154
Accumulated deficit .................................................. (19,722) (58,001)
--------- ---------
Total stockholders' deficit ............................................. (7,099) (42,489)
--------- ---------
Total liabilities and stockholders' deficit ............................. $ 134,149 $ 158,013
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Communications services, net ..................... $ 6,852 $ 14,564 $ 15,669 $ 35,461
Equipment sales, net ............................. 625 2,458 1,573 6,172
------- -------- -------- --------
Total revenue ...................................... 7,477 17,022 17,242 41,633
Cost of services:
Cost of communications services .................. 4,784 11,905 11,214 28,077
Cost of equipment sales .......................... 388 1,364 1,032 3,518
------- -------- -------- --------
Total cost of services ............................. 5,172 13,269 12,246 31,595
------- -------- -------- --------
Gross margin ....................................... 2,305 3,753 4,996 10,038
Selling, general and administrative expense ........ 4,704 14,649 8,816 34,013
Depreciation and amortization expense .............. 597 2,814 1,229 6,388
------- -------- -------- --------
Loss from operations ............................... (2,996) (13,710) (5,049) (30,363)
Interest expense ................................... (4,181) (3,705) (4,517) (11,189)
Interest income .................................... 1,709 725 1,709 2,287
------- -------- -------- --------
Net loss ........................................... (5,468) (16,690) (7,857) (39,265)
Preferred stock dividends .......................... (509) (491) (1,204) (1,477)
Amortization of preferred stock issuance costs ..... (10) (61) (21) (77)
------- -------- -------- --------
Loss applicable to common stock .................... $(5,987) $(17,242) $ (9,082) $(40,819)
======= ======== ======== ========
Loss per common share-- basic and diluted .......... $ (4.73) $ (3.41) $ (2.69) $ (8.06)
======= ======== ======== ========
Weighted average number of common shares outstanding 1,265 5,061 3,381 5,063
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
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<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES .................................. $ (1,353) $(31,073)
INVESTING ACTIVITIES
Purchase of property and equipment ................................... (10,118) (28,925)
Business acquisitions, net of cash acquired .......................... (7,740) (4,553)
Purchase of pledged securities ....................................... (44,247) --
Maturity of pledged securities ....................................... -- 8,050
Amortization of discount on pledged securities ....................... (511) (1,339)
--------- --------
Net cash used in investing activities ................................ (62,616) (26,767)
FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants .................. 342 --
Proceeds from issuance of preferred stock ............................ 9,500 70,000
Payment of financing costs ........................................... (5,106) (7,310)
Payment of Series A Preferred Stock Dividends ........................ (168) --
Proceeds from convertible notes ...................................... 3,500 --
Proceeds from 14% Senior Notes ....................................... 114,663 --
Redemption of preferred stock ........................................ (4,750) (18,572)
Redemption of common stock ........................................... -- (450)
Repayment of short term notes ........................................ (250) (200)
Repayment of long-term debt .......................................... (529) (683)
Repayment of capital lease obligations ............................... (65) (744)
--------- --------
Net cash provided by financing activities ............................ 117,137 42,041
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 53,168 (15,799)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 210 39,745
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 53,378 $ 23,946
========= ========
Supplementary schedule of non-cash investing and financing activities:
Amounts recorded in connection with acquisitions:
Fair value of net assets acquired, net of cash acquired ........... $ 5,064 $ 2,678
Fair value of intangible assets ................................... 20,883 3,884
Assumption of liabilities ......................................... 2,430 926
Assumption of long-term debt and capital lease obligations ........ 1,027 872
Issuance of Series A Preferred Stock .............................. 4,750 --
Issuance of Series C Preferred Stock .............................. 10,000 --
Issuance of common stock .......................................... -- 211
Property and equipment additions included in accounts payable........ 4,703 2,978
Property and equipment additions acquired through capital lease ..... -- 2,099
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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BIRCH TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Birch Telecom, Inc. ("Birch" or "the Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Birch Telecom, Inc.
annual report on Form 10-K for the fiscal year ended December 31, 1998.
2. RECLASSIFICATIONS
Certain items in the 1998 condensed consolidated financial statements
have been reclassified to be consistent with the classification in the 1999
condensed consolidated financial statements.
3. ACQUISITIONS
In February 1998, Birch merged with Valu-Line Companies, Inc.
(Valu-Line) in a transaction valued at $19.5 million, consisting of $4.75
million in cash, 2,968,750 shares of Series A Preferred Stock having an
aggregate liquidation preference of $4.75 million and 6,250,000 shares of Series
C Preferred Stock having an aggregate liquidation preference of $10.0 million.
Since 1982, Valu-Line has been primarily providing switched long distance
services, customer premises equipment (CPE) sales and services and, since March
1997, local service.
In May 1998, Birch acquired Boulevard Phone Company (Boulevard), a
shared tenant service provider in the Kansas City metropolitan area, for
$300,000 in cash and Telesource Communications, Inc. (Telesource), a CPE
provider in the Kansas City metropolitan area, for $325,000 in cash.
In September 1998, Birch acquired TFSnet, Inc. (TFSnet), an Internet
service provider based in the Kansas City metropolitan area, for $2.65 million.
In February 1999, the Company acquired American Local
Telecommunications, LLC (ALT), a competitive local exchange carrier based in the
Dallas, Texas metropolitan area. The acquisition included substantially all
assets of ALT. The total purchase price was approximately $1.6 million.
In March 1999, the Company acquired the stock of Capital Communications
Corporation (Capital), a telecommunications equipment provider based in the St.
Louis, Missouri metropolitan area. The total purchase price was approximately
$3.0 million plus additional cash consideration based on local service lines
converted to the Company's service from Capital's existing customer base, which
totaled $100,000 through September 30, 1999.
The Valu-Line, Boulevard, Telesource, TFSnet, ALT and Capital
acquisitions were recorded using the purchase method of accounting. Accordingly,
the operations of each are included in the condensed consolidated statements of
operations and cash flows from the date of acquisition.
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4. PLEDGED SECURITIES, WARRANTS, AND DEBT
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes due June 2008 (the Senior Notes) and 115,000 warrants to
purchase 1,409,734 shares of common stock. Interest on the Senior Notes is
payable semi-annually in arrears on June 15 and December 15 of each year.
Warrants are exercisable at $0.01 per share and expire June 2008. The Company
received net proceeds from the Senior Notes of $110.2 million and concurrently
purchased pledged securities of $44.2 million. The pledged securities are
restricted for interest payments on the Senior Notes and, together with the
interest accruing thereon, will be used to satisfy such interest payments
through June 2001. The Company classifies its pledged securities, consisting of
$31.1 million and $37.8 million of U.S. Treasury securities at September 30,
1999 and December 31, 1998, respectively, as held to maturity recorded at
amortized cost and maturing between six and twenty-one months. A portion of the
proceeds from the Senior Notes, $337,000, was allocated to the warrants, and the
resulting debt discount is being amortized over the life of the debt on the
straight-line method, which does not differ materially from the effective
interest method. Unamortized discount was $294,000 and $319,000 at September 30,
1999 and December 31, 1998, respectively. The amount allocated to the warrants
represents the estimated fair value of the warrants at the date of issuance. The
Senior Notes rank pari pasu in right of payment to all existing and future
senior indebtedness of the Company and rank senior in the right of payment to
all existing and future subordinated indebtedness of the Company.
A Registration Statement on Form S-4, registering the Company's 14%
Senior Notes and offering to exchange (the Exchange Offer) any and all of the
outstanding 14% Senior Notes for Exchange Notes, was declared effective by the
Securities and Exchange Commission (SEC) in March 1999. The Exchange Offer
terminated after all of the outstanding 14% Senior Notes were exchanged. The
terms and conditions of the Exchange Notes are identical to those of the 14%
Senior Notes in all material respects.
5. CAPITAL STRUCTURE
During July and August 1999, the Company issued and sold Series F and
Series D Preferred Stock generating net proceeds of $44.0 million.
The Company issued and sold 2,222,222 shares of Series D Preferred
Stock at $4.50 per share. The Series D Preferred Stock accrues dividends at a
rate of 15% per annum. As of September 30, 1999, cumulative dividends on the
Series D Preferred Stock totaled $375,000.
The Company issued and sold 13,333,334 shares of its Series F Preferred
Stock at a purchase price of $4.50 per share. Additionally, options were granted
to purchase an additional 5,263,158 shares of Series F Preferred Stock at $4.75
per share and an additional 5,000,000 shares of Series F Preferred Stock at
$5.00 per share on or before April 13, 2000. The Series F Preferred Stock
accrues dividends at a rate of 15% per annum. As of September 30, 1999,
cumulative dividends on the Series F Preferred Stock totaled $1.3 million.
In connection with the Series F Preferred Stock transaction, the
Company (i) repurchased 2,222,222 shares of its Series C Preferred Stock for
$10.0 million, (ii) undertook a plan of recapitalization whereby each
outstanding share of the Company's Series B Preferred Stock was converted into
one share of the Company's amended and restated Series B Preferred Stock and
0.2222 of a share of the Company's Series E Preferred Stock, and (iii) redeemed
the Series E Preferred Stock issued for $8.6 million.
The rights and preferences of the Company's Series B Preferred Stock
were amended and restated to remove the mandatory redemption rights and change
the liquidation rights. As of September 30, 1999, cumulative dividends on the
Series B Preferred Stock totaled $2.5 million.
7
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In connection with these agreements, the Company amended and restated
its certificate of incorporation to authorize 80,000,000 shares of common stock,
and 55,000,000 shares of Preferred Stock. Of the authorized shares of Preferred
Stock, 8,750,000 shares are designated as Series B Preferred Stock; 8,500,000
shares are designated as Series C Preferred Stock; 2,225,000 shares are
designated as Series D Preferred Stock; 1,904,898 shares are designated as
Series E Preferred Stock; and 30,000,000 shares are designated as Series F
Preferred Stock.
Liquidation Rights
Birch's Series D, Series E and Series F Preferred Stock have a
liquidation preference over the Series B and Series C Preferred Stock and common
stock at the greater of (i) the purchase price plus accrued but unpaid dividends
or (ii) the amount the holders would have received upon liquidation if such
shares of Series D, Series E and Series F Preferred Stock had been converted to
common stock immediately prior to liquidation. Birch's Series B Preferred Stock
has a liquidation preference only over Series C Preferred Stock and common stock
at an amount equal to the sum of the purchase price plus accrued but unpaid
dividends. Series C Preferred Stock has preference only over common stock at an
amount equal to the sum of the purchase price plus accrued but unpaid dividends.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company has used strategic acquisitions (the Acquisitions) to
expand its business capabilities. The following acquisitions were completed
during 1998 and the nine months ending September 30, 1999:
<TABLE>
<CAPTION>
Acquired Date of
Company Acquisition Principal Business Activity
------- ----------- ---------------------------
<S> <C> <C>
Valu-Line February 1998 Provider of switched long distance, resold local services and CPE
sales and services in Kansas
Boulevard May 1998 Provider of shared tenant service in the Kansas City, MO
metropolitan area
Telesource May 1998 Provider of CPE sales and service in the Kansas City, MO
metropolitan area
TFSnet September 1998 Provider of Internet service in the Kansas City, MO metropolitan
area
ALT February 1999 Competitive local exchange carrier based in the Dallas, TX
metropolitan area
Capital March 1999 Provider of telecommunications equipment based in the St. Louis,
MO metropolitan area
</TABLE>
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenue. Revenue increased 127.7% to $17.0 million for the 1999 period
compared to $7.5 million for the 1998 period. The increase in revenue is
primarily a result of new customer sales from new and existing markets and the
Acquisitions. For the 1999 and 1998 quarters, as a percentage of total revenue,
communications services were 85.6% and 91.6%, respectively, and CPE sales were
14.4% and 8.4%, respectively. Lines in service increased 188.6% to 89,108 at
September 30, 1999 compared to 30,871 at September 30, 1998.
Cost of services. Cost of services increased 156.6% to $13.3 million
for the 1999 period compared to $5.2 million for the 1998 period. The increase
in cost of services is primarily the result of associated revenue increases.
Gross margin increased 62.8% to $3.8 million (22.0% of revenue) for the 1999
period compared to $2.3 million (30.8% of revenue) for the 1998 period. The
decline in gross margin as a percentage of revenue is principally from a greater
percentage of revenue being derived from resold local service during the 1999
period compared to the 1998 period.
Selling, general and administrative expense. Selling, general and
administrative expense increased 211.4% to $14.6 million for the 1999 period
compared to $4.7 million for the 1998 period. The increase in expense is
primarily a result of supporting and attracting customers from new and existing
markets, preparations for market launches in Texas and the Acquisitions, each of
which affected wages, rent and advertising expenses. Additionally, the Company
had approximately 817 employees at September 30, 1999, compared to 283 employees
at September 30, 1998. EBITDA, a commonly used measure by securities analysts of
earnings before deducting interest, taxes, depreciation and amortization,
increased 354.2% to a loss of $10.9 million for the 1999 period compared to a
loss of $2.4 million for the 1998 period.
Depreciation and amortization. Depreciation and amortization increased
371.4% to $2.8 million for the 1999 period compared to $597,000 for the 1998
period. The increase in depreciation and amortization is primarily attributable
to the fixed and intangible assets related to the Acquisitions, as well as the
deployment of network assets in the Company's markets.
Interest. Interest expense decreased 11.4% to $3.7 million for the 1999
period compared to $4.2 million for the 1998 period. The decrease in interest
expense is primarily attributable to an increase in capitalized interest expense
on the purchase and installation of switches. Interest income decreased 57.6% to
$725,000 for the 1999 period compared to $1.7 million for the 1998 period. The
decrease in interest income is primarily a result of the maturity and sale of
$8.1 million of pledged securities for the payment of interest on the $115
million Senior Notes due 2008 which was partially offset by the interest income
on invested funds received as part of the Series D and Series F Preferred Stock
transactions further described below.
Net loss. Net loss increased 205.2% to $16.7 million for the 1999
period compared to $5.5 million for the 1998 period.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Revenue. Revenue increased 141.5% to $41.6 million for the 1999 period
compared to $17.2 million for the 1998 period. The increase in revenue is
primarily a result of new customer sales from new and existing markets and the
Acquisitions. For the 1999 and 1998 periods, as a percentage of total revenue,
communications services were 85.2% and 90.9%, respectively, and CPE sales were
14.8% and 9.1%, respectively.
Cost of services. Cost of services increased 158.0% to $31.6 million
for the 1999 period compared to $12.2 million for the 1998 period. The increase
in cost of services is primarily a result of associated revenue increases. Gross
margin increased 100.9% to $10.0 million (24.1% of revenue) for the 1999 period
compared to $5.0 million (29.0% of revenue) for the 1998 period. The decline in
gross margin as a percentage of total revenue is principally from a greater
percentage of revenue being derived from resold local service during the 1999
period compared to the 1998 period.
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Selling, general and administrative expense. Selling, general and
administrative expense increased 285.8% to $34.0 million for the 1999 period
compared to $8.8 million for the 1998 period. The increase in expense is
primarily a result of supporting and attracting customers from new and existing
markets, preparations for market launches in Texas and the Acquisitions, each of
which affected wages, rent and advertising expenses. Additionally, the Company
had approximately 817 employees at September 30, 1999 compared to 283 employees
at September 30, 1998. EBITDA, a commonly used measure by securities analysts of
earnings before deducting interest, taxes, depreciation and amortization,
increased 527.6% to a loss of $24.0 million for the 1999 period compared to a
loss of $3.8 million for the 1998 period.
Depreciation and amortization. Depreciation and amortization increased
419.8% to $6.4 million for the 1999 period compared to $1.2 million for the 1998
period. The increase in depreciation and amortization is primarily attributable
to the fixed and intangible assets related to the Acquisitions, as well as the
deployment of network assets in the Company's markets.
Interest. Interest expense increased 147.7% to $11.2 million for the
1999 period compared to $4.5 million for the 1998 period. The increase in
interest expense is primarily attributable to the interest charges on the $115
million Senior Notes due 2008. Interest income increased 33.8% to $2.3 million
for the 1999 period compared to $1.7 million for the 1998 period. The increase
in interest income is primarily the result of invested funds received from the
$115 million Senior Notes due 2008 and the Series D and Series F Preferred Stock
transactions further described below.
Net loss. Net loss increased 399.7% to $39.3 million for the 1999
period compared to $7.9 million for the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $134.1 million at December
31, 1998 to $158.0 million at September 30, 1999, primarily due to capital
outlays for expansion of the Company's local and data networks and development
of operations support systems and automated back office systems, partially
offset by the use of cash to fund operations. At September 30, 1999, the
Company's current assets of $54.8 million exceeded its current liabilities of
$22.9 million, providing working capital of $31.9 million, representing a
decrease of $17.8 million compared to December 31, 1998. At December 31, 1998,
the Company's current assets of $61.1 million exceeded current liabilities of
$11.4 million, providing working capital of $49.7 million. The decrease in
working capital is primarily attributable to the use of cash to fund operations
and capital outlays for expansion of the Company's network, support systems and
back office systems as previously stated. Of working capital at September 30,
1999, $16.0 million represents securities pledged to satisfy interest payments
on the $115 million Senior Notes due 2008, compared to $4.7 million of accrued
interest at September 30, 1999 related to such Notes.
Net cash used in operating activities was $31.1 million for the nine
months ended September 30, 1999 compared to $1.4 million for the same period in
1998. Net cash used in operating activities was primarily used to fund the
Company's net losses of $39.3 million in the 1999 period and $7.9 million in the
1998 period.
Net cash used in investing activities was $26.8 million for the nine
months ended September 30, 1999 compared to $62.6 million during the same period
in 1998. In the 1999 period, net cash used in investing activities was primarily
used for the purchase of property and equipment related to the expansion of the
network, support systems and back office systems of $28.9 million and
acquisitions of $4.6 million, partially offset by net proceeds from the sale of
pledged securities of $8.1 million for the semi-annual interest payment on the
$115 million Senior Notes due 2008. In the 1998 period, net cash used in
investing activities was primarily used for purchases of pledged securities
related to the $115 million Senior Notes due 2008 of $44.2 million, acquisitions
of $7.7 million, and purchases of property and equipment related to the
expansion of the network, support systems and back office systems of $10.1
million.
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Net cash provided by financing activities was $42.1 million for the
nine months ended September 30, 1999 compared to $117.1 million for the same
period in 1998. In the 1999 period, net cash provided by financing activities
was primarily a result of proceeds from the sale of Series D Preferred Stock,
the sale of Series F Preferred Stock to an affiliate of Kohlberg Kravis Roberts
& Co. and other associated preferred stock transactions described below. In the
1998 period, net cash provided by financing activities was primarily a result of
proceeds from the Company's private offering of the $115 million Senior Notes
due 2008.
The expansion of the Company's business will continue to require
significant capital to fund capital expenditures, working capital needs, debt
service and the cash flow deficits generated by operating losses. The Company's
principal capital expenditure requirements include the purchase, installation,
and expansion of switches and transmission equipment for the Company's local and
data networks and the further development of operations support systems and
automated back office systems. Management does not expect that the growth of the
Company's long distance and CPE business will require significant capital
expenditures. The Company currently estimates that the cash required to fund
capital expenditures for its expansion plans will be approximately $45.0 million
in 1999.
To date, the Company has primarily funded its expenditures through
proceeds from the $115 million Senior Notes due 2008 and private sales of equity
securities. In February and March 1998, the Company raised approximately $12.4
million in a private placement of its Series B Preferred Stock and Convertible
Notes. On June 18, 1998, the Company sold the $115 million Senior Notes due 2008
for net proceeds of $110.2 million. During July and August 1999, the Company
completed the following equity transactions generating $44.0 million in net
proceeds:
- Sale of $10.0 million of Series D Preferred Stock to existing
stockholders
- Sale of $60.0 million of Series F Preferred Stock to an
affiliate of Kohlberg Kravis Roberts & Co.
- Repurchase and retirement of 2,222,222 of the outstanding
shares of Series C Preferred Stock for $10.0 million
- Conversion of each share of the Company's Series B Preferred
Stock into (1) one share of the Company's amended and restated
Series B Preferred Stock and (2) 0.22222 of a share of the
Company's Series E Preferred Stock
- Redemption of all Series E Preferred Stock for $8.6 million.
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YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize the
date using "00" as the year 1900 rather than the year 2000. In addressing this
problem, the Company anticipates spending $20 million on new systems from
inception through the end of 1999. Specific expenditures for year 2000 costs are
not being made related to the new systems. The Company has completed its
assessment on the consequences of the year 2000 on information technology
systems. As the Company has a relatively short history, virtually all systems
are newly created or are being created. During information technology
development, year 2000 issues have been consistently addressed. The new
information technology systems will, in certain cases, replace systems of
acquired companies in order to provide consistent and integrated systems. The
acquired companies' systems are not all year 2000 compliant; however, these
systems will be replaced by the end of 1999. If all such systems are not
replaced and year 2000 issues occur, significant disruption to the Company's
operations could occur. The most significant system of the acquired companies
relates to the provisioning and billing of resale local and long distance
services which, if not replaced, could prevent the Company from billing or
provisioning service to existing and future customers. Installation of an
integrated billing and provisioning system is on schedule to date.
Other non-information technology systems which may be affected by the
year 2000 issue include systems provided to the Company by third parties. The
most significant third party systems are those which operate the incumbent local
exchange carrier's interfaces and billing records, switching equipment and
customer premises equipment. The Company has been assured by significant third
parties that year 2000 compliance will be accomplished by the end of 1999. If
such compliance is not achieved by these third parties, it would have a material
adverse effect on the Company's business, operating results and financial
condition and its ability to achieve sufficient cash flow.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth and expansion strategy. The forward-looking statements are
subject to risks, uncertainties and assumptions, including, but not limited to,
the impact of competitive products and pricing, product developments, changes in
law and regulations, customer demand, litigation, availability of future
financing, uncertainty of market acceptance of new products, and other risks.
Actual results may differ materially from anticipated results described in these
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in marketable
securities and long-term debt, is not material.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since July 1, 1999, Birch has issued and sold unregistered securities as
follows:
(a) In July 1999, Birch sold 2,222,222 shares of its Series D Preferred
Stock at $4.50 per share with net proceeds of approximately $10.0
million.
(b) In August 1999, in connection with the Series B Preferred Stock
transaction, the Company (i) repurchased 2,222,222 shares of its Series
C Preferred Stock for $10.0 million, (ii) undertook a plan of
recapitalization whereby each outstanding share of the Company's
Series B Preferred Stock was converted into one share of the Company's
amended and restated Series B Preferred Stock and 0.2222 of a share of
the Company's Series E Preferred Stock, and (iii) redeemed the Series E
Preferred Stock issued for $8.6 million.
(c) In August 1999, Birch sold 13,333,334 shares of its Series F
Preferred Stock at $4.50 per share with net proceeds of approximately
$60.0 million. Additionally, options were granted to purchase an
additional 5,263,158 shares of Series F Preferred Stock at $4.75 per
share and an additional 5,000,000 shares of Series F Preferred Stock at
$5.00 per share on or before April 13, 2000.
All sales of common stock made pursuant to the exercise of stock options
granted under the 1998 Stock Option Plan to Birch's officers, directors,
employees and consultants were made in reliance on Rule 701 under the
Securities Act of 1933, as amended ("the Securities Act") or on Section 4(2) of
the Securities Act. All other sales were made in reliance on Section 4(2) of
the Securities Act and/or Regulation D promulgated under the Securities Act.
These sales were made without general solicitation or advertising. Each
purchaser was a sophisticated investor with access to all relevant information
necessary to evaluate the investment and represented to Birch that the shares
were being acquired 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 securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) In June and July 1999, in connection with its proposed sale of
Series D Preferred Stock, Birch obtained the written consent of its stockholders
with respect to the amendment and restatement of Birch's Certificate of
Incorporation.
(b) In June and July 1999, in connection with its proposed sale of
Series F Preferred Stock, Birch obtained the written consent of its stockholders
with respect to (i) the amendment and restatement of Birch's Certificate of
Incorporation, (ii) the amendment and restatement of Birch's Purchasers Rights
Agreement, (iii) the repurchase by Birch of certain outstanding shares of Series
C Preferred Stock, (iv) the adoption of a plan of recapitalization relating to
the Company's Series B and E Preferred Stock, and (v) and the reorganization of
Birch's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
3.1 Restated Certificate of Incorporation.
10.2 Amended and Restated Purchasers Rights Agreement, dated
August 5, 1999.
10.18 Series D Preferred Stock Purchase Agreement, dated
July 2, 1999.
10.19 Series F Preferred Stock Purchase Agreement, dated
July 13, 1999.
10.21 Amendment to Employment Agreement by and between Birch Telecom,
Inc., and Gary L. Chesser.
10.22 Amendment to Employment Agreement by and between Birch Telecom,
Inc., and Gregory C. Lawhon.
10.23 Amendment to Employment Agreement by and between Birch Telecom,
Inc., and David E. Scott.
10.24 Amendment to Employment Agreement by and between Birch Telecom,
Inc., and David W. Vranicar.
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BIRCH TELECOM, INC.
DATE: NOVEMBER 15, 1999 BY: /S/ DAVID E. SCOTT
----------------------------------
DAVID E. SCOTT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: NOVEMBER 15, 1999 BY: /S/ BRADLEY A. MOLINE
----------------------------------
BRADLEY A. MOLINE
CHIEF FINANCIAL OFFICER
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EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
BIRCH TELECOM, INC.
BIRCH TELECOM, INC., a corporation organized and existing under the
laws of the State of Delaware, certifies as follows:
1. The original Certificate of Incorporation of Birch Telecom, Inc.
was filed with the Delaware Secretary of State on December 23, 1996.
2. This Restated Certificate of Incorporation amends and restates the
provisions of the Certificate of Incorporation of this Corporation, and was duly
adopted in accordance with Sections 245 and 228 of the General Corporation Law
of the State of Delaware by the directors and stockholders of the Corporation.
3. The text of the Certificate of Incorporation is amended and restated
to read in its entirety as set forth below:
FIRST: The name of the Corporation is Birch Telecom, Inc. (the
"Corporation").
SECOND: The address of the Corporation's initial registered office in
the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of
New Castle, and the name of its initial registered agent at such address is the
Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
FOURTH:
A. The aggregate number of shares which the Corporation shall have authority to
issue shall be 135,000,000 shares, divided into 80,000,000 shares of common
stock ("Common Stock"), and 55,000,000 shares of preferred stock ("Preferred
Stock"). The Preferred Stock shall have a par value of one-tenth of one cent
($.001) each, and the Common Stock shall have a par value of one-tenth of one
cent ($.001) each.
B. The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Restated Certificate of Incorporation, to fix or
alter the dividend rights, dividend rate, conversion rate, voting rights, rights
and terms of redemption (including sinking fund provisions), the redemption
price or prices, the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
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below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Of the authorized shares of Preferred Stock, 8,750,000 shares are
hereby designated "Series B Preferred Stock"; 8,500,000 shares are hereby
designated "Series C Preferred Stock"; 2,225,000 shares are hereby designated
"Series D Preferred Stock"; 1,904,898 shares are hereby designated "Series E
Preferred Stock"; and 30,000,000 shares are hereby designated "Series F
Preferred Stock."
C. The powers, preferences, rights, restrictions and other matters relating to
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock are as follows:
(1) DIVIDENDS.
(a) SERIES B PREFERRED STOCK. The holders of Series B Preferred Stock
shall be entitled to receive dividends in cash at the rate of fifteen
percent (15%) per annum on an amount equal to $1.52 plus all unpaid
dividends accrued on such shares of Series B Preferred Stock, on each
outstanding share of Series B Preferred Stock (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares),
when and as declared by the Board of Directors out of the funds legally
available for that purpose. Such dividends shall be cumulative from the
date of issuance of the Series B Preferred Stock, whether or not earned,
whether or not funds of the Corporation are legally available for the
payment of dividends and whether or not declared by the Board, but such
dividends shall be payable only when, as, and if declared by the Board. So
long as any shares of Series B Preferred Stock shall be outstanding, no
dividend, whether in cash, stock or property, shall be paid or declared,
nor shall any other distribution be made, on any shares of Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Common Stock, nor shall more than 2,225,000 shares of Series C Preferred
Stock or any shares of Series D Preferred Stock or Common Stock be
purchased, redeemed or otherwise acquired for value by the Corporation
(except for acquisitions of Common Stock by the Corporation pursuant to
agreements which permit the Corporation to repurchase such shares upon
termination of services to the Corporation or in exercise of the
Corporation's right of first refusal upon a proposed transfer) until all
dividends set forth in this Section (1)(a) on the Series B Preferred Stock
shall have been paid or declared and set apart.
(b) SERIES C PREFERRED STOCK. The holders of Series C Preferred Stock
shall be entitled to receive dividends in cash at the rate of ten percent
(10%) per annum on an amount equal to $1.52 on each outstanding share of
Series C Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares), when and as
declared by the Board of Directors out of funds legally available for that
purpose. Notwithstanding anything to the contrary herein, such dividends
shall be payable only when, as and if declared by the Board of Directors
and shall not be cumulative. So long as any shares of Series C Preferred
Stock shall be outstanding, no dividend, whether in cash, stock or
property, shall be paid or declared, nor shall any other distribution be
made, on any shares of Common Stock, nor shall any shares of Common Stock
be purchased, redeemed or otherwise acquired for value by the Corporation
(except for acquisitions of Common Stock
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by the Corporation pursuant to agreements which permit the Corporation to
repurchase such shares upon termination of services to the Corporation or
in exercise of the Corporation's right of first refusal upon a proposed
transfer) until all dividends set forth in this Section (1)(b) on the
Series C Preferred Stock shall have been paid or declared and set apart.
(c) SERIES D PREFERRED STOCK. The holders of Series D Preferred Stock
shall be entitled to receive dividends in cash at the rate of fifteen
percent (15%) per annum on an amount equal to $4.50 plus all unpaid
dividends accrued on such shares of Series D Preferred Stock, on each
outstanding share of Series D Preferred Stock (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares),
when and as declared by the Board of Directors out of the funds legally
available for that purpose. Such dividends shall be cumulative from the
date of issuance of the Series D Preferred Stock, whether or not earned,
whether or not funds of the Corporation are legally available for the
payment of dividends and whether or not declared by the Board, but such
dividends shall be payable only when, as, and if declared by the Board. So
long as any shares of Series D Preferred Stock shall be outstanding, no
dividend, whether in cash, stock or property, shall be paid or declared,
nor shall any other distribution be made, on any shares of Series B
Preferred Stock (other than in shares of Series E Preferred Stock), Series
C Preferred Stock, Series E Preferred Stock or Common Stock, nor shall more
than 2,225,000 shares of Series C Preferred Stock or any shares of Series B
Preferred Stock or Common Stock be purchased, redeemed or otherwise
acquired for value by the Corporation (except for acquisitions of Common
Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's right of first refusal upon
a proposed transfer) until all dividends set forth in this Section (1)(c)
on the Series D Preferred Stock shall have been paid or declared and set
apart.
(d) SERIES E PREFERRED STOCK. The holders of Series E Preferred Stock
shall be entitled to receive dividends in cash at the rate of fifteen
percent (15%) per annum on an amount equal to $4.50 plus all unpaid
dividends accrued on such shares of Series E Preferred Stock, on each
outstanding share of Series E Preferred Stock (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares),
when and as declared by the Board of Directors out of the funds legally
available for that purpose. Such dividends shall be cumulative from the
date of issuance of the Series E Preferred Stock, whether or not earned,
whether or not funds of the Corporation are legally available for the
payment of dividends and whether or not declared by the Board, but such
dividends shall be payable only when, as, and if declared by the Board. So
long as any shares of Series E Preferred Stock shall be outstanding, no
dividend, whether in cash, stock or property, shall be paid or declared,
nor shall any other distribution be made, on any shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Common Stock, nor shall more than 2,225,000 shares of Series C Preferred
Stock or any shares of Series B Preferred Stock, Series D Preferred Stock
or Common Stock be purchased, redeemed or otherwise acquired for value by
the Corporation (except for acquisitions of Common Stock by the Corporation
pursuant to agreements which permit the Corporation to repurchase such
shares upon termination of services to the Corporation or in exercise of
the Corporation's right of first refusal upon a proposed transfer) until
all dividends set forth in this Section (1)(d) on the Series E Preferred
Stock shall have been paid or declared and set apart.
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(e) SERIES F PREFERRED STOCK. The holders of Series F Preferred Stock
shall be entitled to receive dividends in cash at the rate of fifteen
percent (15%) per annum on an amount equal to the purchase price for such
shares (the "Purchase Price") plus all unpaid dividends accrued on such
shares of Series F Preferred Stock, on each outstanding share of Series F
Preferred Stock (as adjusted for any stock dividends, combinations, splits
and the like with respect to such shares), payable on March 31, June 30,
September 30 and December 31 of each year, when and as declared by the
Board of Directors out of the funds legally available for that purpose.
Such dividends shall be cumulative from the date of issuance of the Series
F Preferred Stock, whether or not earned, whether or not funds of the
Corporation are legally available for the payment of dividends and whether
or not declared by the Board, but such dividends shall be payable only
when, as, and if declared by the Board. The Purchase Price for the Series F
Preferred Stock is $4.50 per share for the initial purchase of 13,333,334
shares by BTI Ventures L.L.C. or its affiliates ("BTI"). In addition, BTI
retains the option (the "Option") to acquire 5,263,158 shares of Series F
Preferred Stock at a Purchase Price of $4.75 per share and 5,000,000 shares
of Series F Preferred Stock at a Purchase Price of $5.00 per share. So long
as any shares of Series F Preferred Stock shall be outstanding, no
dividend, whether in cash or property, shall be paid or declared, nor shall
any other distribution be made, on any shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Common Stock or any other class or series of capital stock of the
Corporation, nor shall more than 2,225,000 shares of Series C Preferred or
any shares of Series B Preferred Stock, Series D Preferred Stock, Common
Stock or any other class or series of capital stock of the Corporation be
purchased, redeemed or otherwise acquired for value by the Corporation
(except for the redemption of the Series E Preferred Stock or acquisitions
of Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation) until all dividends set forth in this Section (1)(e) on the
Series F Preferred Stock shall have been paid or declared and set apart. In
addition to the 15% quarterly dividend payable on the Series F Preferred
Stock, the shares of Series F Preferred Stock shall be entitled to receive
the amount of any cash or non-cash dividends or distributions declared and
paid on the shares of Common Stock, as if the shares of Series F Preferred
Stock had been converted immediately prior to the record date for the
payment of such dividend or distribution.
(2) LIQUIDATION RIGHTS.
(a) SERIES F PREFERRED STOCK. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment shall
be made to the holders of Series B Preferred Stock, Series C Preferred
Stock or Common Stock, the holders of Series F Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount equal to
the greater of (i) the sum of (a) the applicable Purchase Price per share
of Series F Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (b) an
amount equal to all unpaid dividends accrued on such shares of Series F
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board; or (ii) the amount the holders of Series F Preferred
Stock would have received upon liquidation, dissolution or winding up of
the Corporation had such shares of Series F Preferred Stock and
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all shares of Series D Preferred Stock and Series E Preferred Stock been
converted to Common Stock immediately prior to such liquidation,
dissolution or winding up (such greater amount, the "Series F Liquidation
Preference"), for each share of Series F Preferred Stock held by them. If
the assets of the Corporation shall be insufficient to make payment in full
to all holders of Series F Preferred Stock, Series E Preferred Stock and
Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a) through (c), inclusive, then such assets shall be
distributed among the holders of Series F Preferred Stock, Series E
Preferred Stock and Series D Preferred Stock at the time outstanding
ratably in proportion to the full amounts to which they would otherwise be
respectively entitled.
(b) SERIES E PREFERRED STOCK. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment shall
be made to the holders of Series B Preferred Stock, Series C Preferred
Stock or Common Stock, the holders of Series E Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount equal to
the greater of (i) the sum of (a) $4.50 per share of Series E Preferred
Stock (as adjusted for any stock dividends, combinations, splits and the
like with respect to such shares) plus (b) an amount equal to all unpaid
dividends accrued on such shares of Series E Preferred Stock to the date of
payment of such preference, whether or not earned, whether or not funds of
the Corporation are legally available for the payment of dividends and
whether or not such dividends have been declared by the Board; or (ii) the
amount the holders of Series E Preferred Stock would have received upon
liquidation, dissolution or winding up of the Corporation had such shares
of Series E Preferred Stock and all shares of Series D Preferred Stock and
Series F Preferred Stock been converted to Common Stock immediately prior
to such liquidation, dissolution or winding up (such greater amount, the
"Series E Liquidation Preference"), for each share of Series E Preferred
Stock held by them. If the assets of the Corporation shall be insufficient
to make payment in full to all holders of Series F Preferred Stock, Series
E Preferred Stock and Series D Preferred Stock of the liquidation
preference set forth in Sections (2)(a) through (c), inclusive, then such
assets shall be distributed among the holders of Series F Preferred Stock,
Series E Preferred Stock and Series D Preferred Stock at the time
outstanding ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
(c) SERIES D PREFERRED STOCK. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment shall
be made to the holders of Series B Preferred Stock, Series C Preferred
Stock or Common Stock, the holders of Series D Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount equal to
the greater of (i) the sum of (a) $4.50 per share of Series D Preferred
Stock (as adjusted for any stock dividends, combinations, splits and the
like with respect to such shares) plus (b) an amount equal to all unpaid
dividends accrued on such shares of Series D Preferred Stock to the date of
payment of such preference, whether or not earned, whether or not funds of
the Corporation are legally available for the payment of dividends and
whether or not such dividends have been declared by the Board; or (ii) the
amount the holders of Series D Preferred Stock would have received upon
liquidation, dissolution or winding up of the Corporation had such shares
of Series D Preferred Stock and all shares of Series E Preferred Stock and
Series F Preferred Stock been converted to Common Stock immediately prior
to such liquidation, dissolution or winding up (such greater amount the
"Series D Liquidation Preference"), for each share of Series D Preferred
Stock held by them.
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If the assets of the Corporation shall be insufficient to make payment in
full to all holders of Series F Preferred Stock, Series E Preferred Stock
and Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a)-(c), then such assets shall be distributed among the
holders of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock at the time outstanding ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(d) SERIES B PREFERRED STOCK. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section (2)(c)
above, and before any distribution or payment shall be made to the holders
of Series C Preferred Stock or Common Stock, the holders of Series B
Preferred Stock shall be entitled to be paid out of the assets of the
Corporation an amount equal to the sum of (i) $1.52 for each share of
Series B Preferred Stock held by them (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (ii) an
amount equal to all unpaid dividends accrued on such shares of Series B
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board (the "Series B Liquidation Preference"), for each
share of Series B Preferred Stock held by them. If the remaining assets of
the Corporation shall be insufficient to make payment in full to all
holders of Series B Preferred Stock of the liquidation preference set forth
in this Section (2)(d), then such remaining assets shall be distributed
among the holders of Series B Preferred Stock at the time outstanding
ratably in proportion to the full amounts to which they would otherwise be
respectively entitled.
(e) SERIES C PREFERRED STOCK. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section (2)(c)
above and the Series B Preferred Stock as set forth in Section (2)(d)
above, and before any distribution or payment shall be made to the holders
of Common Stock, the holders of Series C Preferred Stock shall be entitled
to be paid out of the assets of the Corporation an amount equal to the sum
of (i) $1.52 per share of Series C Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), plus (ii) an amount equal to all declared and unpaid dividends for
each share of Series C Preferred Stock held by them (the "Series C
Liquidation Preference"). If the remaining assets of the Corporation shall
be insufficient to make payment in full to all holders of Series C
Preferred Stock of the liquidation preference set forth in this Section
(2)(e), then such remaining assets shall be distributed among the holders
of Series C Preferred Stock at the time outstanding ratably in proportion
to the full amounts to which they would otherwise be respectively entitled.
(f) COMMON STOCK. Upon any liquidation, dissolution, or winding up of
the Corporation, and after the payment in full of the Series F Liquidation
Preference, Series E Liquidation Preference, Series D Liquidation
Preference, the Series B Liquidation Preference and the Series C
Liquidation Preference, then the remaining assets of the Corporation
legally available for distribution, if any, shall be distributed ratably to
the holders of the Common Stock.
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(g) DEEMED LIQUIDATIONS. The following events will be deemed a
liquidation under this section: (i) consolidation, reorganization, share
exchange, recapitalization, business combination, merger or similar
transaction involving the Corporation in which the stockholders of the
Corporation immediately prior to such transaction in the aggregate cease to
own at least 50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent thereof), or any
transaction or series of related transactions in which in excess of 50% of
the Corporation's voting power is transferred (in any case, an
"Acquisition"), but not including the purchase of Series F Preferred Stock
by BTI; and (ii) the sale, lease, transfer or other disposition of all or
substantially all of the assets of the Corporation (an "Asset Transfer").
(h) PAYMENTS IN PROPERTY. Whenever the distribution provided for in
this Section (2) shall be payable in securities or other property other
than cash, the value of that distribution shall be the fair market value of
those securities or other property.
(i) DETERMINATIONS OF FAIR MARKET VALUE. Whenever a determination of
fair market value is required under this Restated Certificate of
Incorporation, the fair market value shall be determined based upon the
price that would be paid by a willing buyer of the assets or shares at
issue, in a sale process designed to attract all possible participants and
to maximize value. The determination of fair market value shall be made (i)
by the Board of Directors or (ii) if a majority in interest of the Series F
Preferred Stock object to such determination by the Board of Directors, by
a nationally recognized investment banking firm mutually agreeable to the
Corporation and a majority in interest of the shares of Series F Preferred
Stock. The fees and expenses of such investment banking firm shall be paid
by the Corporation.
(3) VOTING RIGHTS.
(a) SERIES B, C, D, E AND F PREFERRED STOCK. Except as set forth in
Sections (3)(b) and (3)(c), the holders of Series B Preferred Stock shall
be entitled to cast one vote for each share of Series B Preferred Stock
held by them on an as-converted basis, the holders of Series C Preferred
Stock shall be entitled to cast one vote for each share of Series C
Preferred Stock held by them on an as-converted basis, the holders of
Series D Preferred Stock shall be entitled to cast one vote for each share
of Series D Preferred Stock held by them on an as-converted basis, the
holders of Series E Preferred Stock shall be entitled to cast one vote for
each share of Series E Preferred Stock held by them on an as-converted
basis, and the holders of Series F Preferred Stock shall be entitled to
cast one vote for each share of Series F Preferred Stock held by them on an
as-converted basis. Such votes shall be cast together with those cast by
the holders of Common Stock and not as a separate class, except as
otherwise provided herein or required by applicable law. The Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, the Series E Preferred Stock and the Series F Preferred Stock shall
not have cumulative voting rights.
(b) RESTRICTIONS AND LIMITATIONS.
(i) So long as the outstanding shares of Series B Preferred
Stock, Series D
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Preferred Stock and Series E Preferred Stock represent at least five
percent (5%) or more of the outstanding shares of Common Stock of the
Corporation (on an as-converted to Common Stock basis), the approval
by the vote or written consent of the holders of at least a majority
of the then outstanding shares of Series B Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, voting together as a
single class, shall be necessary for effecting or validating the
following actions:
(A) Any action that results in the payment or declaration of
a dividend on any shares of Common Stock; or
(B) The purchase or other acquisition (or payment into or
set aside for a sinking fund for such purpose) of any Series C
Preferred Stock or Common Stock; provided, however, that this
restriction shall not apply to: (x) the repurchase of shares of
Common Stock by the Corporation pursuant to agreements which
permit the Corporation to repurchase such shares upon termination
of services to the Corporation; or (y) the exercise of the
Corporation's right of first refusal with the approval of the
Board of Directors upon a proposed transfer.
(ii) So long as the outstanding shares of Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock,
represents at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least seventy-five percent (75%) of the then
outstanding shares of Series B Preferred Stock, Series D Preferred
Stock, and Series E Preferred Stock, voting together as a single
class, shall be necessary for effecting or validating the following
actions:
(A) Any amendment, alteration, or repeal of any provision of
the Restated Certificate of Incorporation or Bylaws of the
Corporation (including the filing of a Certificate of
Designation), that adversely affects the voting powers,
preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series B
Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock, or
(B) Any amendment, alteration, or repeal of Section
(3)(b)(i) or Section 3(b)(ii).
(iii) So long as the outstanding shares of Series F Preferred
Stock represents at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least seventy-five percent (75%) of the then
outstanding shares of Series F Preferred Stock shall be necessary for
effecting or validating the following actions with respect to the
Corporation:
(A) Any amendment, alteration, or repeal of any provision of
the Restated Certificate of Incorporation or Bylaws of the
Corporation (including the filing of a Certificate of
Designation), that adversely affects the voting
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<PAGE> 9
powers, preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series F
Preferred Stock;
(B) Any authorization, creation, or increase in the
authorized number of any class or series of capital stock ranking
senior to or on parity with the Series F Preferred Stock as to
dividends, voting rights or liquidation, or any issuance of any
shares of such class or series of capital stock (or any
securities convertible into, or exchangeable or exerciseable for
such shares);
(C) Any payment of any cash or non-cash dividends or other
distributions with respect to its capital stock;
(D) Any reclassification, combination, split, subdivision,
redemption, repurchase or other acquisition of any shares of
capital stock (except for (x) acquisitions of Common Stock by the
Corporation pursuant to agreements which permit the Corporation
to repurchase such shares upon the termination of services to the
Corporation or in exercise of the Corporation's right of first
refusal upon a proposed transfer, (y) any redemption of the
Series E Preferred Stock pursuant to Section (5)(b) and (z) the
redemption by the Corporation of up to 2,225,000 shares of Series
C Preferred Stock);
(E) Any agreement by the Corporation or its stockholders
regarding an Acquisition or an Asset Transfer (as defined in
Section 2(g));
(F) Any acquisition of assets or securities of any other
person or entity, except for acquisitions involving cash with an
aggregate value of less than five percent (5%) of the
Corporation's assets for any single acquisition or series of
related transactions;
(G) Any joint venture or similar profit sharing arrangement
involving material assets or the payment or receipt of more than
five percent (5%) of the Corporation's assets;
(H) Any liquidation, dissolution or winding up of the
Corporation; or
(I) An amendment, alteration, or repeal of this Section
(3)(b).
(C) ELECTION OF BOARD OF DIRECTORS.
(i) For so long as at least 6,666,667 shares of Series F
Preferred Stock remain outstanding (subject to adjustment for any
stock split, reverse stock split and the like), the holders of Series
F Preferred Stock, voting as a separate class, shall be entitled to
elect that number of directors to the Corporation's Board of Directors
equal to (A) the authorized size of the Corporation's Board of
Directors, multiplied by (B) (I) the total number of shares of the
Corporation's Common Stock represented by the shares of Series F
Preferred Stock then outstanding (on an as-converted basis),
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<PAGE> 10
divided by (II) the total number of shares of the Corporation's Common
Stock then outstanding (assuming conversion of all Preferred Stock
then outstanding), rounding up so that the nominees of the holders of
Series F Preferred Stock will not represent less than such
proportionate interest in (B) above, at each meeting or pursuant to
each consent of the Corporation's shareholders for the election of
directors; provided, however, that for purposes of this Section
(3)(c)(i) only, the calculation of the total number of shares
outstanding shall exclude any equity securities issued by the Company
after the Series F Original Issue Date (other than the shares issued
pursuant to the Option) if at such time (x) BTI has not exercised any
part of the Option and the outstanding shares of Series F Preferred
Stock represent twenty percent (20%) or more of the outstanding Common
Stock of the Company (on an as-converted to Common Stock basis), or
(y) BTI has exercised any part of the Option and the outstanding
shares of Series F Preferred Stock represent thirty percent (30%) or
more of the outstanding Common Stock of the Company (on an
as-converted to Common Stock basis). Only the holders of the Series F
Preferred Stock shall be entitled to remove from office such directors
or to fill any vacancy caused by the resignation, death or removal of
such directors.
(ii) For so long as at least 8,532,394 shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock remain outstanding (subject to adjustment
for any stock split, reverse stock split and the like), the holders of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, voting together as a single class,
shall be entitled to elect two (2) members of the Board of Directors
at each meeting or pursuant to each consent of the Corporation's
shareholders for the election of directors, and only the holders of
the of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, voting together a single
class, shall be entitled to remove from office such directors or to
fill any vacancy caused by the resignation, death or removal of such
directors.
(iii) For so long as the conditions set forth in 3(c)(i) and (ii)
are satisfied the holders of Common Stock, voting as a separate class,
shall be entitled to elect one (1) member of senior management of the
Corporation to the Board of Directors at each meeting or pursuant to
each consent of the Corporation's shareholders for the election of
directors, and only the holders of the Common Stock shall be entitled
to remove from office such director and to fill any vacancy caused by
the resignation, death or removal of such director.
(iv) Except as provided in 3(c)(i), (ii) and (iii) above, the
holders of Common Stock and Preferred Stock, voting together as a
single class, shall be entitled to elect all members of the Board of
Directors.
(4) CONVERSION RIGHTS. The holders of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock shall have the following rights with
respect to the conversion of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock into shares of Common Stock (the "Conversion
Rights"):
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<PAGE> 11
(a) OPTIONAL CONVERSION. Subject to and in compliance with the
provisions of this Section (4), any shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series F Preferred
Stock may, at the option of the holder, be converted at any time into fully
paid and nonassessable shares of Common Stock. Subject to and in compliance
with the provisions of this Section (4), any shares of Series E Preferred
Stock may, at the option of the holder, be converted at any time after
October 1, 1999 into fully paid and nonassessable shares of Common Stock.
The number of shares of Common Stock to which a holder of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock, or Series F Preferred Stock shall be entitled upon
conversion shall be the product obtained by multiplying the applicable
Preferred Stock Rate then in effect (determined as provided in Section
(4)(c)) by the number of shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock being converted by such holder.
(b) AUTOMATIC CONVERSION. Subject to and in compliance with the
provisions of this Section (4), all outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock shall be automatically
converted into shares of Common Stock immediately prior to the closing of a
firmly underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer
and sale of Common Stock for the account of the Company in which the gross
proceeds to the Corporation (before underwriting discounts, commissions and
fees) are at least $60,000,000. The number of shares of Common Stock to
which a holder of Series B Preferred Stock shall be entitled upon
conversion shall be the product obtained by multiplying the applicable
Preferred Stock Rate then in effect by the number of shares of Series B
Preferred Stock being converted by such holder. The number of shares of
Common Stock to which a holder of Series C Preferred Stock shall be
entitled upon conversion shall be the product obtained by multiplying the
applicable Preferred Stock Rate then in effect by the number of shares of
Series C Preferred Stock being converted by such holder. The number of
shares of Common Stock to which a holder of Series D Preferred Stock shall
be entitled upon conversion shall be the product obtained by multiplying
the applicable Preferred Stock Rate then in effect by the number of shares
of Series D Preferred Stock being converted by such holder. The number of
shares of Common Stock to which a holder of Series E Preferred Stock shall
be entitled upon conversion shall be the product obtained by multiplying
the applicable Preferred Stock Rate then in effect by the number of shares
of Series E Preferred Stock being converted by such holder. The number of
shares of Common Stock to which a holder of Series F Preferred Stock shall
be entitled upon conversion shall be the product obtained by multiplying
the applicable Preferred Stock Rate then in effect by the number of shares
of Series F Preferred Stock being converted by such holder.
(c) PREFERRED STOCK. The conversion rate of the applicable series of
Preferred Stock in effect at any time for conversion of the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock, or Series F Preferred Stock (the "Preferred Stock Rate")
shall be the quotient obtained by dividing the Original Issue Price of the
applicable series of Preferred Stock by the applicable Preferred Stock
Price, calculated as provided in Section (4)(d). The "Original Issue Price"
for the Series B Preferred Stock and Series C Preferred Stock shall
initially equal $1.52 per share. The "Original Issue Price" of the Series D
Preferred Stock and Series E Preferred Stock shall initially equal $4.50
per share. The
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<PAGE> 12
"Original Issue Price" of the Series F Preferred Stock shall initially
equal the Purchase Price with respect to each share.
(d) CONVERSION PRICE. The conversion price for the applicable series
of Preferred Stock shall initially be the Original Issue Price of the
applicable series of Preferred Stock (the "Preferred Stock Price"). Such
initial Preferred Stock Price shall be adjusted from time to time after the
Series F Original Issue Date (as defined below) in accordance with this
Section (4). All references to the Preferred Stock Price herein shall mean
the Preferred Stock Price as applicable and as so adjusted.
(e) MECHANICS OF CONVERSION. Each holder of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock who desires to convert the same into
shares of Common Stock pursuant to this Section (4) shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or any transfer agent for the Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock, and shall give written notice to the Corporation
at such office that such holder elects to convert the same. Such notice
shall state the number of shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock being converted. Thereupon, the Corporation shall
promptly issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder
is entitled. Such conversion shall be deemed to have been made at the close
of business on the date of such surrender of the certificates representing
the shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock to
be converted, and the person entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder of such shares of Common Stock on such date.
(f) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation
shall at any time or from time to time after August 5, 1999 (the "Series F
Original Issue Date") effect a subdivision of the outstanding Common Stock
without a corresponding subdivision of the Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock, the Preferred Stock Price for each series of
Preferred Stock in effect immediately before that subdivision shall be
proportionately decreased. Conversely, if the Corporation shall at any time
or from time to time after the Series F Original Issue Date combine the
outstanding shares of Common Stock into a smaller number of shares without
a corresponding combination of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock, the Preferred Stock Price for each series of
Preferred Stock in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section (4)(f) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(g) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common
Stock, in each such event the Preferred Stock Price of each applicable
series of Preferred Stock that is then in effect shall be decreased as of
the time of such issuance or, in the event such record date is fixed, as of
the close of business on such record date, by
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<PAGE> 13
multiplying the Preferred Stock Price for each applicable series of
Preferred Stock then in effect by a fraction (i) the numerator of which is
the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on
such record date, and (ii) the denominator of which is the total number of
shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the applicable Preferred Stock Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the applicable Preferred Stock Price shall be adjusted pursuant
to this Section (4)(g) to reflect the actual payment of such dividend or
distribution.
(h) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Corporation
other than shares of Common Stock, in each such event provision shall be
made so that the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall receive upon conversion thereof, in addition
to the number of shares of Common Stock receivable thereupon, the amount of
other securities of the Corporation which they would have received had
their Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock been
converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including
the conversion date, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for
during such period under this Section (4)(h) with respect to the rights of
the holders of the Preferred Stock or with respect to such other securities
by their terms.
(i) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at
any time or from time to time after the Series F Original Issue Date, the
Common Stock issuable upon the conversion of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock is changed into the same or a different
number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition
or Asset Transfer as defined in Section (2)(g) or a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section
(4)), in any such event each holder of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall have the right thereafter to convert such
stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the maximum number of shares of Common Stock into which such
shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock
could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided
herein or with respect to such other securities or property by the terms
thereof.
(j) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at
any time or from time to time after the Series F Original Issue Date, there
is a capital reorganization of the
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Common Stock, merger, consolidation or sale of assets (other than an
Acquisition or Asset Transfer as defined in Section (2)(g) or a
recapitalization, subdivision, combination, reclassification, exchange or
substitution of shares provided for elsewhere in this Section (4)), as a
part of such capital reorganization, merger, consolidation or sale of
assets, provision shall be made so that the holders of the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock shall thereafter be entitled
to receive upon conversion of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock the number of shares of stock or other securities
or property of the Corporation or third party entity to which a holder of
the number of shares of Common Stock deliverable upon conversion would have
been entitled on such capital reorganization, merger, consolidation or sale
of assets, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section (4) with respect to
the rights of the holders of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock after the capital reorganization, merger, consolidation or
sale of assets to the end that the provisions of this Section (4)
(including adjustment of the Preferred Stock Price then in effect and the
number of shares issuable upon conversion of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock) shall be applicable after that event
and be as nearly equivalent as practicable.
(k) SALE OF SHARES BELOW PREFERRED STOCK PRICE.
(i) If at any time or from time to time after the Series F
Original Issue Date, the Corporation issues or sells, or is deemed by
the express provisions of this Section (4)(k) to have issued or sold,
Additional Shares of Common Stock (as defined in Section (4)(k)(iv)
below), other than as a dividend or other distribution on any class of
stock as provided in Section (4)(g) above, and other than a
subdivision or combination of shares of Common Stock as provided in
Section (4)(f) above, for an Effective Price (as defined in Section
(4)(k)(iv) below) less than the then effective Preferred Stock Price
with respect to the applicable series of Preferred Stock, then and in
each such case the then existing Preferred Stock Price with respect to
the applicable series of Preferred Stock shall be reduced, as of the
opening of business on the date of such issue or sale, to a price
determined by multiplying the applicable Preferred Stock Price by a
fraction (i) the numerator of which shall be (A) the number of shares
of Common Stock deemed outstanding (as defined below) immediately
prior to such issue or sale, plus (B) the number of shares of Common
Stock which the aggregate consideration received (as defined in
Section (4)(k)(ii) below) by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such
applicable Preferred Stock Price, and (ii) the denominator of which
shall be the number of shares of Common Stock deemed outstanding (as
defined below) immediately prior to such issue or sale plus the total
number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common
Stock deemed to be outstanding as of a given date shall be the sum of
(A) the number of shares of Common Stock actually outstanding, (B) the
number of shares of Common Stock into which the then outstanding
shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F
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Preferred Stock could be converted if fully converted on the day
immediately preceding the given date, and (C) the number of shares of
Common Stock which could be obtained through the exercise or
conversion of all other rights, options and convertible securities on
the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required under this
Section (4)(k), the consideration received by the Corporation for any
issue or sale of securities shall (A) to the extent it consists of
cash, be computed at the net amount of cash received by the
Corporation after deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the
Corporation in connection with such issue or sale but without
deduction of any expenses payable by the Corporation, (B) to the
extent it consists of property other than cash, be computed at the
fair value of that property as determined in good faith by the Board
of Directors, and (C) if Additional Shares of Common Stock,
Convertible Securities (as defined in Section (4)(k)(iii) below) or
rights or options to purchase either Additional Shares of Common Stock
or Convertible Securities are issued or sold together with other stock
or securities or other assets of the Corporation for a consideration
which covers both, be computed as the portion of the consideration so
received that may be reasonably determined in good faith by the Board
of Directors to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this
Section (4)(k), if the Corporation issues or sells any rights or
options for the purchase of, or stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or
securities being herein referred to as "Convertible Securities") and
if the Effective Price of such Additional Shares of Common Stock is
less than the applicable Preferred Stock Price, in each case the
Corporation shall be deemed to have issued at the time of the issuance
of such rights or options or Convertible Securities the maximum number
of Additional Shares of Common Stock issuable upon exercise or
conversion thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the Corporation for the issuance of
such rights or options or Convertible Securities, plus, in the case of
such rights or options, the minimum amounts of consideration, if any,
payable to the Corporation upon the exercise of such rights or
options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Corporation (other
than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion thereof; provided that if
in the case of Convertible Securities the minimum amounts of such
consideration cannot be ascertained, but are a function of
antidilution or similar protective clauses, the Corporation shall be
deemed to have received the minimum amounts of consideration without
reference to such clauses; provided further that if the minimum amount
of consideration payable to the Corporation upon the exercise or
conversion of rights, options or Convertible Securities is reduced
over time or on the occurrence or non-occurrence of specified events
other than by reason of antidilution adjustments, the Effective Price
shall be recalculated using the figure to which such minimum amount of
consideration is reduced; provided further that if the minimum amount
of consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities is
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<PAGE> 16
subsequently increased, the Effective Price shall be again
recalculated using the increased minimum amount of consideration
payable to the Corporation upon the exercise or conversion of such
rights, options or Convertible Securities. No further adjustment of
the applicable Preferred Stock Price, as adjusted upon the issuance of
such rights, options or Convertible Securities, shall be made as a
result of the actual issuance of Additional Shares of Common Stock on
the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the
conversion privilege represented by any such Convertible Securities
shall expire without having been exercised, the applicable Preferred
Stock Price as adjusted upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the applicable Preferred
Stock Price which would have been in effect had an adjustment been
made on the basis that the only Additional Shares of Common Stock so
issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and such Additional Shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for the
granting of all such rights or options, whether or not exercised, plus
the consideration received for issuing or selling the Convertible
Securities actually converted, plus the consideration, if any,
actually received by the Corporation (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities)
on the conversion of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock.
(iv) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by the Corporation or deemed to be issued pursuant
to this Section (4)(k), whether or not subsequently reacquired or
retired by the Corporation other than (A) shares of Series E Preferred
Stock; (B) shares of Common Stock issued upon conversion of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock; (C)
Common Stock and/or options, warrants or other Common Stock purchase
rights, and the Common Stock issued pursuant to such options, warrants
or other rights to employees, officers or directors of, or consultants
or advisors to the Corporation or any subsidiary pursuant to stock
purchase or stock option plans or other arrangements that are approved
by the Board; (D) shares of Common Stock issued pursuant to the
exercise of options, warrants or convertible securities outstanding as
of the Series F Original Issue Date; and (E) warrants to purchase
Common Stock, and the Common Stock issued pursuant to such warrants,
that are issued to holders of the Senior Notes due 2008 issued by the
Corporation pursuant to an indenture between the Corporation and
Norwest Bank, N.A. (the "Senior Notes"). The "Effective Price" of
Additional Shares of Common Stock shall mean the quotient determined
by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the
Corporation under this Section (4)(k), into the aggregate
consideration received, or deemed to have been received by the
Corporation for such issue under this Section (4)(k), for such
Additional Shares of Common Stock.
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(l) CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or
readjustment of the applicable Preferred Stock Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock, if the Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock is then convertible
pursuant to this Section (4), the Corporation, at its expense, shall
compute such adjustment or readjustment in accordance with the provisions
hereof and prepare a certificate showing such adjustment or readjustment,
and shall mail such certificate, by first class mail, postage prepaid, to
each registered holder of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock at the holder's address as shown in the Corporation's
books. The certificate shall set forth such adjustment or readjustment,
showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (i) the consideration received or deemed to
be received by the Corporation for any Additional Shares of Common Stock
issued or sold or deemed to have been issued or sold, (ii) the Preferred
Stock Price at the time in effect, (iii) the number of Additional Shares of
Common Stock and (iv) the type and amount, if any, of other property which
at the time would be received upon conversion of the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock.
(m) NOTICES OF RECORD DATE. Upon (i) any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any Acquisition (as defined in Section (2)(g))
or other capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation with or into any other corporation, or any
Asset Transfer (as defined in Section (2)(g)), or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of Preferred Stock at least twenty
(20) calendar days prior to the record date specified therein a notice
specifying (A) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend
or distribution, (B) the date on which any such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up is expected to become
effective, and (C) the date, if any, that is to be fixed as to when the
holders of record of Common Stock (or other securities) shall be entitled
to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up.
(n) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result
in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of any fractional
share, the Corporation shall, in lieu of issuing any fractional share, pay
cash equal to the product of such fraction
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multiplied by the Common Stock's fair market value (as determined in
accordance with Section (2)(i)) on the date of conversion.
(o) RESERVATION OF STOCK. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common
Stock such number of its shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock and the exercise of
all outstanding options and warrants of the Corporation. If at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock or the
exercise of all outstanding options and warrants, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
(p) NOTICES. Any notice required by the provisions of this Section (4)
shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
telex or facsimile if sent during normal business hours of the recipient;
if not, then on the next business day, (iii) five (5) business days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid, or (iv) one (1) business day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All notices shall be addressed to each
holder of record at the address of such holder appearing on the books of
the Corporation.
(q) PAYMENT OF TAXES. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock, excluding any tax or other charge imposed in connection with any
transfer involved in the issue and delivery of shares of Common Stock in a
name other than that in which the shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock so converted were registered.
(5) REDEMPTION.
(a) SERIES F PREFERRED STOCK.
(i) GENERALLY. In the event of (a) a breach by the Corporation of
any of the terms of this Restated Certificate of Incorporation, the
Bylaws of the Corporation, or the Amended and Restated Purchaser's
Rights Agreement, dated July 2, 1999 by and among the Corporation and
certain holders of its capital stock, as the same may be amended from
time to time (including in connection with the issuance of Series F
Preferred Stock), which has a material adverse effect on the holders
of the Series F Preferred Stock that is not cured within fifteen (15)
days of receipt of written notice by the Corporation from a holder of
Series F Preferred Stock, or (b) the voluntary resignation (other than
due to death or disability) prior to February 10, 2001 of (i) David E.
Scott or (ii) any two of Jeffrey D. Shackelford, Bradley A. Moline, or
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<PAGE> 19
Gregory C. Lawhon within six (6) months of one another (in the case of
(a) or (b), a "Redemption Event"), a majority in interest of the
Series F Preferred Stock may elect to demand in writing ("Redemption
Demand") the redemption of all or any portion of the shares of Series
F Preferred Stock, from any source of funds legally available
therefor, at a redemption price per share (the "Series F Redemption
Price") equal to the amount of the Series F Liquidation Preference.
The redemption under this Section (5)(a) shall take place on a date
(the "Series F Redemption Date") that is no later than thirty (30)
days after the receipt by the Corporation of the Redemption Demand.
(ii) INDENTURE RESTRICTION. Notwithstanding the foregoing, the
Corporation shall not be obligated to redeem the shares of Series F
Preferred Stock for cash pursuant to Section (5)(a)(i), if such
redemption or the existence of the redemption provision would violate
the terms of the Indenture, dated as of June 23, 1998, by and between
the Corporation and Norwest Bank Minnesota, National Association (as
trustee), as amended, pursuant to which the Senior Notes were issued,
until 91 days after the date on which the Senior Notes mature. If the
Corporation is unable to redeem the Series F Preferred Stock for cash
as set forth above, a majority in interest of the Series F Preferred
Stock may elect to receive shares of Common Stock with a fair market
value (as determined in accordance with Section (2)(i)) equal to the
Series F Redemption Price.
(iii) PROCEDURE. At least 15 days prior to a Series F Redemption
Date, written notice shall be mailed, first class postage prepaid, to
each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Series F
Preferred Stock to be redeemed, at the address last shown on the
records of the Corporation for such holder, notifying such holder of
the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Series F Redemption Date, the Series F
Redemption Price, whether or not the Corporation may redeem the shares
for cash, or if not, the number of shares of Common Stock issuable in
lieu of cash as set forth in Section (5)(a)(ii) above, the place at
which payment or delivery may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place
designated, his certificate or certificates representing the shares to
be redeemed (the "Series F Company Redemption Notice"). Except as
provided in Section (5)(c), on or after the applicable Series F
Redemption Date, each holder of Series F Preferred Stock to be
redeemed shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place
designated in the Series F Redemption Notice, and thereupon the Series
F Redemption Price of such shares (in cash or shares of Common Stock,
as applicable) shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. In the event less than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(iv) DEPOSIT OF REDEMPTION PRICE OR SHARES OF COMMON STOCK.
Subject to the provisions set forth above, on or prior to each Series
F Redemption Date, the Corporation shall deposit the Series F
Redemption Price of all shares of Series F
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<PAGE> 20
Preferred Stock designated for redemption in the Series F Redemption
Notice and not yet redeemed with a bank or trust corporation as a
trust fund for the benefit of the respective holder or holders of the
shares designated for redemption and not yet redeemed, with
irrevocable instructions and authority to the bank or trust
corporation to pay the Series F Redemption Price for such shares to
their respective holder or holders on or after the applicable Series F
Redemption Date upon receipt of notification from the Corporation that
such holder has surrendered his share certificate to the Corporation
pursuant to Section (5)(a)(iii). As of the applicable Series F
Redemption Date, the deposit shall constitute full payment of the
shares to the holder or holders, and from and after the applicable
Series F Redemption Date the shares so called for redemption shall be
redeemed and shall be deemed to be no longer outstanding, and the
holder or holders thereof shall cease to be stockholders with respect
to such shares and shall have no rights with respect thereto except
the rights to receive from the bank or trust corporation payment of
the Series F Redemption Price of the shares, without interest, upon
surrender of their certificates therefor. The balance of any moneys
deposited by the Corporation pursuant to this Section (5)(a)(iv)
remaining unclaimed at the expiration of two years following the
applicable Series F Redemption Date shall thereafter be returned to
the Corporation upon its request expressed in a resolution of its
Board of Directors. In the event that the Corporation must issue new
shares of Common Stock instead of cash pursuant to the provisions set
forth in Section (5)(a)(ii), shares of Common Stock shall be delivered
to the bank or trust corporation in lieu of such cash.
(b) SERIES E PREFERRED STOCK.
(i) GENERALLY. The Corporation, at any time and from time to time
(each a "Series E Redemption Date"), may redeem all or any portion of
the shares of Series E Preferred Stock, from any source of funds
legally available therefor, at a redemption price per share (the
"Series E Redemption Price") equal to (A) $4.50 per share for shares
of Series E Preferred Stock redeemed pursuant to a Series E Redemption
Date occurring on or before October 1, 1999, or (B) the Series E
Liquidation Preference for shares of Series E Preferred Stock redeemed
pursuant to a Series E Redemption Date occurring after October 1,
1999.
(ii) PROCEDURE. On each Series E Redemption Date, written notice
shall be mailed, first class postage prepaid, to each holder of record
(at the close of business on the business day next preceding the day
on which notice is given) of the Series E Preferred Stock to be
redeemed, at the address last shown on the records of the Corporation
for such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such
holder, the Series E Redemption Date and the Series E Redemption Price
(the "Series E Company Redemption Notice").
(iii) DEPOSIT OF REDEMPTION PRICE. As of the applicable Series E
Redemption Date, the Corporation shall deposit the Series E Redemption
Price of all shares of Series E Preferred Stock designated for
redemption in the Series E Redemption Notice with a bank or trust
corporation as a trust fund for the benefit of the respective holder
or holders of the shares designated for redemption, with irrevocable
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<PAGE> 21
instructions and authority to the bank or trust corporation to pay to
the holders of record of the Series E Preferred Stock to be redeemed
As of the applicable Series E Redemption Date, the deposit shall
constitute full payment of the shares to the holder or holders, and
from and after the applicable Series E Redemption Date the shares so
called for redemption shall be redeemed and shall be deemed to be no
longer outstanding, and the holder or holders thereof shall cease to
be stockholders with respect to such shares and shall have no rights
with respect thereto except the rights to receive from the bank or
trust corporation payment of the Series E Redemption Price of the
shares, without interest. The balance of any moneys deposited by the
Corporation pursuant to this Section (5)(b)(iii) remaining unclaimed
at the expiration of two years following the applicable Series E
Redemption Date shall thereafter be returned to the Corporation upon
its request expressed in a resolution of its Board of Directors.
(c) RIGHTS OF REDEEMED STOCK; DEFAULT.
(i) From and after the applicable Redemption Date, unless there
shall have been a default in payment of the applicable Redemption
Price (in cash or shares of Common Stock, as applicable), all rights
of the holders of shares of Preferred Stock designated for redemption
in the Company Redemption Notice as holders of Series E Preferred
Stock or Series F Preferred Stock, as applicable (except the right to
receive the applicable Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with
respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(ii) If the Corporation fails to redeem for any reason,
including, but not limited to, the insufficiency of funds legally
available for the redemption of shares, the total number of shares of
Preferred Stock to be redeemed on such Redemption Date, those funds
which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such
shares to be redeemed based upon their holdings of Series E Preferred
Stock or Series F Preferred Stock, as applicable. The shares of
Preferred Stock not redeemed shall remain outstanding and be entitled
to all the rights and preferences provided herein or, with respect to
the Series F Preferred Stock, may be otherwise converted into shares
of Common Stock pursuant to the provisions set forth in Section
(5)(a)(ii). At any time thereafter when additional funds of the
Corporation are legally available for the redemption such shares of
Preferred Stock such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obliged to
redeem on any applicable Redemption Date, but which it has not
redeemed.
(6) INCREASING COMMON STOCK. Subject to the provisions of this
Restated Certificate of Incorporation, the number of authorized shares of
Common Stock may be increased or decreased (but not below the number of
shares of Common Stock then outstanding, issuable upon the conversion of
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and any
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other convertible securities of the Corporation, and issuable upon the
exercise of all outstanding options and warrants), by the affirmative vote
of the holders of a majority of the Common Stock and Preferred Stock,
voting together as a single class.
(7) NO REISSUANCE OF SERIES B PREFERRED STOCK, SERIES C PREFERRED
STOCK, SERIES D PREFERRED STOCK, SERIES E PREFERRED STOCK OR SERIES F
PREFERRED STOCK. No share or shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock acquired by the Corporation by reason of
redemption, purchase, or otherwise shall be reissued, and all such shares
shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
FIFTH: The number of directors which shall constitute the whole Board of
Directors of the Corporation shall be no less than seven (7) nor more than
eleven (11), which number shall be fixed by the Board of Directors of the
Corporation from time to time.
SIXTH: The Board of Directors shall have power to make, and from time to
time alter, amend, or repeal the Bylaws of the Corporation; provided, however,
that (a) the stockholders shall have the paramount power to alter, amend and
repeal the Bylaws or adopt new Bylaws, exercisable by a majority vote of the
stockholders present in person or by proxy at any annual or special meeting of
stockholders, and (b) if and to the extent the stockholders exercise such power,
the Board of Directors shall not thereafter suspend, alter, amend or repeal the
Bylaws, or portions thereof, adopted by the stockholders, unless, in adopting
such Bylaws, or portions thereof, the stockholders otherwise provide.
SEVENTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under the provisions of Section 174 of the Delaware
General Corporation Law and amendments thereto, or (d) for any transaction from
which the director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. No amendment,
repeal or adoption of any provision of this Restated Certificate of
Incorporation inconsistent with this Article Seventh shall apply or have any
effect on the liability of any director of the Corporation for or with respect
to any acts or omissions of such director occurring prior to such amendment,
repeal, or adoption of any inconsistent provision.
EIGHTH: The directors of the Corporation need not be elected by written
ballot.
NINTH:
(a) Subject only to the exclusions set forth in paragraph (c) of this
Article Ninth, the Corporation shall hold harmless and indemnify, to the fullest
extent permitted by applicable law as
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it presently exists or may hereafter be amended, each director or officer of the
Corporation (each, an "Indemnitee") against any and all liability and loss
suffered and expenses (including attorneys' fees), judgments, fines, excise
taxes assessed with respect to any employee benefit plan, or penalties and
amounts paid in settlement actually and reasonably incurred by Indemnitee in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including an action by
or in the right of the Corporation), to which Indemnitee is, was or at any time
becomes a party, or is threatened to be made a party, by reason of the fact that
Indemnitee is, was or at any time becomes a director or officer of the
Corporation, or is, or was serving, or at any time serves at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise.
(b) The expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in defending any proceeding and any judgments, fines or
amounts to be paid in settlement shall be advanced by the Corporation at the
request of the Indemnitee and upon delivery to the Corporation of an undertaking
by such Indemnitee to repay all amounts so advanced if it shall ultimately be
determined that Indemnitee was not entitled to be indemnified or was not to be
fully indemnified.
(c) No indemnity pursuant to this Article Ninth shall be paid by the
Corporation (i) for which payment is actually made to Indemnitee under a valid
and collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance; (ii) for which Indemnitee is indemnified
by the Corporation pursuant to applicable law or otherwise than pursuant to this
Article Ninth; (iii) for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Corporation within the meaning of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any state statutory law or common law; (iv) on account of
Indemnitee's conduct which is finally adjudged by a court to have been knowingly
fraudulent, deliberately dishonest or willful misconduct; or (v) if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnity is not lawful.
(d) All obligations of the Corporation contained herein shall continue
during the period Indemnitee is a director or officer of the Corporation (or is,
or was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer of the Corporation or serving in any other capacity referred
to herein.
(e) Promptly after receipt by Indemnitee of notice of the commencement of
any action, suit or proceeding, Indemnitee will, if a claim in respect thereof
is to be made against the Corporation under this Article Ninth, notify the
Corporation of the commencement thereof; but the omission so to notify the
Corporation will not relieve it from any liability which it may have to
Indemnitee otherwise than under this Article Ninth. With respect to any such
action, suit or proceeding as to which Indemnitee notifies the Corporation of
the commencement thereof, the Corporation will be entitled to participate
therein at its own expense.
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(f) Except as otherwise provided below, to the extent that it may wish, the
Corporation jointly with any other indemnifying party similarly notified will be
entitled to assume the defense thereof with counsel reasonably satisfactory to
the Indemnitee. After notice from the Corporation to Indemnitee of its election
so to assume the defense thereof, the Corporation will not be liable to
Indemnitee under this Article Ninth for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding,
but the fees and expenses of such counsel, incurred after notice from the
Corporation of its assumption of the defense thereof, shall be at the expense of
Indemnitee unless (i) the employment of counsel by Indemnitee has been
authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Corporation and Indemnitee
in the conduct of the defense of such, subject to the approval of the
Corporation, which approval shall not be unreasonably withheld, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel shall be at
the expense of the Corporation. The Corporation shall not be entitled to assume
the defense of any action, suit or proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion provided
for in (ii) above.
(g) The Corporation shall not be liable to indemnify Indemnitee under this
Article Ninth for any amounts paid in settlement of any action or claim effected
without its written consent. The Corporation shall not settle any action or
claim in any manner which would impose any penalty or limitation on Indemnitee
without Indemnitee's written consent. Neither the Corporation nor Indemnitee
will unreasonably withhold their consent to any proposed settlement.
(h) In the event Indemnitee is required to bring any action to enforce
rights or to collect moneys due under this Article Ninth and is successful in
such action, the Corporation shall promptly reimburse Indemnitee for all of
Indemnitee's reasonable fees and expenses in bringing and pursuing such action.
(i) The provisions of this Article Ninth shall inure to the benefit of and
be enforceable by the Indemnitee's personal or legal representatives, executors,
administrators, heirs, devises and legatees.
(j) The Corporation shall have power to purchase and maintain insurance, at
its expense, on behalf of any person who is or was an officer, director,
employee or agent of the Corporation or a subsidiary thereof, or is or was
serving at the request of the Corporation as an officer, director, partner,
member, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including any employee benefit plan, against
any expense, liability or loss asserted against such person and incurred by such
person in any such capacity, or arising out of such person's status as such,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Bylaws, the provisions of this
Article Ninth or the Delaware General Corporation Law.
(k) The indemnification provided by this Article Ninth shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any statute, the Bylaws,
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other provisions of this Restated Certificate of Incorporation, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in any other capacity while
holding such office, and shall continue as to a person who has ceased to be an
officer or director of the Corporation or a subsidiary thereof or an officer,
director, partner, member, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including any employee
benefit plan, and shall inure to the benefit of the heirs, executors and
administrators of such person.
(l) This Article Ninth may be hereafter amended or repealed; provided,
however, that no amendment or repeal shall reduce, terminate, or otherwise
adversely affect the right of a person entitled to obtain indemnification
hereunder with respect to acts or omissions of such person occurring prior to
the effective date of such amendment or repeal.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation this 3rd day of August, 1999.
BIRCH TELECOM, INC.
By: /s/ Gregory C. Lawhon
---------------------------------------
Gregory C. Lawhon, Senior Vice President
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<PAGE> 1
EXHIBIT 10.2
BIRCH TELECOM, INC.
AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT
<PAGE> 2
AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT
THIS AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of August 5, 1999, by and among BIRCH
TELECOM, INC., a Delaware corporation (the "Company"), and certain purchasers of
the Company's Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred (together, the
"Series Preferred"), and of the Company's Common Stock (the "Common Stock")
(including the purchasers of the Common Shares), and certain holders of stock
options, each as set forth on Exhibit A hereto. Such purchasers of the Series
Preferred and Common Stock and holders of stock options or Option Shares
(including members of Key Management) shall be referred to hereinafter as the
"Purchasers" and each individually as a "Purchaser".
RECITALS
WHEREAS, certain of the Purchasers hold shares of the Company's Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common
Stock (the "Existing Purchasers");
WHEREAS, the Existing Purchasers possess registration rights,
information rights and other rights pursuant to that certain Amended and
Restated Purchaser Rights Agreement, dated as of July 2, 1999, among the Company
and the Existing Purchasers (the "Prior Agreement");
WHEREAS, the Company proposes to issue 1,904,898 shares of its Series E
Preferred Stock to existing holders of Series B Preferred Stock, on a pro rata
basis, in connection with a certain recapitalization of the Company (such
holders being referred to herein collectively as the "Series E Purchasers" and
each individually as a "Series E Purchaser");
WHEREAS, the Company proposes to sell and issue up to 23,596,492 shares
of its Series F Preferred Stock pursuant to that certain Series F Preferred
Stock Purchase Agreement (the "Purchase Agreement"), by and between the Company
and BTI Ventures L.L.C. (together with its Affiliates, "BTI" and sometimes
referred to herein as the "Series F Purchaser");
WHEREAS, in order to satisfy certain closing conditions under the
Purchase Agreement, the Company desires to add Donald H. Goldman as a party to
this Agreement and provide that Mr. Goldman have the rights, and be subject to
the obligations, under this Agreement; and
WHEREAS, the Existing Purchasers desire to amend and restate the Prior
Agreement in order to induce the Company, the Series E Purchasers and Series F
Purchaser to enter into the Purchase Agreement, and to extend to the Series E
Purchaser, Series F Purchaser and Mr. Goldman the registration rights,
information rights and other rights and obligations as set forth below.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto further agree as follows:
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<PAGE> 3
1. CERTAIN DEFINITIONS.
Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Purchase Agreement. As used in this Agreement,
the following terms shall have the meanings set forth below:
(A) "AFFILIATE" shall have the meaning ascribed to such term in
Rule 12b-2 promulgated under the Exchange Act.
(B) "COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
(C) "COMMON SHARES" shall mean the shares of the Company's Common
Stock issued pursuant to the Securities Purchase Agreement.
(D) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(E) "HOLDER" shall mean any Purchaser who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
Section 2.9 and Section 3 hereof.
(F) "INITIATING HOLDERS" shall mean any Holder or Holders who in
the aggregate hold at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding Registrable Securities.
(G) "KEY MANAGEMENT" shall mean David E. Scott, Jeffrey D.
Shackelford, Gary L. Chesser, David W. Vranicar, Donald H. Goldman, Bradley A.
Moline and Gregory C. Lawhon.
(H) "1998 AGREEMENT" shall mean that certain Purchaser Rights
Agreement, dated as of February 10, 1998, among the Company and certain Persons.
(I) "OPTION SHARES" shall mean the shares of Common Stock issued
or issuable upon the exercise of stock options granted pursuant to a stock
option plan of the Company (including the vested and unvested shares of Common
Stock held by Key Management as of the date hereof that were obtained pursuant
to the exercise of stock options pursuant to a stock option plan of the
Company).
(J) "OTHER PURCHASERS" shall mean persons other than Holders who,
by virtue of agreements with the Company, are entitled to include their
securities in certain registrations hereunder.
(K) "QUALIFYING PUBLIC OFFERING" shall mean the closing of a
firmly underwritten public offering pursuant to an effective registration
statement under the Securities
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Act covering the offer and sale of Common Stock for the account of the Company
in which the gross proceeds to the Company (before underwriting discounts,
commissions and fees) are at least $60,000,000.
(L) "PERSONS" shall mean any individual, corporation (including
non-profit corporation), general partnership, limited partnership, limited
liability partnership, joint venture, estate, trust, company, firm or other
enterprise, association, organization or entity, or any governmental body or
authority (federal, state or local).
(M) "REGISTRABLE SECURITIES" shall mean (i) the Common Shares and
fully vested Option Shares; and (ii) the shares of Common Stock issuable upon
the conversion of the Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock;
provided, however, that Registrable Securities shall not include any shares of
Common Stock which have previously been registered or which have been sold to
the public either pursuant to a registration statement or Rule 144, or which
have been sold in a private transaction in which the transferor's rights and
obligations under this Agreement are not assigned.
(N) The terms "REGISTER," "REGISTER" and "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
(O) "REGISTRATION EXPENSES" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, and expenses of any regular or special audits incident to or
required by any such registration, but shall not include Selling Expenses.
(P) "RESTRICTED SECURITIES" shall mean any Registrable Securities
required to bear the legend set forth in Section 3.4 hereof.
(Q) "RULE 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(R) "RULE 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(S) "SECURITIES" shall mean (i) the Common Stock, (ii) the Series
Preferred, and (iii) the shares of Common Stock issuable upon the conversion of
the Series Preferred.
(T) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
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(U) "SECURITIES PURCHASE AGREEMENT" shall mean that certain
Securities Purchase Agreement, dated as of February 10, 1998, by and among the
Company and certain of the Existing Purchasers, as the same may be amended and
in effect from time to time.
(V) "SELLING EXPENSES" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of
Registrable Securities.
References to BTI herein shall refer to BTI and each of its Affiliates,
including, without limitation, Kohlberg Kravis Roberts & Co. L.P. and the KKR
1996 Fund L.P.
2. REGISTRATION RIGHTS.
2.1 REQUESTED REGISTRATION.
(A) REQUEST FOR REGISTRATION. If the Company shall receive from
Initiating Holders at any time after the earlier of (I) five years after the
date of this Agreement or (II) one year after the effective date of the first
registration statement filed by the Company pursuant to the Securities Act
covering an underwritten offering of Common Stock to the general public, a
written request that the Company effect any registration with respect to all or
a part of the Registrable Securities, the Company will:
(I) promptly give written notice of the proposed registration
to all other Holders; and
(II) as soon as practicable, use its commercially reasonable
efforts to effect such registration (including, without limitation, filing
post-effective amendments, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with the Securities
Act) and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) calendar days after such written notice from
the Company is given. The registration statement filed pursuant to the request
of the Initiating Holders may, subject to the provisions of Sections 2.1(e),
include other securities of the Company, with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 2.1(a):
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) After the Company has initiated one such registration
pursuant to this Section 2.1(a) (counting for these purposes only registrations
which have been declared or ordered effective and pursuant to which securities
have been sold and registrations which have
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been withdrawn by the Holders as to which the Holders have not elected to bear
the Registration Expenses pursuant to Section 2.3 hereof and would, absent such
election, have been required to bear such expenses) or
(C) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
Company-initiated registration; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective.
(B) SPECIAL DEMAND RIGHTS. After 180 days after the effective date
of the first registration statement filed by the Company pursuant to the
Securities Act covering an underwritten offering of Common Stock to the general
public, upon the written request of BTI (or its Affiliates or a transferee who
agrees to be bound by the terms of this Agreement) (a "BTI Demand"), that the
Company effect any registration with respect to all or a part of the Registrable
Securities held by such entity, the Company will:
(I) promptly give written notice of the proposed registration
to all other Holders; and
(II) as soon as practicable, use commercially reasonable
efforts to effect such registration (including, without limitation, filing
post-effective amendments, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with the Securities
Act) and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request
(including shares of Common Stock issuable upon the conversion of Series F
Preferred Stock, if applicable), together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request as are
specified in a written request received by the Company within twenty (20)
calendar days after such written notice from the Company is given. The
registration statement filed pursuant to a BTI Demand may, subject to the
provisions of Sections 2.1(e), include other securities of the Company, with
respect to which registration rights have been granted, and may include
securities of the Company being sold for the account of the Company.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 2.1(b):
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) After the Company has initiated pursuant to this
Section 2.1(b) (i) two such registrations, if BTI has not exercised the Option
in full, and (iii) three such registration if BTI has exercised the Option in
full (counting for these purposes only registrations which have been declared or
ordered effective and pursuant to which at least 80% of the securities requested
to be sold by BTI have been sold);
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(C) If the party making the BTI Demand holds less than 5%
of the outstanding shares of Common Stock (on an as converted basis) at the time
of such demand;
(D) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
Company-initiated registration; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective;
(C) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the requests contemplated in
Sections 2.1(a) and 2.1(b); provided, however, that if (I) in the good faith
judgment of the Board of Directors of the Company, such registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (II) the Company shall furnish to such
Holders a certificate signed by the President 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 for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not more than
one hundred twenty (120) days after receipt of the request of the Initiating
Holders or the BTI Demand, as the case may be, and, provided further, that the
Company shall not defer its obligation in this manner more than once in any
twelve-month period.
(D) UNDERWRITING. If the Holders requesting registration intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as part of their request made
pursuant to Section 2.1(a) or 2.1(b) and the Company shall include such
information in the written notice referred to in Section 2.1(a)(i) and Section
2.1(b)(i). In such event, the right of any Holder to registration pursuant to
Sections 2.1(a) or 2.1(b) 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. A Holder may elect to include
in such underwriting all or a part of the Registrable Securities such Holder
holds.
(E) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to Sections 2.1(a) or 2.1(b) of securities being sold for
its own account, or if other persons shall request inclusion in any registration
pursuant to Sections 2.1(a) or 2.1(b), the Initiating Holders or the party
making the BTI Demand shall, on behalf of all Holders, offer to include such
securities in the underwriting and may condition such offer on their acceptance
of the further applicable provisions of this Section 2. The Company shall
(together with all Holders and other persons proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders, in the case of registrations pursuant to Section 2.1(a) or the entity
making the BTI Demand, in the case of registrations pursuant to Section 2.1(b),
which underwriters are reasonably acceptable to the Company. Notwithstanding any
other provision of this Section 2.1(e), if the representative of
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the underwriters advises the Initiating Holders or the entity making the BTI
Demand, in writing that marketing factors require a limitation on the number of
shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated: first, to the Holders of
Registrable Securities pro rata based on the number of shares of Registrable
Securities for which registration was requested; and second, to the Company for
securities being sold for its own account; and finally, to the holders of other
securities of the Company with registration rights pro rata based on the number
of shares for which registration was requested. The Company shall not limit the
number of Registrable Securities to be included in a registration statement
pursuant to this Section 2.1 in order to include shares held by Purchasers with
no registration rights or any other shares of stock issued to employees,
officers, directors or consultants pursuant to a stock option plan of the
Company or in order to include in such registration securities registered for
the Company's own account. If a person who has requested inclusion in such
registration as provided above does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from the
Company, the underwriter, the Initiating Holders or BTI, as the case may be, and
the securities so excluded shall also be withdrawn from registration. Any
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall also be withdrawn from such registration. If shares are so
withdrawn from the registration and if the number of shares to be included in
such registration was previously reduced as a result of marketing factors
pursuant to this Section 2.1(e), then the Company shall offer to all holders who
have retained rights to include securities in the registration the right to
include additional securities in the registration in an aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated among
such Holders requesting additional inclusion in accordance with this Section
2.1(e).
2.2 COMPANY REGISTRATION.
(A) If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights (other than
pursuant to Section 2.1 hereof), other than a registration statement on Form S-8
relating solely to employee benefit plans, or a registration relating to a
corporate reorganization or other transaction under Rule 145, or a registration
on any registration form that does not permit secondary sales, the Company will:
(I) promptly give to each Holder written notice thereof; and
(II) use its best efforts to include in such registration
(and any related qualification under blue sky laws or other compliance), except
as set forth in Section 2.2(b) below, and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests, made
by any Holder and received by the Company within ten (10) calendar days after
the written notice from the Company described in clause (i) above is given by
the Company. Such written request may specify all or a part of a Holder's
Registrable Securities.
(B) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.2(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 2.2 shall be conditioned upon such
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<PAGE> 9
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 by the Company.
(C) Notwithstanding any other provision of this Section 2.2, if
the representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting. The
Company shall so advise all holders of securities requesting registration, and
the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated: first, to the Company for
securities being sold for its own account; second, to the Holders of Registrable
Securities pro rata based on the number of shares of Registrable Securities for
which registration was requested; and finally, to the holders of other
securities of the Company with registration rights pro rata based on the number
of Other Shares for which registration was requested. The Company shall not
limit the number of Registrable Securities to be included in a registration
pursuant to this Agreement in order to include shares held by Purchasers with no
registration rights or any other shares of stock issued to employees, officers,
directors, or consultants pursuant to a stock option plan of the Company, in
order to include in such registration securities registered for the Company's
own account. If any person does not agree to the terms of any such underwriting,
he shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of shares of
Registrable Securities to be included in such registration was previously
reduced as a result of marketing factors, the Company shall then offer to all
persons who have retained the right to include securities in the registration
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the persons requesting additional inclusion as set forth above.
2.3 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 2.1 and 2.2 hereof and reasonable fees and expenses of one counsel for
the selling Holders shall be borne by the Company; provided, however, that if
the Holders bear the Registration Expenses for any registration proceeding begun
pursuant to Section 2.1(a) and subsequently withdrawn by the Holders registering
shares therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 2.1(a)(ii)(B) hereof. Furthermore, in the event
that a withdrawal by the Holders is based upon material adverse information
relating to the Company that is different from the information known or
available (upon request from the Company or otherwise) to the Holders requesting
registration at the time of their request for registration under Section 2.1,
such registration shall not be treated as a counted registration for purposes of
Section 2.1 hereof, even though the Holders do not bear the Registration
Expenses for such registration. All Selling Expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the
basis of the number of shares of securities so registered
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on their behalf, as shall any other expenses in connection with the registration
required to be borne by the holders of such securities.
2.4 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to Section 2, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use commercially reasonable
efforts to:
(A) Keep such registration effective for a period of one hundred
eighty (180) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that such 180-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company;
(B) Prepare and file with the Commission 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 such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request and provide the Holders,
underwriters and their respective counsel the opportunity to participate in the
preparation of such documents;
(D) Notify each seller 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 or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(E) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed and use commercially reasonable efforts to
register and qualify the Registrable Securities under state securities laws or
blue sky laws of those jurisdictions within the United States and Puerto Rico as
shall be reasonably required in order to effect the distribution of the
Registrable Securities; provided, however, that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the requirements of
this Section 2.4 be obligated to be so qualified or to consent to general
service of process in any such jurisdiction and provided that the Company shall
not be required to register or qualify such Registrable Securities in any
jurisdiction in which the
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Company would solely as a result thereof (i) become subject to taxation, (ii) be
required (or any shareholder would be required) to escrow shares of Common Stock
or be subject to other significant limitations on its (or any such
shareholder's) disposition of such shares or (iii) be required to amend the
terms of such public offering, in each case in a manner which is materially
adverse to the Company;
(F) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration;
(G) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act; and
(H) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 2.1 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
(I) Use its commercially reasonable efforts to obtain the
withdrawal of any stop order suspending the effectiveness of such registration
statement or any post-effective amendment thereto at the earliest practicable
date;
(J) Cause to be furnished, at the request of each Holder of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with a registration, if
such Registrable Securities are being sold through underwriters, or, if such
Registrable Securities are not being sold through underwriters, on the date that
the registration statement with respect to such Registrable Securities becomes
effective, (i) a signed counterpart of an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance reasonably satisfactory to such Holder, addressed to the
underwriters, if any, and to each Holder of Registrable Securities, and (ii) a
letter dated such date, signed by the independent certified public accountants
of the Company, in form and substance reasonably satisfactory to such Holder of
Registrable Securities, addressed to the underwriters, if any, and to such
Holder of Registrable Securities, covering substantially the same matters with
respect to such registration statement (and the prospectus included therein)
and, in the case of the independent certified public accountants' letter, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuers' counsel and in independent certified
public accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the independent certified public
accountants' letter, such other financial matters, and, in the case of the legal
opinion, such other legal matters, as such Holder (or the underwriters, if any)
may reasonably request; and
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(K) Otherwise use commercially reasonable efforts to make
available the executive officers of the Company (including David Scott and
Bradley Moline) to participate in such "Road Shows" or other selling efforts as
may be reasonably requested by the Holders in connection with the distribution
of the Registrable Securities.
2.5 INDEMNIFICATION.
(A) The Company will indemnify each Holder, each of its officers,
directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification, or compliance has been
effected pursuant to this Section 2, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
2.5(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 has not been unreasonably withheld).
(B) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, each other such Holder and Other
Purchaser, and each of their officers, directors, and partners, and each person
controlling such Holder or Other Purchaser, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, Other Purchasers,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred
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in connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular,
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein provided, however, that the obligations of such Holder hereunder shall
not apply to amounts paid in settlement of any such claims, losses, damages, or
liabilities (or actions in respect thereof if such settlement is effected
without the consent of such Holder (which consent shall not be unreasonably
withheld); and provided that in no event shall any indemnity under this Section
2.5 exceed the gross proceeds from the offering received by such Holder.
(C) Each party entitled to indemnification under this Section 2.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnifying Party otherwise agrees
or unless representation by the Indemnifying Party's counsel is inappropriate
due to actual or potential conflicts of interest), and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 2, to the
extent such failure is not prejudicial. 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. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
(D) If the indemnification provided for in this Section 2.5 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
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 statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined 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.
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(E) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(F) Notwithstanding any of the foregoing, no Holder shall be
required to contribute any amount in excess of the amount of net proceeds
received by such Holder from the sale of Registrable Securities covered by such
registration statement and no person guilty of fraudulent misrepresentation
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
2.6 INFORMATION BY HOLDER. Each Holder of Registrable Securities
shall furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 2.
2.7 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and until
four years after the date of this Agreement, if the Company enters into any
agreement with any holder or prospective holder of any securities of the Company
giving such holder or prospective holder any registration rights the terms of
which are more favorable than the registration rights granted to the Holders
hereunder, then the Company shall give equivalent registration rights to the
Holders.
2.8 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission that may permit the sale of
the Restricted Securities to the public without registration, the Company agrees
to use commercially reasonable efforts to:
(A) Make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by the
Company for an offering of its securities to the general public;
(B) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act at any time after it has become subject to such reporting
requirements;
(C) So long as a Holder owns any Restricted Securities, furnish
to the Holder forthwith upon written request a written statement by the Company
as to its compliance with the reporting requirements of Rule 144 (at any time
from and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and 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 so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
2.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to
cause the Company to register securities granted to a Holder by the Company
under this Section 2 may be
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transferred or assigned by a Holder only to a transferee or assignee of not less
than 200,000 shares of Registrable Securities (as currently constituted and
subject to subsequent adjustments for stock splits, stock dividends, reverse
stock splits, and the like), provided that the Company is given written notice
prior to said transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes in writing the
obligations of such Holder under this Agreement.
2.10 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and an
underwriter of securities of the Company, a Purchaser shall not sell or
otherwise transfer or dispose of any securities of the Company held by such
Purchaser (other than those included in the registration) during the one hundred
eighty (180) day period following the effective date of a registration statement
of the Company filed under the Securities Act, provided that:
(A) such agreement shall only apply to the first such
registration statement of the Company, including securities to be sold on its
behalf to the public in an underwritten offering; and
(B) all officers and directors of the Company are bound by and
have entered into similar agreements.
The obligations described in this Section 2.10 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 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.
2.11 DELAY OF REGISTRATION. No Holder shall have any right to take
any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
3. RESTRICTIONS ON TRANSFER.
3.1 TRANSFER. No Purchaser will, voluntarily or involuntarily,
directly or indirectly, sell, transfer, assign, donate, pledge or otherwise
encumber or dispose of any interest in all or any portion of the Securities or
Option Shares (a "Transfer") except pursuant to an Exempt Transfer.
3.2 EXEMPT TRANSFER. The restrictions contained in this Section 3
will not apply to any Transfer which is one of the following "Exempt Transfers":
(A) the Transfer by a partnership to its partners or retired
partners in accordance with partnership interests;
(B) the Transfer by a corporation to its shareholders in
accordance with their interest in the corporation;
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(C) the Transfer by a limited liability company to its members
in accordance with their interest in the limited liability company;
(D) the Transfer by a Purchaser to such Purchaser's spouse,
lineal descendant, father, mother, brother or sister ("Immediate Family");
(E) the Transfer by a Purchaser to a custodian or trustee for the
account of such Purchaser or such Purchaser's Immediate Family;
(F) the Transfer by a Purchaser (other than Transfers of Option
Shares by a member of Key Management) to any Affiliate of that Purchaser;
(G) the Transfer to the Company or any other Purchaser; provided,
however, that a member of Key Management may not Transfer any Option Shares to
the Company or any other Purchaser during the Key Management Restricted Period
(as defined below), except for Transfers to the Company in payment of the
exercise price of any stock option granted pursuant to a stock option plan
and/or option agreement of the Company;
(H) a bona fide pledge or mortgage with a commercial lending
institution that creates a mere security interest;
(I) pursuant to Section 5 or 6 of this Agreement (i) after the
third anniversary of the date of this Agreement for Purchasers other than as
provided in (ii), and (ii) for transfers of fully vested Option Shares held by
Key Management, such Transfers may be made only after the fifth anniversary of
the date of the option grant pursuant to which such Option Shares were acquired
(the "Key Management Restricted Period"); provided, however, that prior to the
end of the applicable Key Management Restricted Period with respect to any fully
vested Option Shares, each member of Key Management may exercise its co-sale
rights under Section 6 on Transfers by BTI or its Affiliates;
(J) pursuant to Section 2 or 7 of this Agreement; provided,
however, each member of Key Management acknowledges and agrees that he may not
Transfer any Option Shares pursuant to Section 2 until the expiration of the Key
Management Restricted Period, except that prior to the end of the applicable Key
Management Restricted Period with respect to any Option Shares, each member of
Key Management may request registration of fully vested Option Shares pursuant
to Section 2.1 or 2.2 in an amount equal to the product of (i) the number of
fully vested Option Shares then held by such member of Key Management and (ii)
the quotient determined by dividing (A) the total number of shares of Common
Stock requested by BTI or its Affiliates to be registered in such offering by
(B) the aggregate number of shares of Common Stock beneficially owned by BTI and
its Affiliates; or
(K) transfers of fully vested Option Shares held Key Management
that are made after a Qualifying Public Offering but before the fifth
anniversary of the date of the option grant pursuant to which such Option Shares
were acquired; provided, that (i) no more than ten percent (10%) of the fully
vested Option Shares held by any individual may be transferred in any given
calendar year pursuant to this Section 3.2(k), (ii) any unused portion of this
ten percent (10%) from a given calendar year may be carried over to, and be
available for transfers in, subsequent calendar years pursuant to this Section
3.2(k), and (iii) in no event can any individual
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transfer more than an aggregate of twenty five percent (25%) of their fully
vested Option Shares pursuant to this Section 3.2(k).
3.3 SECURITIES LAWS; ASSIGNMENT OF OBLIGATIONS. In addition to any
other restriction on Transfer herein, such Purchaser will not effect any
Transfer (other than Transfers pursuant to Sections 2 or 7 hereof) until the
transferee has agreed in writing to be bound by the terms of this Agreement, at
which time such transferee shall be a "Purchaser" for all purposes of this
Agreement, and:
(A) 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
(B) Such Purchaser 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 if reasonably
requested by the Company, such Purchaser shall have furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such shares under the Securities
Act; provided however, that it is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
3.4 LEGEND.
(A) Each certificate representing Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with legends substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED TO EFFECTUATE
SUCH TRANSACTION.
THE SALE, TRANSFER OR PLEDGE OF THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN PURCHASER RIGHTS AGREEMENT BETWEEN THE COMPANY AND
CERTAIN HOLDERS OF ITS SECURITIES, AS THE SAME MAY BE AMENDED AND IN EFFECT FROM
TIME TO TIME. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO
THE SECRETARY OF THE COMPANY.
(B) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Purchaser if the Purchaser shall have
obtained an opinion of counsel at such Purchaser's expense (which counsel may be
counsel to the Company) reasonably
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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.
3.5 IMPROPER TRANSFER. Any attempt to Transfer any Securities or
Option Shares which is not in accordance with this Agreement shall be null and
void, and the Company shall not give any effect to such attempted Transfer in
the records of the Company.
4. PRE-EMPTIVE RIGHT.
4.1 PRE-EMPTIVE RIGHT. The Company hereby grants to each Purchaser
who owns shares of Series Preferred or Common Stock (such Purchasers referred to
as the "Pre-Emptive Purchasers") the right to purchase a pro rata portion of New
Securities (as defined in Section 4.2) which the Company may, from time to time,
propose to sell and issue (the "Pre-Emptive Right"). Such Pre-Emptive
Purchaser's pro rata share for purposes of this Pre-Emptive Right is the ratio
of the number of shares of Common Stock owned by such Pre-Emptive Purchaser (on
an as-converted, as-exercised basis) immediately prior to the issuance of New
Securities, to the total number of shares of Common Stock outstanding
immediately prior to the issuance of New Securities, assuming full conversion of
all securities and full exercise of all outstanding rights, options and warrants
to acquire Common Stock of the Company. Each Pre-Emptive Purchaser exercising
their portion of the Pre-Emptive Right in full (an "Exercising Pre-Emptive
Purchaser") shall have a right of over-allotment such that if any other
Pre-Emptive Purchaser fails to exercise its right hereunder to purchase its pro
rata share of New Securities (a "Non-Purchasing Pre-Emptive Purchaser"), such
Exercising Pre-Emptive Purchaser may purchase such portion, on a pro rata basis,
by giving written notice to the Company within ten (10) calendar days from the
date that the Company provides written notice of the amount of New Securities
such Non-Purchasing Pre-Emptive Purchasers have failed to exercise their
Pre-Emptive Rights hereunder. This Pre-Emptive Right shall be subject to the
following provisions of this Section 4.
4.2 NEW SECURITIES. "New Securities" shall mean any capital stock
(including Common Stock and/or Preferred Stock) of the Company whether now
authorized or not, and rights, options or warrants to purchase such capital
stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock; provided that the term "New Securities" does not
include (i) securities purchased under the Securities Purchase Agreement, Series
D Purchase Agreement, dated July 2, 1999 (the "Series D Purchase Agreement"),
the plan of recapitalization adopted by the Board of Directors and stockholders
of the Company providing for the conversion of each share of the Series B
Preferred Stock into one share of Series B Preferred Stock and 0.22222 of a
share of Series E Preferred Stock (the "Series E Recapitalization") or Purchase
Agreement; (ii) securities issuable upon conversion or exercise of the
securities purchased under the Securities Purchase Agreement, Series D Purchase
Agreement, Series E Recapitalization or Purchase Agreement;(iii) securities
issued pursuant to the acquisition of another business entity or business
segment of any such entity by the Company by merger, purchase of substantially
all the assets or other reorganization whereby the Company will own more than
fifty percent (50%) of the voting power of such business entity or business
segment of any such entity; (iv) any borrowings, direct or indirect, from
financial institutions or other Persons by the Company, whether or not currently
authorized, including any type of loan or payment evidenced by any type of debt
instrument, provided such borrowings do not have any equity features including
warrants, options or other rights to purchase capital stock and are not
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convertible into capital stock of the Company; (v) securities issued to
employees, consultants, officers or directors of the Company pursuant to any
stock option, stock purchase or stock bonus plan, agreement or arrangement
approved by the Board of Directors; (vi) securities issued to vendors or
customers or to other Persons in similar commercial situations with the Company
if such issuance is approved by the Board of Directors; (vii) securities issued
in connection with obtaining lease financing, whether issued to a lessor,
guarantor or other Person; (viii) securities issued in connection with any stock
split, stock dividend or recapitalization of the Company; and (ix) securities
issuable upon the exercise of warrants pursuant to the Warrant Agreement, dated
June 23, 1998, between the Company and Norwest Bank Minnesota, National
Association,
4.3 NOTICE. In the event the Company proposes to undertake an
issuance of New Securities, it shall give each Pre-Emptive Purchaser written
notice of its intention, describing the type of New Securities, and their price
and the general terms upon which the Company proposes to issue the same. Each
such Pre-Emptive Purchaser shall have twenty (20) calendar days after any such
notice is given to agree to purchase such Pre-Emptive Purchaser's pro rata share
of such New Securities for the price and upon the terms specified in the notice
by giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
4.4 SELLING PERIOD. In the event any Pre-Emptive Purchaser or
Exercising Pre-Emptive Purchaser fails to exercise fully the Pre-Emptive Right
within said twenty (20) day period and after the expiration of the 10-day period
for the exercise of the over-allotment provisions of Section 4.1, the Company
shall have one hundred twenty (120) calendar days thereafter to sell or enter
into an agreement (pursuant to which the sale of New Securities covered thereby
shall be closed, if at all, within one hundred twenty (120) calendar days from
the date of said agreement) to sell the New Securities respecting which any
Pre-Emptive Purchasers' or Exercising Pre-Emptive Purchasers' Pre-Emptive Right
option set forth in this Section 4 was not exercised, at a price and upon terms
no more favorable to the purchasers thereof than specified in the Company's
notice to the Pre-Emptive Purchasers pursuant to Section 4.3. In the event the
Company has not sold within said 120-day period or entered into an agreement to
sell the New Securities in accordance with the foregoing within said 120-day
period from the date of said agreement, the Company shall not thereafter issue
or sell any New Securities, without first again offering such securities to the
Pre-Emptive Purchasers in the manner provided in Section 4.3 above.
4.5 TRANSFER OF PRE-EMPTIVE RIGHT. The Pre-Emptive Right set forth
in this Section 4 may be transferred or assigned by a Pre-Emptive Purchaser only
to a transferee or assignee of not less than (i) 200,000 shares of Series B
Preferred Stock, (ii) 200,000 shares of Series C Preferred Stock, (iii) 200,000
shares of Series D Preferred Stock (iv) 200,000 shares of Series E Preferred
Stock, (v) 200,000 shares of Series F Preferred Stock or (vi) 200,000 shares of
Common Stock (in each case, as currently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like), provided that the Company is given written notice prior to said transfer
or assignment, stating the name and address of the transferee or assignee and
identifying the securities with respect to which such Pre-Emptive Rights are
being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes in writing the obligations of such Pre-Emptive
Purchaser under this Agreement.
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5. RIGHT OF FIRST REFUSAL.
5.1 RIGHT OF FIRST REFUSAL. Commencing on (i) the third anniversary
of the date of this Agreement for Purchasers other than as provided in (ii), and
(ii) the fifth anniversary of the date of the option grant pursuant to which the
fully vested Option Shares held by members of Key Management were acquired, no
Purchaser shall sell, assign, pledge, or in any manner transfer any shares of
capital stock of the Company (whether now owned or hereafter acquired) or any
right or interest therein, whether voluntarily or by operation of law, or by
gift or otherwise, except as set forth herein:
(A) If Purchaser desires to sell or otherwise transfer any shares
of capital stock, then such Purchaser (the "Section 5 Selling Purchaser") shall
give at least thirty (30) calendar days written notice thereof to the Company
and the other Purchasers. The notice shall name the proposed transferee and
state the number of shares of capital stock to be transferred, the proposed
consideration, and all other terms and conditions of the proposed transfer.
(B) For twenty (20) calendar days following receipt of such
notice, the Company shall have the option but not the obligation to purchase all
(but not less than all) of the shares of capital stock specified in the notice
at the price and upon the terms set forth in such notice; provided, however,
that, with the consent of the Section 5 Selling Purchaser, the Company shall
have the option to purchase a lesser portion of the shares of capital stock
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares of capital stock, and
that is not otherwise exempted from the provisions of this Section 5.1, the
price shall be deemed to be the fair market value of the capital stock at such
time as determined in good faith by the Board of Directors. In the event the
Company elects to purchase all of the shares of capital stock or, with consent
of the Section 5 Selling Purchaser, a lesser portion of the shares of capital
stock, it shall give written notice to the Section 5 Selling Purchaser of its
election and settlement for said shares of capital stock shall be made as
provided below in paragraph (d).
(C) If the Company does not elect to purchase the shares
specified in the notice, then the Company shall promptly provide written notice
to the Purchasers of such election (which in no event will be later than 20
calendar days following receipt of the notice referred to in Section 5.1(a)) and
the Purchasers may elect to purchase all (but not less than all) of the shares
by delivering written notice to the Company and the Section 5 Selling Purchaser
within ten (10) calendar days after notice is given by the Company.
(D) In the event the Company and/or any other Purchasers elect
to acquire any of the shares of capital stock of the Section 5 Selling Purchaser
as specified in said Section 5 Selling Purchaser's notice, the Secretary of the
Company shall so notify the Section 5 Selling Purchaser and settlement thereof
shall be made in cash within forty (40) days after the Secretary of the Company
receives said Section 5 Selling Purchaser's notice; provided that if the terms
of payment set forth in said Section 5 Selling Purchaser's notice were other
than cash against delivery, the Company and/or the other Purchasers shall pay
for said shares on the same terms and conditions set forth in said Section 5
Selling Purchaser's notice.
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(E) In the event the Company and/or the other Purchasers do not
elect to acquire all of the shares of capital stock specified in the Section 5
Selling Purchaser's notice, said Section 5 Selling Purchaser may, within the
sixty-day period following the expiration of the rights granted to the Company
and/or the other Purchasers' herein, transfer the shares of capital stock
specified in said Section 5 Selling Purchaser's notice which were not acquired
by the Company and/or the other Purchasers as specified in said Section 5
Selling Purchaser's notice.
5.2 TRANSFER EXEMPT FROM RIGHT OF FIRST REFUSAL. Anything to the
contrary contained herein notwithstanding, the following transactions shall be
exempt from the provisions of this section:
(A) A Purchaser's transfer to such Purchaser's Immediate Family.
(B) A transfer to any custodian or trustee for the account of
such Purchaser or such Purchaser's Immediate Family.
(C) A Purchaser's bona fide pledge or mortgage with a commercial
lending institution creating a mere security interest.
(D) A corporate Purchaser's transfer of any or all of its shares
of capital stock to its stockholders in accordance with their interest in the
corporation.
(E) A transfer by a Purchaser which is a partnership to any or
all of its partners or retired partners in accordance with partnership
interests.
(F) A transfer by a Purchaser to any Affiliate of that Purchaser.
(G) A transfer by a Purchaser which is a limited liability
company to its members in accordance with their interest in the limited
liability company.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this section, and there
shall be no further transfer of such stock except in accord with this section.
5.3 RIGHT OF FIRST REFUSAL AFTER A PUBLIC OFFERING. The foregoing
right of first refusal shall be modified after the closing of a Qualifying
Public Offering with respect to "public sales" pursuant to Rule 144 (including
Rule 144(k)) under the Securities Act such that the Company shall have
twenty-four (24) hours to decide to exercise its right to purchase the shares
specified in the notice and to notify the Purchasers of its election and the
Purchasers only twenty-four (24) hours after such notice is given to exercise
their election.
5.4 TRANSFER EXEMPT FROM FIRST REFUSAL RIGHT AFTER A PUBLIC OFFERING.
Anything to the contrary contained herein notwithstanding, any Transfer after
the closing of a Qualifying Public Offering by a Purchaser which in the
aggregate, over the term of this Agreement, amounts to no more than 10,000
shares of Series Preferred or Common Stock, shall be exempt from the provisions
of this Section 5.
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6. CO-SALE RIGHT.
6.1 NOTICE. At any time after the third anniversary of the date of
this Agreement, if a Purchaser holding Series Preferred or Common Stock proposes
to sell or transfer any shares of Series Preferred or Common Stock ("Co-Sale
Stock") then such Purchaser (a "Section 6 Selling Purchaser") shall promptly
give written notice (the "Notice") simultaneously to the Company and to each of
the other Purchasers holding Series Preferred or Common Stock at least thirty
(30) calendar days prior to the closing of such sale or transfer. The Notice
shall describe in reasonable detail the proposed sale or transfer including,
without limitation, the number of shares of Co-Sale Stock to be sold or
transferred, the nature of such sale or transfer, the total consideration to be
paid to the Section 6 Selling Purchaser (including any consideration for the
securities that is paid or to be paid under other arrangements with the Section
6 Selling Purchaser, including but not limited to, compensation for employment
or services in excess of the reasonable value of the Section 6 Selling
Purchaser's services), and the name and address of each prospective purchaser or
transferee.
6.2 NOTICE OF PARTICIPATION. Each Purchaser holding Series Preferred
or Common Stock shall have the right, exercisable upon written notice to the
Company within fifteen (15) calendar days after the Notice is given, to
participate in such sale of Co-Sale Stock on the same terms and conditions. Such
notice shall indicate the number of shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Common Stock such Purchaser wishes to sell under his or her
right to participate. To the extent one or more Purchasers exercises such right
of participation in accordance with the terms and conditions set forth in this
Section 6, the number of shares of Co-Sale Stock that may be sold in the
transaction shall be computed as set forth below. Each Purchaser desiring to
participate shall be referred to as a "Participant". If one or more Purchasers
become Participants, each Participant shall sell that number of shares of Series
Preferred or Common Stock equal to the product obtained by multiplying (a) the
aggregate number of shares of Co-Sale Stock by (b) a fraction the numerator of
which is the number of shares of Series Preferred or Common Stock owned by the
Participant or the Section 6 Selling Purchaser, as the case may be, at the time
of the sale of the transfer (on an as-converted to Common Stock basis) and the
denominator of which is the total number of shares of Series Preferred or Common
Stock owned by all Participants and the Section 6 Selling Purchaser at the time
of the sale or transfer (on an as-converted to Common Stock basis).
6.3 TRANSFER. Each Participant shall effect its participation in the
sale by promptly delivering to the Company for transfer to the prospective
purchaser one or more certificates, properly endorsed for transfer of the type
and number of shares of Series Preferred or Common Stock which such Participant
elects to sell. In the event the Participant holds the same type of stock as the
Section 6 Selling Purchaser intends to sell the Participant must sell that type
of stock.
6.4 ADDITIONAL TRANSFER PROVISIONS. The stock certificate or
certificates that the Participant delivers to the Company pursuant to Section
6.3 shall be transferred to the prospective purchaser in consummation of the
sale of the Series Preferred or Common Stock pursuant to the terms and
conditions specified in the Notice, and the Section 6 Selling Purchaser(s) shall
concurrently therewith remit to such Participant that portion of the sale
proceeds to which such Participant is entitled by reason of its participation in
such sale. To the extent that any prospective purchaser or purchasers prohibits
such assignment or otherwise
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refuses to purchase shares or other securities from a Participant exercising its
rights of co-sale hereunder, such Section 6 Selling Purchaser(s) shall not sell
to such prospective purchaser or purchasers any Co-Sale Stock unless and until,
simultaneously with such sale, such Section 6 Selling Purchaser(s) shall
purchase such shares or other securities from such Participant on the same terms
and conditions specified in the Notice.
6.5 NO ELECTION TO PARTICIPATE. If none of the other Purchasers
holding Series Preferred or Common Stock to participate in the sale of the
Co-Sale Stock subject to the Notice, such Section 6 Selling Purchaser(s) may,
not later than sixty (60) calendar days following delivery to the Company of the
Notice, enter into an agreement providing for the closing of the transfer of the
Co-Sale Stock covered by the Notice within thirty (30) days of such agreement on
terms and conditions not more favorable to the transferor than those described
in the Notice. Any proposed transfer on terms and conditions more favorable than
those described in the Notice, as well as any subsequent proposed transfer of
any of the Co-Sale Stock by a Section 6 Selling Purchaser(s), shall again be
subject to the co-sale rights of the Purchaser and shall require compliance by
such Section 6 Selling Purchaser(s) with the procedures described in this
Section 6.
6.6 TRANSFERS EXEMPT FROM CO-SALE RIGHT.
(A) Notwithstanding the foregoing, the co-sale rights of the
Purchaser shall not apply to (i) any transfer or transfers by a Section 6
Selling Purchaser(s) which in the aggregate, over the term of this Agreement,
amount to no more than 10,000 shares of Co-Sale Stock held by such holder, (ii)
any bona fide pledge or mortgage of Co-Sale Stock with a commercial lending
institution that creates a mere security interest, (iii) any transfer to the
Immediate Family of the holders of Co-Sale Stock, (iv) any transfer to a
custodian or trustee for the account of the holder of Co-Sale Stock or such
holder's Immediate Family, (v) any transfer or transfers by a holder of Co-Sale
Stock to another holder of Co-Sale Stock (the "Transferee-Holder") so long as
the Transferee-Holder is, at the time of the transfer, employed by, or acting as
a consultant or director of, the Company, (vi) any bona fide gift or (vii) any
transfer by any Purchaser to an Affiliate of such Purchaser; provided that in
the event of any transfer made pursuant to one of the exemptions provided by
clauses (ii), (iii), (iv), (v), (vi) and (vii), (A) the holder of Co-Sale Stock
shall inform the Purchasers of such pledge, transfer or gift prior to effecting
it and (B) the pledgee, transferee or donee shall furnish the Purchasers with a
written agreement to be bound by and comply with all provisions of Sections 6 of
this Agreement. Such transferred Co-Sale Stock shall remain "Restricted Stock"
hereunder.
(B) The co-sale rights of the Purchasers are subject to, and
shall in no manner limit the right which the Company may have to repurchase
securities from the holder of Co-Sale Stock pursuant to (i) a stock restriction
agreement or other agreement between the Company and the holder of Co-Sale Stock
and (ii) the Pre-Emptive Right set forth in Section 5 hereto.
6.7 TERMINATION OF CO-SALE RIGHTS. The provisions of Section 6 of
this Agreement shall not apply to sales pursuant to a registered public offering
or "public" sales pursuant to Rule 144 under the Securities Act after an initial
public offering.
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7. DRAG ALONG RIGHTS.
7.1 DRAG ALONG RIGHT. If BTI or its Affiliates (the "Initiating
Securityholder"), agree to sell or transfer (whether in a stock sale, merger or
other transaction) all or substantially all of their securities of the Company
or agree to the sale of all or substantially all of the assets of the Company to
a third party (whether for cash, securities or a combination of both), then all
Purchasers (including the holders of the Option Shares) ("Selling
Securityholders") will be required to sell all of their securities of the
Company held by them (and may be required to convert their Series Preferred into
Common Stock in connection with such sale) or acquiesce to the sale of the
assets of the Company.
7.2 CONSIDERATION. The consideration to be received by the Selling
Securityholders shall be the same consideration per share to be received by the
Initiating Securityholder for the corresponding class or series of stock (on an
as-converted basis, if applicable), or type of security, and the terms and
conditions of such sale shall be the same as those upon which the Initiating
Securityholder sells its securities; provided however, that any general
indemnity given by the Selling Securityholder, applicable to liabilities not
specific to a particular Selling Securityholder, to the purchaser in connection
with such sale shall be apportioned among the Selling Securityholder according
to the consideration received by each Selling Securityholder.
7.3 EXPENSES. The fees and expenses incurred in connection with a
sale under this Section 7 shall be shared by all the Purchasers on a pro rata
basis.
7.4 NOTICE. The Initiating Securityholder shall provide written
notice to the other Selling Securityholder setting forth the consideration to be
paid by the purchaser for the securities and the material terms of the sale
within ten (10) business days after such Initiating Securityholder exercises the
Drag Along Rights pursuant to Section 7.1 ("Drag Along Notice").
7.5 DELIVERY OF SECURITIES. Within ten (10) business days after the
date of the Drag Along Notice, each Selling Securityholder shall deliver to the
Company, the duly endorsed certificate or certificates representing the
securities held by such Selling Securityholder to be sold, and a limited
power-of-attorney authorizing the Company to take all actions necessary to sell
or otherwise dispose of such securities. In the event that a Selling
Securityholder should fail to deliver the securities, the Company shall cause
the books and records of the Company to show that such securities are bound by
the provisions of this Section 7 and that such securities may only be
transferred to the purchaser in such sale.
7.6 REMITTANCE OF CONSIDERATION. Promptly after the consummation of
the sale, the Purchaser shall remit directly to the Selling Securityholder the
consideration for the securities sold pursuant thereto.
8. BOARD OF DIRECTORS.
8.1 NOMINATION AND ELECTION OF DIRECTORS.
(A) SIZE. Commencing on the date of this Agreement, the Company
and the Purchasers agree to take any actions necessary so that the Board will be
comprised of seven (7) directors; provided, however, that in the event BTI
exercises all or any part of the Option, then the Board will be comprised of
nine (9) directors. The Company and the Purchasers agree to take any actions
necessary so that, at the First Closing, the Series F Directors shall consist of
James
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H. Greene, Alexander Navab, Jr. and Adam H. Clammer, the Other Series Directors
shall consist of Henry H. Bradley and Thomas R. Palmer, the Common Director
shall be David E. Scott and there shall be one vacancy. The Company and the
Purchasers also agree to take any actions necessary so that, after the First
Closing, an independent director nominated by Mr. Scott and approved by the
Series F Directors (such approval not to be unreasonably withheld) is appointed
or elected to the Board.
(B) SERIES F AND BTI DIRECTORS.
(I) For so long at least 6,666,667 shares of Series F
Preferred Stock remain outstanding (subject to adjustment for any stock split,
reverse stock split and the like), the holders of Series F Preferred Stock shall
be entitled to elect and remove directors of the Company (the "Series F
Directors") pursuant to the Company's Restated Certificate.
(II) In the event that less than 6,666,667 shares of Series
F Preferred Stock remain outstanding (subject to adjustment for any stock split,
reverse stock split and the like), as a result of conversion or otherwise, but
BTI and its Affiliates beneficially own at least ten percent (10%) of the
outstanding Common Stock of the Company (assuming conversion of all Series
Preferred), BTI shall have the right to designate the number of persons to serve
as members of the Board of Directors (each a "BTI Nominee" and together, the
"BTI Nominees") equal to (A) the authorized size of the Board of Directors,
multiplied by (B) (1) the total number of shares of Common Stock beneficially
owned by BTI or its Affiliates (assuming conversion of all Series Preferred),
divided by (2) the total number of shares of Common Stock then outstanding
(assuming conversion of all Series Preferred), rounding up so that the BTI
Nominees will not represent less than such proportionate interest in the Company
calculated above; provided, however, that for purposes of this Section
8.1(b)(ii) only, the calculation of the total number of shares outstanding shall
exclude any equity securities issued by the Company after the date hereof (other
than the shares issued pursuant to the Option) if at such time (x) BTI has not
exercised any part of the Option and BTI and its Affiliates beneficially own
twenty percent (20%) or more of the outstanding Common Stock of the Company
(assuming conversion of all Series Preferred), or (y) BTI has exercised any part
of the Option and BTI and its Affiliates beneficially own thirty percent (30%)
or more of the outstanding Common Stock of the Company (assuming conversion of
all Series Preferred). The Company agrees to cause the BTI Nominees to be
nominated for election to the Board of Directors (the "BTI Directors"). A BTI
Director may be removed without cause only with the approval of BTI. In the
event a BTI Director dies, resigns or is removed, BTI shall be entitled to
appoint a successor director to the Board of Directors to fill the vacancy
created by such death, resignation or removal of the BTI Director.
(C) OTHER SERIES PREFERRED DIRECTORS. For so long as at least
8,532,394 shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock remain outstanding (subject to
adjustment for any stock split, reverse stock split and the like), the holders
of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock, voting together as a single class, shall be
entitled to elect and remove directors of the Company (the "Other Series
Preferred Directors") pursuant to the Company's Restated Certificate. The
Purchasers of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock agree that for such time
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as Henry H. Bradley and Thomas R. Palmer are (i) employees of News-Press &
Gazette Company and Kansas City Equity Partners, respectively, (ii) are willing
to continue to serve on the Board of Directors, and (iii) do not violate their
fiduciary duties to the stockholders of the Company or otherwise demonstrate
that they are unfit to serve as members of the Board of Directors, that they
will continue to nominate and elect Mr. Bradley and Mr. Palmer as their
representatives on the Board of Directors of the Company.
(D) COMMON AND CEO DIRECTOR.
(I) For so long as the conditions set forth in Sections
8.1(b)(i) and 8.1(c) are satisfied, the holders of Common Stock shall be
entitled to elect and remove a director of the Company (the "Common Director")
pursuant to the Company's Restated Certificate and the holders of the Common
Stock agree, that until such time as David E. Scott ceases to hold the position
of Chief Executive Officer of the Company, that they will nominate and elect Mr.
Scott as their representative on the Board of Directors, and if Mr. Scott ceases
to function as the Chief Executive Officer of the Company, the holders of the
Common Stock will nominate and elect another member of senior management of the
Company to replace Mr. Scott.
(II) In the event the conditions set forth in either Section
8.1(b)(i) or 8.1(c) cease to be satisfied, the Company, for so long as Mr. Scott
holds the position of Chief Executive Officer of the Company, shall nominate Mr.
Scott for election to the Board of Directors (the "CEO Director").
(E) OTHER DIRECTORS. The Board of Directors shall nominate the
other members of the Board of Directors, if any, for election to the Board of
Directors (the "Other Directors").
(F) VOTING. Each Purchaser and any Affiliate of such Purchaser
owning shares of Series Preferred or Common Stock agree to cast the votes to
which they are entitled (whether at an annual or special meeting of stockholders
or by written consent in lieu of a meeting or otherwise) in such a manner as to
cause the BTI Nominees to be elected to the Board of Directors.
(G) EFFECTIVENESS. The Company and the Purchasers hereby
represent and warrant that the procedures established in this Section 8.1
relating to the size of the Board of Directors and for the designation,
nomination and election of the BTI Nominees is effective, under the terms of
Company's Restated Certificate and Bylaws, to ensure that at all times
subsequent to the date hereof and until the termination of this Agreement, the
BTI Nominees shall be members of the Board of Directors. The Company and
Purchasers covenant that if, at some point in the future, these procedures shall
prove to be ineffective in so providing, the Company and the Purchasers shall
take all steps within their respective power to provide for the designation,
nomination and election of the BTI Nominees to the Board of Directors. Upon the
request of BTI, the Company shall take all actions necessary to cause the Board
of Directors to appoint nominees of the Series F Preferred Stock or BTI, as
applicable, to the Boards of Directors of one or more Subsidiaries in proportion
to the representation of the Series F Preferred Stock or BTI, as applicable, on
the Company's Board of Directors.
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<PAGE> 27
(H) PUBLIC SOLICITATION. After a registered offering to the
general public of the Company's equity securities, the Company shall use its
reasonable best efforts to solicit from the stockholders of the Company eligible
to vote for the election of directors proxies in favor of the nominees
designated in accordance with this Section 8.1. For purposes of this Section 8.1
and all other purposes of this Agreement, "beneficial ownership" or to
"beneficially own" shall be determined in a manner consistent with the meanings
assigned to such terms in Rule 13d-3 and Rule 13d-5 of the Securities Act.
8.2 BOARD COMMITTEES.
(A) The Company and the Purchasers agree that so long as BTI and
its Affiliates beneficially own at least ten percent (10%) of the outstanding
Common Stock of the Company (assuming conversion of all Series Preferred), the
Purchasers agree to take all actions necessary to cause the Board of Directors
to appoint no less than two of the Series F Directors or BTI Directors to any
committees of the Board of Directors, as requested by (i) the Purchasers holding
a majority of the votes of the Series F Preferred Stock (if the condition set
forth in Sections 8.1(b)(i) is satisfied), or (ii) BTI (if the condition set
forth in Sections 8.1(b)(i) is not satisfied).
(B) The Company and the Purchasers agree that so long as BTI and
its Affiliates beneficially own at least ten percent (10%) of the outstanding
Common Stock of the Company (assuming conversion of all Series Preferred), the
Company shall create an Audit Committee of the Board of Directors consisting of
four (4) members, two members of which shall be Series F Directors or BTI
Directors and the other two members of which shall not be employees of the
Company.
(C) The Company and the Purchasers agree that so long as BTI and
its Affiliates beneficially own at least ten percent (10%) of the outstanding
Common Stock of the Company (assuming conversion of all Series Preferred), the
Company shall create a Compensation Committee of the Board of Directors
consisting of four (4) members. Two members of such Compensation Committee shall
not be employees of the Company and one member shall be either the Chief
Executive Officer, the President, the Chief Operating Officer or a Senior Vice
President of the Company. No less than two of the Series F Directors or BTI
Directors shall serve on the Compensation Committee.
(D) Notwithstanding the foregoing, in the event BTI exercises its
Option, BTI's representation on, and the size of, such committees of the Board
of Directors shall be increased as appropriate to reflect BTI's proportionate
equity interest in the Company.
8.3 VETO RIGHTS. So long as BTI or its Affiliates beneficially owns
at least 6,666,667 shares of the Common Stock of the Company or shares of Series
F Preferred Stock representing such number of shares of Common on an
as-converted basis Stock (subject to adjustment for any stock split, reverse
stock split and the like), the approval of at least one of the BTI Nominees
shall be required for the Board of Directors of the Company or any Subsidiary to
approve and authorize any of the following with respect to the Company or any
Subsidiary:
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(A) Any increase or decrease in the total authorized shares of,
or issuance, sale, pledge or other disposition of, capital stock or any security
exchangeable or exerciseable for or convertible into capital stock;
(B) Any payment of any cash or non-cash dividends or other
distributions with respect to any capital stock;
(C) Any reclassification, combination, split, subdivision,
redemption, repurchase or other acquisition of any shares of capital stock
(excluding repurchases upon termination of services, the Company's exercise of
its rights under Section 5 hereof where BTI or its Affiliate is the Section 5
Selling Purchaser, the redemption of the Series E Preferred Stock, and the
redemption by the Company of up to 2,222,222 shares of Series C Preferred Stock
from Stephen L. Sauder pursuant to the Stock Purchase Agreement dated July 12,
1999);
(D) Any individual incurrence or guarantee of indebtedness
(including draw downs on credit facilities) or the individual issuance of any
debt securities in excess of $5,000,000;
(E) Any change in the size or composition of the Board of
Directors or any committee of the Board of Directors or create any new committee
of the Board of Directors;
(F) Any transaction with an Affiliate or any entity in which an
Affiliate has an interest as a director, officer, employee or greater than 5%
stockholder or interest through a family relationship (excluding repurchases
upon termination of services, the Company's exercise of its rights under Section
5 hereof where BTI or its Affiliate is the Section 5 Selling Purchaser, the
redemption of the Series E Preferred Stock, and the redemption by the Company of
up to 2,222,222 shares of Series C Preferred Stock from Stephen L. Sauder
pursuant to the Stock Repurchase Agreement dated July 12, 1999);
(G) Any hiring or termination of a chief executive officer or
other key officer;
(H) Any adoption or modification of the annual budget and
business plan;
(I) Any amendment or modification of any material provision of
the Indenture for the Company's Senior Notes, or the Company's main credit
facility or any other material contract;
(J) Any adoption, renewal or material modification of any
material compensation or benefit plan or arrangement;
(K) Any authorization of entering into a new line of business
provided as of the date hereof or the expansion outside of Missouri, Kansas or
Texas;
(L) Any consolidation, reorganization, share exchange,
recapitalization, business combination, merger or similar transaction other than
intra-Company transactions;
(M) Any sale, pledge, grant of security interest, lease,
transfer or other disposition of assets in excess of five million dollars
($5,000,000);
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(N) Any acquisition of assets or securities of any other person
or entity, except for acquisitions involving cash with an aggregate value of
less than five million dollars ($5,000,000) for any single acquisition or series
of related transactions;
(O) Any amendment to the Company's Restated Certificate or
Bylaws;
(P) Any voting or similar agreement concerning the Company's
capital stock;
(Q) Any payment, discharge or satisfaction of any material claim,
liability or obligation or the commencement of any material suit or proceeding;
(R) Any joint venture or similar profit sharing arrangement
involving material assets or the payment or receipt of more than five million
dollars ($5,000,000);
(S) Any material license, contract or agreement; or
(T) Any liquidation, dissolution or winding up of the Company.
8.4 OBSERVER RIGHTS. Subject to the provisions of this Section 8.4,
so long as Stephen L. Sauder holds at least an aggregate of 2,054,678 shares of
the Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (subject to adjustment for any stock split, reverse stock split
and the like), he shall have the right to attend all meetings of the Company's
Board of Directors (other than Board committee meetings) in a nonvoting observer
capacity, to receive notice of such meetings and to receive all minutes,
consents and other materials, financial or otherwise, which the Company provides
to its Board of Directors ("Observer Rights"). Subject to the provisions of this
Section 8.4, so long as Advantage Capital Missouri Partners I, L.P., Advantage
Capital Missouri Partners II, L.P. and their Affiliates hold at least an
aggregate of 940,875 shares the Company's Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock (subject to adjustment for any
stock split, reverse stock split and the like), they shall have the right to
appoint a total of one representative who shall have Observer Rights. Subject to
the provisions of this Section 8.4, so long as White Pines Limited Partnership I
and Pacific Capital, L.P. hold at least an aggregate of 1,104,526 shares the
Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (subject to adjustment for any stock split, reverse stock split
and the like), they shall have the right to appoint a total of one
representative who shall have Observer Rights. The Company may require as a
condition precedent to granting Observer Rights under this Section 8.4 that each
person proposing to attend any meeting of the Company's Board of Directors and
each person to have access to any of the information provided by the Company to
the Board of Directors shall agree to hold in confidence and trust and to act in
a fiduciary manner with respect to all information so received during such
meetings or otherwise. The Company also reserves the right not to provide
information and to exclude persons having Observer Rights from any meeting or
portion thereof (a) if the Company believes upon advice of counsel and with
reasonable notice to the persons having Observer Rights that attendance at such
meeting by such persons would adversely affect the attorney-client privilege or
the Board's fiduciary duties, or (b) to protect confidential or competitively
sensitive information. The Observer Rights set forth in this Section 8.4 shall
terminate upon the closing of a Qualifying Public Offering, unless terminated
sooner pursuant to the terms of this Section 8.4.
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9. MISCELLANEOUS.
9.1 GOVERNING LAW; PROCEEDINGS AND WAIVER OF JURY TRIAL. This
Agreement shall be governed in all respects by the laws of the State of New
York. All actions and proceedings arising our of or relating to this Agreement
shall be heard and determined in New York state or federal court located in New
York. Each party irrevocably waives all right to trial by jury in any action or
proceeding (including counterclaims) arising out of or relating to this
Agreement.
9.2 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. References to BTI in this Agreement shall be deemed to refer to
BTI and its Affiliates, including any affiliate of Kohlberg Kravis Roberts & Co.
L.P.
9.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER.
(A) This Agreement (including the Exhibits hereto) constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof; provided, that the parties to this Agreement
acknowledge and agree that the rights, restrictions and obligations set forth in
this Agreement are in addition to, and not in replacement of, the rights,
restrictions and obligations set forth in the Purchase Agreement, Restated
Certificate and the Management Stockholder Agreements.
(B) This Agreement may be amended or modified only upon the
written consent of the Company and Purchasers holding: (i) at least fifty
percent (50%) of the Common Shares, voting together as a single class; (ii) at
least fifty percent (50%) of the Series B Preferred, voting together as a single
class; (iii) at least fifty percent (50%) of the Series C Preferred Stock,
voting together as a single class; and (iv) at least fifty percent (50%) of the
Series D Preferred Stock, voting together as a single class; (v) at least fifty
percent (50%) of the Series E Preferred Stock, voting together as a single
class; and (vi) at least fifty percent (50%) of the Series F Preferred Stock,
voting together as a single class.
(C) The obligations of the Company and the rights of the holders
of any series of the Series Preferred or of the Common Stock under this
Agreement may be waived only with the written consent of Purchasers holding the
following percentage of that series of the Series Preferred or of the Common
Stock, as applicable: (i) at least fifty percent (50%) of the Common Shares,
voting together as a single class; (ii) at least fifty percent (50%) of the
Series B Preferred, voting together as a single class; (iii) at least fifty
percent (50%) of the Series C Preferred Stock, voting together as a single
class; (iv) at least fifty percent (50%) of the Series D Preferred Stock, voting
together as a single class; (v) at least fifty percent (50%) of the Series E
Preferred Stock, voting together as a single class; and (vi) at least fifty
percent (50%) of the Series F Preferred Stock, voting together as a single
class.
9.4 NOTICES, ETC. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to a Holder, as indicated
on the list of Holders attached hereto as Exhibit A, or at
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such other address as such holder or permitted assignee shall have furnished to
the Company in writing, or (b) if to the Company, at such address or facsimile
number as the Company shall have furnished to each Holder in writing. All such
notices and other written communications shall be effective on the date of
mailing, facsimile transfer or delivery.
9.5 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder 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 therefore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part 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.
9.6 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein,
a Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
9.7 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by them pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
9.8 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing or interpreting this Agreement.
9.9 COUNTERPARTS; EXECUTION BY FACSIMILE SIGNATURE. This Agreement
may be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument. This
Agreement may be executed by facsimile signature(s).
9.10 BOARD MEETINGS/INFORMATION. The Board of Directors of the
Company shall meet at least quarterly at all times during the term of this
Agreement. In addition to the information rights set forth in the Purchase
Agreement, the Company shall provide the Directors as soon as available after
the end of each calendar month, copies of the unaudited interim financial
statements of the Company and its consolidated Subsidiaries as at the end of
such
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month or fiscal quarter, as the case may be, in each case in a form customarily
distributed to the officers of the Company.
9.11 RESTATED CERTIFICATE AND BYLAWS. The Company and the Purchasers
shall take or cause to be taken all lawful action necessary to ensure at all
times that the Company's Restated Certificate and Bylaws do not, at any time,
contradict the provisions of this Agreement.
9.12 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
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IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Purchasers Rights Agreement effective as of the day and year first
above written.
BIRCH TELECOM, INC. PURCHASER:
BTI Ventures L.L.C.
By: /s/ David E. Scott By: /s/ Alex Navab
------------------------------- -------------------------------
David E. Scott, President
Name: Alex Navab
----------------------------
Title: Member
----------------------------
SIGNATURE PAGE TO
AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT
<PAGE> 1
EXHIBIT 10.18
BIRCH TELECOM, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
entered into as of this 2nd day of July, 1999, by and among BIRCH TELECOM, INC.,
a Delaware corporation (the "Company"), and each of those persons and entities,
severally and not jointly, whose names are set forth on the Schedule of
Purchasers attached hereto as Exhibit A (which persons and entities are
hereinafter collectively referred to as "Purchasers" and each individually as a
"Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale and issuance of an
aggregate of Two Million Five Hundred Thousand (2,500,000) shares of its Series
D Preferred Stock (the "Shares");
WHEREAS, Purchasers desire to purchase the Shares on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Shares to
Purchasers on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined
in Section 2 below), the Company shall have authorized (i) the sale and issuance
to Purchasers of the Shares and (ii) the issuance of such shares of Common Stock
to be issued upon conversion of the Shares (the "Conversion Shares"). The Shares
and the Conversion Shares shall have the rights, preferences, privileges and
restrictions set forth in the Amended and Restated Certificate of Incorporation
of the Company in the form attached hereto as Exhibit B (the "Restated
Certificate").
1.2 SALE AND PURCHASE. Subject to the terms and conditions hereof,
at the Closing (as hereinafter defined) the Company hereby agrees to issue and
sell to each Purchaser, severally and not jointly, and each Purchaser agrees to
purchase from the Company, severally and not jointly, the number of Shares set
forth opposite such Purchaser's name on Exhibit A, at a purchase price of four
dollars and fifty cents $4.50 per share.
<PAGE> 2
2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The closing of the sale and purchase of the Shares
under this Agreement (the "Closing") shall take place at 5:00 p.m. on the date
hereof, at the offices of the Company, 2020 Baltimore Avenue, Kansas City,
Missouri, or at such other time or place as the Company and Purchasers may
mutually agree (such date is hereinafter referred to as the "Closing Date").
2.2 DELIVERY. At the Closing, subject to the terms and conditions
hereof, the Company will deliver to the Purchasers certificates representing the
number of Shares to be purchased at the Closing by each Purchaser, against
payment of the purchase price therefor by check, wire transfer made payable to
the order of the Company, cancellation of indebtedness or any combination of the
foregoing.
2.3 SUBSEQUENT SALES OF SHARES. At any time on or before the 30th
day following the Closing, the Company may sell up to the balance of the
authorized shares of Series D Preferred Stock not sold at the Closing to such
persons as may be approved by the Board of Directors of the Company. All such
sales shall be made on the terms and conditions set forth in this Agreement,
including, without limitation, the representations and warranties by such
Purchasers as set forth in Section 4. Any Shares of Series D Preferred Stock
sold pursuant to this Section 2.3 shall be deemed to be "Shares" for all
purposes under this Agreement and any purchasers thereof shall be deemed to be
"Purchasers" for all purposes under this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on a Schedule of Exceptions delivered by the
Company to the Purchasers at the Closing, the Company hereby represents and
warrants to each Purchaser as of the date of this Agreement as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the
Company and its Subsidiaries (as hereinafter defined) is a corporation or other
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation or formation (as set forth on Schedule
3.1) and has all requisite power and authority to own and operate its respective
properties and assets and to carry on its respective business as currently
conducted and as currently proposed to be conducted. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and the Amended and Restated Purchasers Rights Agreement in substantially the
form of Exhibit C attached hereto (the "Purchasers Rights Agreement," and
together with this Agreement, the "Related Agreements"), to issue and sell the
Shares and to carry out the provisions of this Agreement and the Related
Agreements. Each of the Company and its Subsidiaries is duly qualified and is
authorized to do business and is in good standing as a foreign corporation or
other entity in all jurisdictions 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 the business, operations or financial condition of
the Company and its Subsidiaries, taken as a whole.
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3.2 SUBSIDIARIES. The Company does not own voting securities or
other similar interests of any corporation or other entity that is sufficient to
enable the Company to elect a majority of the members of such corporation's or
other entity's board of directors or other governing body, except for those
corporations or other entities set forth on Schedule 3.2 (each a "Subsidiary"
and collectively, the "Subsidiaries"). All the outstanding shares of stock of
the Subsidiaries have been validly issued and are fully paid and non-assessable
and all such outstanding shares are owned directly by the Company free of any
lien or claim. Neither the Company nor any of its Subsidiaries is a participant
in any joint venture, partnership or similar arrangement.
3.3 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of
the Company, immediately prior to the Closing, will consist of 76,000,000
shares, of which 50,000,000 shares of Common Stock, par value $.001 per share,
5,043,706 shares of which are issued and outstanding and 791,748 shares of which
are reserved for future issuance to employees pursuant to the Stock Option Plan
(as hereinafter defined) and 26,000,000 shares of Preferred Stock, par value
$.001 per share; 8,750,000 of which are designated Series B Preferred Stock,
8,572,039 of which are issued and outstanding; 8,500,000 shares of which are
designated Series C Preferred Stock, 8,492,749 of which are issued and
outstanding; and 2,500,000 shares of which are designated Series D Preferred
Stock, none of which are issued and outstanding. All issued and outstanding
shares of the Company's capital stock (a) have been duly authorized and validly
issued, (b) are fully paid and nonassessable, (c) were issued in compliance with
all applicable state and federal laws concerning the issuance of securities. The
rights, preferences, privileges and restrictions of the Preferred Stock are as
stated in the Restated Certificate. Other than the 791,748 shares reserved for
issuance under the Stock Option Plan and outstanding warrants to purchase
1,409,734 shares of Common Stock (the "Existing Warrants"), and except as may be
granted pursuant to this Agreement and the Related Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or shareholder agreements, or agreements of
any kind for the purchase or acquisition from the Company of any of its
securities. When issued in compliance with the provisions of this Agreement and
the Restated Certificate, the Shares will be validly issued, fully paid and
nonassessable; provided, however, that such shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or in the Purchasers Rights Agreement or as otherwise required by such
laws at the time a transfer is proposed.
3.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization of this Agreement and the Related Agreements, the performance of
all obligations of the Company hereunder and thereunder as of the Closing and
the authorization, sale, issuance and delivery of the Shares 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 the
Company enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights; (b) general
principles of equity that restrict the availability of equitable remedies; and
(c) to the extent that the enforceability of the indemnification provisions in
Section 2.5 of the Purchasers Rights Agreement may be limited by applicable
laws. Other than pursuant to the Related Agreements, the sale of the Shares is
not and will not be subject to
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any preemptive rights or rights of first refusal that have not been properly
waived or complied with.
3.5 FINANCIAL STATEMENTS. The Company has delivered to each
Purchaser an unaudited balance sheet of the Company and its subsidiaries as at
March 31, 1999 (the "Statement Date") and unaudited statement of income and cash
flows of the Company and its subsidiaries for the three months ending on the
Statement Date (the "Financial Statements"). The Financial Statements, together
with the notes thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated, except as disclosed therein, and present fairly the financial
condition and position of the Company and its Subsidiaries as of the Statement
Date; provided, however, that the unaudited financial statements are subject to
normal recurring year-end audit adjustments (which are not expected to be
material), and do not contain all footnotes required under generally accepted
accounting principles.
3.6 LIABILITIES. Neither the Company nor any Subsidiary has material
liabilities and neither the Company nor any Subsidiary knows of any material
contingent liabilities not disclosed in the Financial Statements, except current
liabilities incurred in the ordinary course of business subsequent to the
Statement Date which would not have, either individually or in the aggregate, a
material adverse effect on the business, operations or financial condition of
the Company and its Subsidiaries, taken as a whole.
3.7 AGREEMENTS; ACTION.
(A) Except (i) as set forth on Schedule 3.7(a), (ii) as
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 or any subsequent Quarterly Report on Form 10-Q (collectively
the "Forms 10"), and (iii) for agreements between the Company or any Subsidiary
and its employees with respect to the sale of Common Stock, there are no
agreements, understandings or proposed transactions between the Company or any
Subsidiary and any of its officers, directors, affiliates or any affiliate
thereof, required to be described in or filed with an Annual Report on Form
10-K.
(B) Except (i) as set forth on Schedule 3.7(b), or (ii) as
described in the Forms 10 or as filed as exhibits thereto, there are no
agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees required to be described in or filed with an
Annual Report on Form 10-K.
(C) Neither the Company nor any Subsidiary has (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock, (ii) incurred any indebtedness for
money borrowed in excess of $1,000,000 in any single instance, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, 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.
(D) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions
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involving the same person or entity (including persons or entities the Company
or any Subsidiary has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
3.8 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the
Company or any Subsidiary to their respective officers, directors, shareholders,
or employees other than (a) for payment of salary for services rendered, (b)
reimbursement for reasonable expenses incurred on behalf of the Company or
Subsidiary and (c) 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 the Company or Subsidiary).
Except as may be disclosed in the Financial Statements, neither the Company nor
any Subsidiary is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
3.9 CHANGES. Since the Statement Date, there has not been:
(A) Any change in the assets, liabilities, financial condition
or operations of the Company and its Subsidiaries 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 the business, operations or financial condition of
the Company and its Subsidiaries, taken as a whole;
(B) Any resignation or termination of any key officers of the
Company and its Subsidiaries; and the Company does not know of the impending
resignation or termination of employment of any such officer;
(C) Any material change, except in the ordinary course of
business, in the contingent obligations of the Company and its Subsidiaries by
way of guaranty, endorsement, indemnity, warranty or otherwise;
(D) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, business or
prospects or financial condition of the Company and its Subsidiaries;
(E) Any waiver by the Company or any Subsidiary of a valuable
right or of a material debt owed to it;
(F) Any direct or indirect loans made by the Company or any
Subsidiary to any shareholder, employee, officer or director of the Company or
any Subsidiary, other than advances made in the ordinary course of business;
(G) Any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder;
(H) Any declaration or payment of any dividend or other
distribution of the assets of the Company or any Subsidiary;
(I) Any labor organization activity;
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(J) Any debt, obligation or liability incurred, assumed or
guaranteed by the Company or any Subsidiary, except those for immaterial amounts
and for current liabilities incurred in the ordinary course of business;
(K) Any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(L) Any change in any material agreement to which the Company or
any Subsidiary is a party or by which it is bound which materially and adversely
affects the business, operations or financial condition of the Company and its
Subsidiaries, taken as a whole; or
(M) Any other event or condition of any character that, either
individually or cumulatively, has materially and adversely affected the
business, operations or financial condition of the Company and its Subsidiaries,
taken as a whole.
3.10 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company and
each of its Subsidiaries has good and marketable title to its respective
properties and assets, including the properties and assets reflected in the most
recent balance sheet included in the Financial Statements, and good title to its
respective leasehold estates, in each case subject to no mortgage, pledge, lien,
lease, encumbrance or charge. The Company and each of its Subsidiaries is in
compliance with all material terms of each lease to which it is a party or is
otherwise bound.
3.11 PATENTS AND TRADEMARKS. The Company and each of its
Subsidiaries owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes necessary for its
respective business as now conducted and as currently proposed to be conducted,
without any known infringement of the rights of others. Neither the Company nor
any of its Subsidiaries has received any communications alleging that it has
violated or, by conducting its business as presently 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. Neither the
Company nor any of its Subsidiaries is aware that any of its 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
the Company or any of its Subsidiaries or that would conflict with the Company's
or any of its Subsidiaries' business as presently proposed to be conducted.
Neither the execution nor delivery of this Agreement, nor the carrying on of the
Company's or any of its Subsidiaries' business by the employees of the Company
or its Subsidiaries, nor the conduct of the Company's or any of its
Subsidiaries' business as currently proposed, will 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.
Neither the Company or any of its Subsidiaries believes it is or will be
necessary to utilize any inventions, trade secrets or proprietary information of
any of its employees made prior to their employment by the Company or any of its
Subsidiaries, except for inventions, trade secrets or proprietary information
that have been assigned to the Company or any of its Subsidiaries.
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3.12 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor any
of its Subsidiaries is in violation or default of any term of its Restated
Certificate or Bylaws or other organizational documents, 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 the Company or any
Subsidiary which would materially and adversely affect the business, assets,
liabilities, financial condition, or operations of the Company or any
Subsidiary. The execution, delivery, and performance of and compliance with this
Agreement, and the Related Agreements, and the issuance and sale of the 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 the Company and its Subsidiaries or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit license, authorization or
approval applicable to the Company, its business or operations or any of its
assets or properties.
3.13 LITIGATION. There is no action, suit, proceeding or
investigation pending or to the Company's knowledge currently threatened against
the Company or any Subsidiary that questions the validity of this Agreement, or
the Related Agreements or the right of the Company to enter into any of such
agreements, or to consummate the transactions contemplated hereby or thereby, or
which might result, either individually or in the aggregate, in any material
adverse change in the assets, condition, affairs or operations of the Company
and its Subsidiaries, financially or otherwise, or any change in the current
equity ownership of the Company, nor is the Company aware that there is any
basis for the foregoing. The foregoing includes, without limitation, actions
pending or threatened (or any basis therefor known to the Company) involving the
prior employment of any of the Company's or any Subsidiary's employees, their
use in connection with the Company's or any Subsidiary's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.
Neither the Company 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 the Company or any Subsidiary currently pending or which the Company or any
Subsidiary intends to initiate.
3.14 TAX RETURNS AND PAYMENTS. The Company and each of its
Subsidiaries have filed all 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 all other taxes due and payable by the Company and each
of its Subsidiaries on or before the Closing have been paid or will be paid
prior to the time they become delinquent. Neither the Company nor any Subsidiary
has knowledge of any liability of any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.
3.15 EMPLOYEES. Neither the Company nor any of its Subsidiaries has
any collective bargaining agreements with any of its employees. There is no
labor union organizing activity pending or, to the knowledge of the Company or
any of its Subsidiaries, threatened with respect to the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries is aware that any
officer or key employee, or that any group of key employees,
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intends to terminate their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
key employees.
3.16 REGISTRATION RIGHTS. Except as required pursuant to the
Purchasers Rights Agreement, neither the Company nor any of its Subsidiaries is
currently under any obligation, and has not granted any rights, to register (as
defined in the Purchasers Rights Agreement) any of the Company's or any
Subsidiary's currently outstanding securities or any of its securities that may
hereafter be issued.
3.17 COMPLIANCE WITH LAWS; PERMITS. Neither the Company nor any of
its Subsidiaries 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 which violation would materially and adversely
affect the business, assets, liabilities, financial condition, operations or
prospects of the Company or any of its 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 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. The Company and each of its Subsidiaries has 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, operations or financial condition of the Company and its
Subsidiaries, taken as a whole, and believes it can obtain, without undue burden
or expense, any similar authority for the conduct of its business as planned to
be conducted.
3.18 ENVIRONMENTAL AND SAFETY LAWS. Neither the Company nor any of
its Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
3.19 OFFERING VALID. Assuming the accuracy of the representations
and warranties of the Purchasers contained in Section 4 hereof, the offer, sale
and issuance of the 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 registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws. Neither the Company 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 Shares to any person or persons so as to
bring the sale of such Shares by the Company within the registration provisions
of the Securities Act or any state securities laws.
3.20 SMALL BUSINESS CONCERN. The Company together with its
"affiliates" (as that term is defined in Section 121.103 of Title 13 of the Code
of Federal Regulations (the "Federal Regulations")), is a "small business
concern" or a "smaller business" within the meaning of the Small Business
Investment Act of 1958, as amended (the "Small Business Act"), and the
regulations thereunder, including Section 121.301 of Title 13 of the Federal
Regulations
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(a "Small Business Concern") or including Section 107.710 of Title 13 of the
Federal Regulations (a "Smaller Business"). The information delivered to each
Purchaser that is a licensed Small Business Investment Company (an "SBIC
Purchaser") on SBA Forms 480, 652 and 1031 delivered in connection herewith is
true and correct. The Company is not ineligible for financing by any SBIC
Purchaser pursuant to Section 107.720 of Title 13 of the Federal Regulations.
The Company acknowledges that each SBIC Purchaser is a Federal licensee under
the Small Business Investment Act of 1958, as amended.
3.21 EMPLOYEE BENEFIT PLANS. Neither the Company nor any of its
Subsidiaries has any employee benefit plan as defined in the Employment
Retirement Income Security Act of 1974, as amended ("ERISA"). The Company and
each of its Subsidiaries is in compliance in all material respects with ERISA,
and has fulfilled its obligations under the minimum funding standards of ERISA
and the Internal Revenue Code of 1986, as amended (the "Code"), with respect to
each of its federally insured pension plans and is in compliance in all material
respects with the currently applicable provisions of ERISA and the Code. No
"Reportable Event" (as defined in ERISA) which could result in a material
accumulated deficiency under ERISA or material liability to the Pension Benefit
Guaranty Corporation ("PBGC") has occurred or is continuing, and there exists no
condition or set of circumstances which could result in a "Reportable Event."
The value of all accrued benefits is fully funded by the assets of such plans.
All contributions have been made or accrued for each of the plans, including
contributions that are payable for the preceding and current plan year. Neither
the Company nor any of its Subsidiaries participates in any "multi-employer
plan" as defined in ERISA. Neither the Company nor any of its Subsidiaries has
any liability under ERISA on account of the prior termination of any employee
welfare or benefit plan.
3.22 INSURANCE. Each property of the Company and its Subsidiaries
is insured for the benefit of the Company or respective Subsidiary in amounts
reasonably deemed adequate by the Company's or Subsidiary's management against
risks usually insured against by persons operating businesses similar to those
of the Company or Subsidiary in the localities where such properties are
located.
3.23 BOOKS AND RECORDS. The books of account, stock records, minute
books and other records of the Company and each of its Subsidiaries are
accurate, up-to-date and complete in all material respects, and have been
maintained in accordance with prudent business practices.
3.24 NO BROKER. Neither the Company nor any of its Subsidiaries has
employed any broker or finder, or incurred any liability for any brokerage or
finders' fees or any similar fees or commissions in connection with the
transactions contemplated by this Agreement.
3.25 DISCLOSURE. No representation or warranty contained in this
Agreement or any statement or information contained in any schedule, exhibit,
certificate, written statement, document or instrument, or other information
attached to, delivered or required to be delivered pursuant to this Agreement
contains any untrue statement of material fact or omits to state a material fact
necessary in order to make the statements contained herein not misleading or
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necessary in order to fully and fairly provide the information required to be
provided in any such document.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby represents and warrants to the Company only as to
itself as follows (such representations and warranties do not lessen or obviate
the representations and warranties of the Company set forth in this Agreement):
4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and the Related Agreements and to carry out their
provisions. All action on Purchaser's part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be
effectively taken prior to the Closing. Upon their execution and delivery, this
Agreement and the Related Agreements will be valid and binding obligations of
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, (b) general
principles of equity that restrict the availability of equitable remedies, and
(c) to the extent that the enforceability of the indemnification provisions of
Section 2.5 of the Purchasers Rights Agreement may be limited by applicable
laws.
4.2 INVESTMENT REPRESENTATIONS. Purchaser understands that neither
the Shares nor the Conversion Shares have been registered under the Securities
Act. Purchaser also understands that the Shares are being offered and sold
pursuant to an exemption from registration contained in the Securities Act based
in part upon Purchaser's representations contained in this Agreement. Purchaser
hereby represents and warrants as follows:
(A) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Shares are registered pursuant to the
Securities Act, or an exemption from registration is available. Purchaser
understands that the Company has no present intention of registering the Shares,
the Conversion Shares or any shares of its Common Stock. Purchaser also
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the Shares
under the circumstances, in the amounts or at the times Purchaser might propose.
(B) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the
Shares for Purchaser's own account for investment only, and not with a view
towards their distribution.
(C) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement,
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and the Related Agreements. Further, Purchaser is aware of no publication of any
advertisement in connection with the transactions contemplated in the Agreement.
(D) ACCREDITED INVESTOR. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(E) COMPANY INFORMATION. Purchaser has received and read the
Financial Statements and has had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the Company's
operations and facilities. Purchaser has also had the opportunity to ask
questions of and receive answers from, the Company and its management regarding
the terms and conditions of this investment.
(F) RULE 144. Purchaser acknowledges and agrees that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
has been advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act as in effect from time to time, which permits limited resale of
shares purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things: the availability of certain current
public information about the Company, the resale occurring following the
required holding period under Rule 144 and the number of shares being sold
during any three-month period not exceeding specified limitations.
(G) RESIDENCE. If the Purchaser is an individual, then the
Purchaser resides in the state or province identified in the address of the
Purchaser set forth on the Schedule of Purchasers attached hereto as Exhibit A;
if the Purchaser is a partnership, corporation, limited liability company or
other entity, then the office or offices of the Purchaser in which its
investment decision was made is located at the address or addresses of the
Purchaser set forth on the Schedule of Purchasers attached hereto as Exhibit A.
4.3 TRANSFER RESTRICTIONS. Each Purchaser acknowledges and agrees
that the Shares and Conversion Shares are subject to restrictions on transfer as
set forth in the Purchasers Rights Agreement.
5. COVENANTS OF THE COMPANY.
5.1 BASIC FINANCIAL INFORMATION. The Company will furnish the
following reports to each Purchaser (except for the reports described in
subsections (c) and (d), which only will be provided to Significant Purchasers
(as defined below)):
(A) As soon as practicable after the end of each fiscal year of
the Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and cash flows of the Company
and its subsidiaries, if any, for such year, 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, all
in
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reasonable detail and certified by independent public accountants of recognized
national standing selected by the Company, and a Company-prepared comparison to
the Company's operating plan for such year.
(B) 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 consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and cash flows of the
Company and its subsidiaries, if any, for such period and for the current fiscal
year to date, prepared in accordance with generally accepted accounting
principles consistently applied and setting forth in comparative form the
figures for the corresponding periods of the previous fiscal year and to the
Company's operating plan then in effect and approved by its Board of Directors,
subject to changes resulting from normal year-end audit adjustments, all in
reasonable detail and certified by the principal financial or accounting officer
of the Company, except that such financial statements need not contain the notes
required by generally accepted accounting principles.
(C) As soon as practical after the end of each month and in any
event within twenty (20) days thereafter (within thirty (30) days thereafter for
the first three months following the First Closing), the Company will deliver to
each Significant Purchaser (as defined below) a consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such month and
consolidated statements of income and cash flows of the Company and its
subsidiaries, for each month and for the current fiscal year of the Company to
date, all subject to normal year-end audit adjustments, prepared in accordance
with generally accepted accounting principles consistently applied and certified
by the principal financial or accounting officer of the Company, together with a
comparison of such statements to the corresponding periods of the prior fiscal
year and to the Company's operating plan then in effect and approved by its
Board of Directors.
(D) The Company will deliver to each Significant Purchaser (as
defined below) an annual financial plan for the Company for the next fiscal
year, no later than forty-five (45) days before the start of the Company's next
fiscal year, in such manner and form as approved by the Board of Directors of
the Company, which financial plan shall include at least a projection of income
and a projected cash flow statement for each fiscal quarter in such fiscal year
and a projected balance sheet as of the end of each fiscal quarter in such
fiscal year. Any material changes in such business plan shall be delivered to
each requesting Purchaser as promptly as practicable after such changes have
been approved by the Board of Directors of the Company.
(E) From the date the Company becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, (which shall
include any successor federal statute), and in lieu of the financial information
required pursuant to this Section 5.1, the Company may deliver copies of its
annual reports on Form 10-K and its quarterly reports on Form 10-Q,
respectively.
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5.2 ADDITIONAL INFORMATION AND RIGHTS.
(A) The Company shall permit a Purchaser who holds at least 200,000
Shares (as adjusted for any stock combinations, splits and the like with respect
to such shares) (each a "Significant Purchaser") to visit and inspect any of the
properties of the Company, including its books of account and other records (and
make copies thereof and take extracts therefrom), and to discuss its affairs,
finances and accounts with the Company's officers and its independent public
accountants, at such reasonable times and as often as such Significant Purchaser
may reasonably request.
(B) As soon as practicable after the end of each fiscal year and
in any event within ninety (90) days thereafter, the Company shall provide a
report to each Purchaser reporting on compliance with the terms and conditions
of this Agreement.
(C) Anything in Section 5 to the contrary notwithstanding, no
Purchaser or Significant Purchaser by reason of this Agreement shall have access
to any trade secrets or classified information of the Company. Each Significant
Purchaser hereby agrees to hold in confidence and trust and not to misuse or
disclose any confidential information provided pursuant to Sections 5.1 and 5.2.
The Company shall not be required to comply with Section 5.2(a) in respect of
any Purchaser whom the Company reasonably determines to be a competitor or an
officer, employee, director or greater than ten percent (10%) stockholder of a
competitor.
5.3 KEY PERSON LIFE INSURANCE. The Company shall maintain term life
insurance on the life of David E. Scott in the amount of $5,000,000 from
financially sound and reputable insurers.
5.4 INDEPENDENT ACCOUNTANTS. The Company shall retain independent
public accountants of recognized national standing who shall certify the
Company's financial statements at the end of each fiscal year. In the event the
services of the independent public accountants so selected, or any firm of
independent public accountants hereafter employed by the Company, are
terminated, the Company will promptly thereafter notify the Purchasers and will
request the firm of independent public accountants whose services are terminated
to deliver to the Purchasers a letter from such firm setting forth the reasons
for the termination of their services. In the event of such termination, the
Company will promptly thereafter engage another firm of independent public
accountants of recognized national standing. In its notice to the Purchasers the
Company shall state whether the change of accountants was recommended or
approved by the Board of Directors of the Company or any committee thereof.
5.5 TRANSACTIONS WITH AFFILIATES. The Company shall not, without the
approval of the disinterested members of the Company's Board of Directors,
engage in any loans, leases, contracts or other transactions with any director,
officer or key employee of the Company, or any member of any such person's
immediate family, including the parents, spouse, children and other relatives of
any such person, on terms less favorable than the Company would obtain in a
transaction with an unrelated party, as determined in good faith by the Board of
Directors.
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5.6 USE OF PROCEEDS.
(A) The Company shall use the proceeds from the sale of the
Shares for the purchase of certain capital equipment and for working capital and
general corporate purposes.
(B) Notwithstanding anything herein to the contrary, no
portion of the proceeds from the sale of Shares acquired by the Purchasers who
are licensed under the Small Business Investment Act of 1958, as amended
(together with the rules and regulations thereunder) will be used (i) for
relending or reinvesting, if the Company's primary purpose involves, directly or
indirectly, providing funds to others, (ii) for the purchase of debt
obligations, factoring, or the long-term leasing of equipment with no provision
for maintenance or repair, (iii) to, directly or indirectly, provide capital or
financing to a company, (iv) to acquire, or to pay obligations relating to the
prior acquisition of, land or improved real estate to be held, without prompt
and substantial improvement, for resale or leasing to others, (v) outside the
United States (except that all or any portion of such proceeds may be used by
the Company in the domestic production of products for distribution abroad or to
acquire abroad materials used in such production, provided the major portion of
the assets and activities of the Company after such proceeds are so employed
remains within the territorial jurisdiction of the United States), (vi) for any
purpose contrary to the public interest (including but not limited to activities
which are in violation of law or inconsistent with free competitive enterprise),
(vii) to purchase goods or services from a supplier that is an "associate" (as
defined in Section 107.50 of Title 13 of the Federal Regulations) of Purchaser
if 50% or more of such proceeds will be used to purchase goods or services from
any such supplier (provided, however, that (A) in no event may such proceeds be
used to purchase capital goods from an associate supplier, and (B) such goods
and services shall be at a price no greater than that charged other customers of
the associate supplier), or (viii) to acquire "farm land" (as that term is
defined in Section 107.720 of Title 13 of the Federal Regulations).
The Company shall give the Significant Purchasers access to
its records to confirm that the Company has used the proceeds from the sale of
the Shares solely for the foregoing purposes. Without limiting the generality of
the foregoing, the Company shall permit the Significant Purchasers to conduct a
post-closing review within 90 days after the date hereof to assure that the
proceeds from the sale of the Shares were used for the foregoing purposes.
5.7 TERMINATION OF COVENANTS. The covenants set forth in this
Section 5 shall terminate and be of no further force and effect after the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement declared effective under the Securities Act
covering the offer and sale of Common Stock for the account of the Company in
which the gross proceeds to the Company (before underwriting discounts,
commissions and fees), are at least $30,000,000 (a "Qualifying Public
Offering").
6. CONDITIONS TO CLOSING.
6.1 CONDITIONS TO PURCHASERS' OBLIGATIONS. Purchasers' obligations
to purchase the Shares at the Closing are subject to the satisfaction, at or
prior to the Closing Date, of the following conditions:
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(A) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing Date.
(B) LEGAL INVESTMENT. On the Closing Date, the sale and issuance
of the Shares shall be legally permitted by all laws and regulations to which
Purchasers and the Company are subject.
(C) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Related
Agreements (except for such as may be properly obtained subsequent to the
Closing Date).
(D) CORPORATE DOCUMENTS. The Company shall have delivered to
Purchasers or their counsel, copies of all corporate documents of the Company as
Purchasers shall reasonably request.
(E) COMPLIANCE CERTIFICATE; SECRETARY'S CERTIFICATE; GOOD
STANDING CERTIFICATE. The Company shall have delivered to the Purchasers a
Compliance Certificate, executed by the President of the Company, dated the
Closing Date, to the effect that the conditions specified in Section 6.1(a) have
been satisfied. The Company shall have delivered to the Purchasers a certificate
executed by the Secretary of the Company, dated the Closing Date, certifying as
to (i) the resolutions of the Board of Directors and stockholders of the Company
evidencing approval of the transactions contemplated by and from this Agreement
and the Related Agreements and the authorization of the named officer or
officers to execute and deliver this Agreement and the Related Agreements and
(ii) certain of the officers of the Company, their titles and examples of their
signatures. The Company shall have delivered to the Purchasers certificates of
the Secretary of State of the State of Delaware, dated a recent date, that the
Company is in good standing.
(F) LEGAL OPINION. The Purchasers shall have received from
legal counsel to the Company an opinion addressed to them, dated as of such
Closing Date, in substantially the form attached hereto as Exhibit D.
(G) SBA MATTERS. The Company shall have executed and delivered
to each SBIC Purchaser a Size Status Declaration on SBA Form 480 and an
Assurance of Compliance on SBA Form 652, and shall have provided to each such
Purchaser information necessary for the preparation of a Portfolio Financing
Report on SBA Form 1031.
(H) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
hereby and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to the Purchasers and their
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special counsel, and the Purchasers and their special counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
(I) FILING AND CERTIFICATION OF RESTATED CERTIFICATE. The
Restated Certificate shall have been filed with and certified by the Secretary
of State of the State of Delaware.
(J) PURCHASERS RIGHTS AGREEMENT. The Purchasers Rights Agreement
shall have been executed and delivered by the parties thereto.
6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's
obligation to issue and sell the Shares at the Closing is subject to the
satisfaction, on or prior to the Closing, of the following conditions:
(A) REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties made by those Purchasers acquiring Shares in Section 4 hereof shall
be true and correct in all material respects at the date of the Closing Date
with the same force and effect as if they had been made on and as of the Closing
Date.
(B) PERFORMANCE OF OBLIGATIONS. Such Purchasers shall have
performed and complied with all agreements and conditions herein required to be
performed or complied with by such Purchasers on or before the Closing Date.
(C) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Related
Agreements (except for such as may be properly obtained subsequent to the
Closing Date).
(D) FILING AND CERTIFICATION OF RESTATED CERTIFICATE. The
Restated Certificate shall have been filed with and certified by the Secretary
of State of the State of Delaware.
(E) PURCHASERS RIGHTS AGREEMENT. The Purchasers Rights Agreement
shall have been executed and delivered by the Purchasers.
7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed in all respects
by the laws of the State of Missouri as such laws are applied to agreements
between Missouri residents entered into and performed entirely in Missouri.
7.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Purchaser 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.
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7.3 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 the Shares from time to time.
7.4 ENTIRE AGREEMENT; SUPERCEDES PRIOR AGREEMENT. This Agreement
and the Exhibits hereto, the Related Agreements and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and no party
shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein and
therein.
7.5 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.
7.6 AMENDMENT AND WAIVER.
(A) This Agreement may be amended or modified only upon the
written consent of the Company and holders of at least fifty percent (50%) of
the Shares, voting together as a single class.
(B) The obligations of the Company and the rights of the holders
of the Shares under this Agreement may be waived only with the written consent
of the holders of at least fifty percent (50%) of the Shares, voting together as
a single class.
7.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, 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 or in any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on any Purchaser's part of any breach, default
or noncompliance under this Agreement or the Related Agreements or any waiver on
such party's part of any provisions or conditions of the Agreement or the
Related Agreements, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or the Related Agreements, by law, or otherwise afforded to any
party, shall be cumulative and not alternative.
7.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified; (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (d) one (1) business 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 Company at the address as set
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forth on the signature page hereof and to Purchaser at the address set forth on
the Schedule of Purchasers attached hereto as Exhibit A or at such other address
as the Company or Purchaser may designate by ten (10) days advance written
notice to the other parties hereto.
7.9 EXPENSES. The Company shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement and the Related Agreements. The Company shall, at the Closing,
reimburse the reasonable fees of and expenses of special counsel for the
Purchasers, not to exceed $10,000, and shall reimburse such special counsel for
reasonable expenses incurred in connection with the negotiation, execution, and
delivery of this Agreement and the Related Agreements.
7.10 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.
7.11 TITLES AND SUBTITLES. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
7.12 COUNTERPARTS; EXECUTION BY FACSIMILE SIGNATURE. This Agreement
may be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument. This
Agreement may be executed by facsimile signature(s).
7.13 BROKER'S FEES. Each party hereto represents and warrants that
no agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.13 being untrue.
7.14 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that
it is not relying upon any person, firm, or corporation, other than the Company
and its officers and directors, in making its investment or decision to invest
in the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the Shares.
7.15 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
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IN WITNESS WHEREOF, the parties hereto have executed the SERIES D
PREFERRED STOCK PURCHASE AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY: PURCHASERS:
BIRCH TELECOM, INC.
By: /s/ Gregory C. Lawhon
-------------------------------
Senior Vice President
<PAGE> 1
EXHIBIT 10.19
BIRCH TELECOM, INC.
SERIES F PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES F PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
entered into as of July 13, 1999, by and among BIRCH TELECOM, INC., a Delaware
corporation (the "Company"), and BTI VENTURES L.L.C. , a Delaware limited
liability company, together with such affiliates as it shall designate
("Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale and issuance of an
aggregate of twenty-three million, five hundred ninety-six thousand, four
hundred and ninety two (23,596,492) shares of its Series F Preferred Stock;
WHEREAS, Purchaser initially desires to purchase 13,333,334 shares of
Series F Preferred Stock and obtain options to purchase up to an additional
10,263,158 shares of Series F Preferred Stock on the terms and conditions set
forth herein; and
WHEREAS, the Company desires to issue and sell such shares of Series F
Preferred Stock and grant such options to Purchaser on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 AUTHORIZATION OF SHARES. On or prior to the First Closing (as
defined in Section 2 below), the Company shall have authorized (i) the initial
sale and issuance to Purchaser of 13,333,334 shares of Series F Preferred Stock
(the "Firm Shares"), (ii) the issuance of 10,263,158 shares of Series F
Preferred Stock (the "Option Shares" and, together with the Firm Shares, the
"Shares") to be issued upon exercise of the Option (as defined below), and (iii)
the issuance of such shares of Common Stock to be issued upon conversion of the
Shares (the "Conversion Shares"). The Shares and the Conversion Shares shall
have the rights, preferences, privileges and restrictions set forth in the
Restated Certificate of Incorporation of the Company in the form attached hereto
as Exhibit A (the "Restated Certificate").
1.2 SALE AND PURCHASE. Subject to the terms and conditions hereof, at
the First Closing (as hereinafter defined) the Company hereby agrees to issue
and sell to Purchaser, and Purchaser agrees to purchase from the Company the
Firm Shares at a purchase price of $4.50 per Firm Share.
1.3 OPTION.
(A) In connection with the purchase of the Firm Shares, the Company
has agreed to provide Purchaser, as of the date of the First Closing, with an
irrevocable option (the "Option") to purchase up to (i) 5,263,158 Option Shares
at a purchase price of $4.75 per Option Share and (ii) up to 5,000,000 Option
Shares at a purchase price of $5.00 per Option Share.
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(B) The Option may be exercised by Purchaser as to all or any part
of the Option Shares, at any time, commencing on the First Closing and ending on
midnight of the date which is 270 days after the First Closing.
(C) In the event Purchaser wishes to exercise the Option, Purchaser
shall send a written notice to the Company of its intention to exercise the
Option, in whole or in part (a "Notice"), specifying the place, time and date
("Option Closing Date") of the closing of such purchase (the "Option Closing"),
which date shall not be less than three business days from the date on which a
Notice is delivered.
(D) At the Option Closing, the Company shall deliver to Purchaser
all of the Option Shares to be purchased by delivery of a certificate or
certificates evidencing such Option Shares so purchased by Purchaser, free and
clear of any liens, encumbrances or any interests of any other party and
Purchaser will make payment to the Company of the aggregate purchase price for
the Option Shares being purchased upon partial or full exercise of the Option by
wire transfer of immediately available funds to an account designated by the
Company.
(E) To the extent not reflected in the adjustment provisions in the
Restated Certificate, the applicable purchase price with respect to the Option,
shall be adjusted to reflect any stock splits, cash or noncash dividends,
recapitalizations, combinations, distributions, issuances, reclassifications,
exchanges, substitutions or other similar adjustments with respect to the
capital stock of the Company, or sales of shares of capital stock below the
applicable purchase price with respect to the Option, in each case consistent
with the adjustment provisions relating to the Shares in the Restated
Certificate.
(F) Except to the extent set forth herein, the purchase of any
Option Shares pursuant to the exercise of the Option shall be subject to the
same terms and conditions as the purchase of the Firm Shares under this
Agreement. Without limiting the generality of the foregoing, the
representations, warranties, covenants and agreements contained in this
Agreement shall apply to the purchase of the Option Shares pursuant to the
Option and the closing conditions set forth in Section 6.1(a), shall apply to
the extent applicable to the Option Closing.
2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The closing of the sale and purchase of the Firm Shares
under this Agreement (the "First Closing" and, together with the Option Closing,
each a "Closing") shall take place at 5:00 p.m. on the third business day after
the satisfaction or waiver of the conditions set forth in Section 6, at the
offices of the Company, 2020 Baltimore Avenue, Kansas City, Missouri 64108, or
at such other time or place as the Company and Purchaser may mutually agree
(such date is hereinafter referred to as the "First Closing Date" and, together
with each Option Closing Date, each a "Closing Date").
2.2 DELIVERY. At the First Closing, subject to the terms and conditions
hereof, the Company will deliver to the Purchaser all of the Firm Shares by
delivery of a certificate or certificates evidencing the Firm Shares to be
purchased at the First Closing, free and clear of any liens, encumbrances or
interests of any other party and the Purchaser will make payment to the
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Company of the purchase price therefor by wire transfer of immediately
available funds to an account designated by the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on a Schedule of Exceptions delivered by the
Company at each Closing, the Company hereby represents and warrants to Purchaser
as of the date of this Agreement, First Closing Date and each Option Closing
Date as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the Company
and its Subsidiaries (as defined below) is a corporation or other entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of incorporation or formation as set forth on Schedule 3.1 and has
all requisite power and authority to own and operate its respective properties
and assets and to carry on its respective business as currently conducted and as
currently proposed to be conducted. The Company has all requisite corporate
power and authority to execute and deliver this Agreement and the Amended and
Restated Purchasers Rights Agreement in the form of Exhibit B attached hereto
(the "Purchasers Rights Agreement," and together with any other agreement
entered into in connection with this transaction, the "Related Agreements"), to
issue and sell the Shares and to carry out the provisions of this Agreement and
the Related Agreements. Each of the Company and its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation or other entity in all jurisdictions 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 the assets, liabilities,
business, results of operations, financial condition or prospects of the Company
and its Subsidiaries, taken as a whole (a "Material Adverse Effect"). Schedule
3.1 lists all the jurisdictions in which the Company is qualified as a foreign
corporation and the dates of such qualifications.
3.2 SUBSIDIARIES. The Company does not own voting securities or other
similar interests of any corporation or other entity that is sufficient to
enable the company to elect a majority of the members of such corporation's or
other entity's Board of Directors or other governing body, except for those
corporations or other entities set forth on Schedule 3.1 (each a "Subsidiary"
and collectively, the "Subsidiaries"). All the outstanding shares of stock of
the Subsidiaries have been validly issued and are fully paid and non-assessable
and all such outstanding shares are owned directly by the Company free of any
lien or claim. Except as set forth of Schedule 3.1, neither the Company nor any
of its Subsidiaries is a participant in any joint venture, partnership or
similar arrangement.
3.3 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of the
Company, immediately prior to the First Closing, will consist of 135,000,000
shares, of which 80,000,000 are shares of Common Stock, par value $.001 per
share, 5,043,706 shares of which are issued and outstanding and 791,748 shares
of which are reserved for future issuance to employees pursuant to the Stock
Option Plan (as hereinafter defined) and 55,000,000 are shares of Preferred
Stock, par value $.001 per share; 8,750,000 of which are designated Series B
Preferred Stock, 8,572,039 of which are issued and outstanding; 8,500,000 shares
of which are designated Series C Preferred Stock, 8,492,749 of which are issued
and outstanding; 2,225,000 of which are designated Series D Preferred Stock, not
more than 2,222,222 of which are issued and outstanding; 1,904,898 of which
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are designated Series E Preferred Stock, none of which are issued and
outstanding; and 30,000,000 of which are designated Series F Preferred Stock,
none of which are issued and outstanding. All issued and outstanding shares of
the Company's capital stock (a) have been duly authorized and validly issued,
(b) are fully paid and nonassessable, (c) were issued in compliance with all
applicable state and federal laws concerning the issuance of securities. The
rights, preferences, privileges and restrictions of the Preferred Stock are as
stated in the Restated Certificate. The Company has delivered to Purchaser a
copy of the Company's Stock Option Plan (the "Stock Option Plan"). Schedule 3.3
sets forth a true and complete summary of all options issued under the Stock
Option Plan, including the holder, issue date, exercise price, vesting status
and expiration date of such option. Other than the 791,748 shares reserved for
issuance under the Stock Option Plan, the Options issued pursuant to the Stock
Option Plan as set forth on Schedule 3.3 and 115,000 outstanding warrants to
purchase 1,409,734 shares of Common Stock (the "Existing Warrants"), and except
as may be granted pursuant to this Agreement and the Related Agreements, there
are no outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal), proxy or shareholder agreements, or
agreements of any kind for the purchase or acquisition from the Company or any
Subsidiary of any of their securities. Except as described in this Agreement or
set forth in Schedule 3.3, (x) there are no outstanding obligations of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any securities of the Company or any voting or equity securities or interests of
any subsidiary of the Company, (y) there is no voting trust or other agreement
or understanding to which the Company or any of its Subsidiaries is a party or
is bound with respect to the voting of the capital stock or other voting
securities of the Company or any of its Subsidiaries and (z) there are no other
options, calls, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
the Company or any of its Subsidiaries to which the Company or any of its
Subsidiaries is a party. When issued in accordance with the provisions of this
Agreement and the Restated Certificate, the Shares will be validly issued, fully
paid and nonassessable; provided, however, that such shares may be subject to
restrictions on transfer under the Purchasers Right Agreement or under state
and/or federal securities laws or as otherwise required by such laws at the time
a transfer is proposed. Schedule 3.3 sets forth as of the date hereof the name
of each person or entity owning any of the Company's outstanding equity
securities and the number and class of equity security owned by each such person
or entity.
3.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization of this Agreement and the Related Agreements, the performance of
all obligations of the Company hereunder and thereunder as of each Closing and
the authorization, sale, issuance and delivery of the Shares (including the
Option Shares) has been taken or will be taken prior to the First Closing. The
Agreement and the Related Agreements, when executed and delivered, will be valid
and binding obligations of the Company enforceable in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; (b) general principles of equity that restrict
the availability of equitable remedies; and (c) to the extent that the
enforceability of the indemnification provisions in Section 2.5 of the
Purchasers Rights Agreement may be limited by applicable laws. The sale of the
Shares (including Option Shares) is not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived.
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3.5 SEC REPORTS; FINANCIAL STATEMENTS.
(A) The Company has filed with the Securities and Exchange
Commission ("SEC") all forms, reports, schedules, proxy statements
(collectively, and in each case including all exhibits and schedules thereto and
documents incorporated by reference therein, the "SEC Reports") required to be
filed by the Company with the SEC since September 1, 1998. As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations promulgated thereunder and none of such SEC Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(B) The Company has delivered to Purchaser an unaudited balance
sheet (the "Statement Date Balance Sheet") of the Company and its Subsidiaries
as at March 31, 1999 (the "Statement Date") and unaudited statement of income
and cash flows of the Company and its subsidiaries for the three months ending
on the Statement Date (the "Statement Date Income Statement" and "Statement Date
Cash Flow Statement" respectively, and collectively with the Statement Date
Balance Sheet and all audited and unaudited financial statements included in the
SEC Reports, the "Financial Statements"). The Financial Statements, together
with the notes thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated, except as disclosed therein, and present fairly the
consolidated financial position of the Company and its Subsidiaries as of the
respective dates presented therein and the consolidated results of operations
and cash flows of the Company and its Subsidiaries for the respective periods
presented therein; provided, however, that the unaudited financial statements
are subject to normal recurring year-end audit adjustments (which are not
individually or in the aggregate expected to be material).
3.6 UNDISCLOSED LIABILITIES. Except as and to the extent set forth on
the Statement Date Balance Sheet of the Company and its Subsidiaries at the
Statement Date, neither the Company nor any Subsidiaries has any liabilities
that are material (individually or in the aggregate), except current liabilities
incurred in the ordinary course of business consistent with past practice
subsequent to the Statement Date.
3.7 AGREEMENTS; ACTION.
(A) Except (i) as set forth on Schedule 3.7(a), (ii) as described
in the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K") and (iii) for agreements between the Company or any
Subsidiary and its employees with respect to the sale of Common Stock, there are
no agreements, understandings or proposed transactions between the Company or
any Subsidiary and any of its officers, directors, affiliates or any affiliate
thereof.
(B) Attached hereto as Schedule 3.7(b) is a list of (i) all
"material contracts" with the meaning of Item 601 of Regulation S-K of the
United States Securities and Exchange Commission, and (ii) all Contracts
restricting the Company or any of its Subsidiaries from engaging in any line of
business or competing with any person or entity or in any geographical area, or
from using or disclosing any information in its possession (other than routine
vendor and customer
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confidentiality agreements and confidentiality agreements with potential
acquisition targets) (collectively, the "Contracts").
(C) Except as set forth in Schedule 3.7(c), neither the Company nor
any of its Subsidiaries is, nor to the Company's knowledge is any other party to
any Contract, in material default under, or in material breach or material
violation of, any Contract and, to the knowledge of the Company, no event has
occurred which, with the giving of notice or passage of time or both would
constitute a material default by the Company under any Contract. Other than
Contracts which have terminated or expired in accordance with their terms, each
of the Contracts is valid and binding obligation of the Company enforceable
against the Company in accordance with its terms (subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered on a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing) and is in full force and
effect. No event has occurred which either entitles, or would, on notice or
lapse of time or both, entitle the holder of any indebtedness of the Company or
any of its Subsidiaries to accelerate or which does accelerate the maturity of
any indebtedness for borrowed money of the Company or any of the Subsidiaries.
(D) Except as set forth on Schedule 3.7(d), neither the Company nor
any Subsidiary has (i) declared or paid any dividends, or authorized or made any
distribution upon or with respect to any class or series of its capital stock,
(ii) incurred any indebtedness for money borrowed or any other liabilities,
individually, in excess of $1,000,000, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, 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.
(E) For the purposes of subsection (d) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company or any Subsidiary has reason to believe are affiliated therewith)
shall be aggregated for the purpose of meeting the individual minimum dollar
amounts of such subsections.
3.8 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the
Company or any Subsidiary to their respective officers, directors, shareholders,
or employees other than (a) for payment of salary for services rendered, (b)
reimbursement for reasonable expenses incurred on behalf of the Company or
Subsidiary and (c) for other standard employee benefits made generally available
to all employees (including stock option agreements outstanding under the Stock
Option Plan). Except as set forth on Schedule 3.8, neither the Company nor any
Subsidiary is a guarantor or indemnitor of any indebtedness of any other person,
firm or corporation.
3.9 CHANGES. Since the Statement Date, there has not been:
(A) any change in the assets, liabilities, financial condition or
operations of the Company and its Subsidiaries from that reflected in the
Statement Date Balance Sheet and Statement Date Income Statement, other than
changes in the ordinary course of business, none of which individually or in the
aggregate has had, or could reasonably be expected to have, a Material Adverse
Effect;
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(B) any resignation or termination of any key officers of the
Company and its Subsidiaries; and the Company does not know of the impending
resignation or termination of employment of any such officer;
(C) any material damage, destruction or loss, whether or not
covered by insurance;
(D) any waiver by the Company or any Subsidiary of a valuable right
or of a material debt owed to it;
(E) any direct or indirect loans made by the Company or any
Subsidiary to any shareholder, employee, officer or director of the Company or
any Subsidiary, other than travel advances and salary advances (which salary
advances do not exceed $25,000 in the aggregate) made in the ordinary course of
business consistent with past practice;
(F) any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder (other than
compensation increases in the ordinary course of business consistent with past
practice);
(G) any declaration or payment of any dividend or other
distribution of the assets of the Company or any Subsidiary;
(H) to the Company's knowledge, any labor organization activity;
(I) any debt, obligation or liability incurred, assumed or
guaranteed by the Company or any Subsidiary, except those for immaterial amounts
and for current liabilities incurred in the ordinary course of business and
consistent with past practice;
(J) any sale, assignment or transfer of any material patents,
trademarks, copyrights, trade secrets or other intangible assets;
(K) any change in any Contract which could reasonably be expected
to have a Material Adverse Effect;
(L) any action taken by the Company or any Subsidiary that if taken
after the date of this Agreement would require the prior written consent of
Purchaser in accordance with Section 5.1(b); or
(M) any other event or condition of any character that, either
individually or cumulatively, has had, or could reasonably be expected to have,
a Material Adverse Effect.
3.10 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company and each
of its Subsidiaries has good and marketable title to its respective properties
and assets, including the properties and assets reflected in the Statement Date
Balance Sheet, and good title to its respective leasehold estates, in each case
subject to no mortgage, pledge, lien, lease, encumbrance or charge. The Company
and each of its Subsidiaries is in compliance with all material terms of each
lease to which it is a party or is otherwise bound.
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3.11 PATENTS AND TRADEMARKS. The Company and each of its Subsidiaries
owns or possesses sufficient legal rights to all patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes necessary for its respective business as now
conducted and as currently proposed to be conducted, without any known
infringement of the rights of others. Neither the Company nor any of its
Subsidiaries has received any communications alleging that it has violated or,
by conducting its business as currently 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. Neither the Company nor
any of its Subsidiaries is aware that any of its 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 the Company or
any of its Subsidiaries or that would conflict with the Company's or any of its
Subsidiaries' business as presently proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
or any of its Subsidiaries' business by the employees of the Company or its
Subsidiaries, nor the conduct of the Company's or any of its Subsidiaries'
business as currently proposed, will 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. Neither the
Company nor any of its Subsidiaries believes it is or will be necessary to
utilize any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment by the Company or any of its
Subsidiaries, except for inventions, trade secrets or proprietary information
that have been assigned to the Company or any of its Subsidiaries.
3.12 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor any of
its Subsidiaries is in violation or default of (i) the Restated Certificate or
Bylaws, (ii) any Contract or (iii) of any judgment, decree, order, writ, or any
statute, rule or regulation, including, without limitation, requirements of the
FCC or any state regulatory agency applicable to the Company or any Subsidiary,
except for such violations or defaults in respect of clauses (ii) or (iii) which
would not, individually or in the aggregate, be reasonably expected to have a
Material Adverse Effect. The execution, delivery, and performance of this
Agreement, and the Related Agreements, and the issuance and sale of the Shares
pursuant hereto, will not, with or without the passage of time or giving of
notice, result in any violation, or be in conflict with or constitute a default
under (i) the Restated Certificate or Bylaws, (iii) any Contract or (iii) any
judgment, decree, order, writ or any statute, rule or regulation including,
without limitation, requirements of the FCC or any state regulatory agency
applicable to the Company or any Subsidiary. The execution, delivery and
performance of this Agreement, and the Related Agreements, and the issuance and
sale of the Shares pursuant hereto, will not result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company and its Subsidiaries or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit license, authorization or
approval applicable to the Company, its business or operations or any of its
assets or properties.
3.13 LITIGATION. Except as set forth on Schedule 3.13, there is no
action, suit, proceeding or investigation pending or to the Company's knowledge
currently threatened against the Company or any Subsidiary. The foregoing
includes, without limitation, actions pending or threatened (or any basis
therefor known to the Company) involving the prior employment of any of the
Company's or any Subsidiary's employees, their use in connection with the
Company's or any Subsidiary's business of any information or techniques
allegedly proprietary to any of their former employers, or
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their obligations under any agreements with prior employers. Neither the Company
nor any Subsidiary is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government authority. There is no
action, suit, proceeding or investigation by the Company or any Subsidiary
currently pending or which the Company or any Subsidiary intends to initiate.
3.14 TAX RETURNS AND PAYMENTS.
(A) Except as set forth on Schedule 3.14(a), each of the Company
and its Subsidiaries has accurately prepared and filed on time with all
appropriate governmental authorities all material Tax returns and other material
documents that it has been required to file in respect of any Taxes for all
fiscal periods ending on or prior to the Closing Date and all such returns or
other material documents are correct and complete in all material respects and
do not contain a disclosure statement under Section 6662 of the Internal Revenue
Code of 1986, as amended (the "Code").
(B) Each of the Company and its Subsidiaries has paid in full all
material Taxes due on or before the date hereof and, in the case of such Taxes
accruing on or before such date that are not due on or before such date, the
Company has made adequate provision in its books and records and Financial
Statements to the extent currently required by GAAP.
(C) Each of the Company and its Subsidiaries has withheld from
each payment made to any of its present or former employees, officers, directors
and managers all amounts required by law to be withheld or remitted. Each of the
Company and its Subsidiaries has remitted all social security contributions and
other Taxes payable by it in respect of its employees. Each of the Company and
its Subsidiaries has charged, collected and remitted all material Taxes as
required under applicable legislation on any sale, supply or delivery
whatsoever, made by the Company or any of its Subsidiaries.
(D) Except as set forth on Schedule 3.14(d), there are no
reassessments of Taxes of the Company or any of its Subsidiaries that have been
issued and are outstanding. No governmental authority has challenged, disputed
or questioned the Company or any of its Subsidiaries in writing in respect of
any Taxes or of any Tax returns, filings or other reports filed under any
statute providing for such Taxes.
(E) Except as set forth in Schedule 3.14(e), neither the Company
nor any of its Subsidiaries has (i) granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of,
any Tax, or (ii) requested any extension of time within which to file any
federal income Tax Return or any state income or franchise Tax Return, which Tax
Return has not been filed as of the date hereof.
(F) Except as set forth in Schedule 3.14(f), neither the Company
nor any of its Subsidiaries (i) is a party to or bound by (nor will it become a
party to or become bound by) any Tax indemnity, Tax sharing, Tax allocation or
similar agreement or arrangement (or administrative or accounting practice
having substantially the same effect); (ii) has filed a consent under Section
341(f) of the Code (or any corresponding provisions of state, local or foreign
income tax law) or agreed to have Section 341(f) of the Code (or any
corresponding provision of state, local or foreign tax law) apply to any
disposition of any asset owned by it; (iii) has agreed to make or is required to
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make any material adjustment under Section 481(a) of the Code; (iv) has been a
member of an affiliate group of corporations, within the meaning of Section 1504
of the Code (other than the affiliated group of which the Company is the common
parent corporation); (v) owns material assets that directly or indirectly secure
debt the interest on which is tax-exempt under Section 103(a) of the Code; or
(vi) is obligated under any agreements in connection with industrial development
bonds or other obligations with respect to which the excludability from gross
income of the holder for federal or state income tax purposes would be affected
by the transactions contemplated hereunder, or (vii) owns any property of a
character, the indirect transfer of which pursuant to this Agreement, would give
rise to any material documentary, stamp or other transfer tax.
(G) Neither the Company nor any of its Subsidiaries is, or has
been, a United States real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code, and, to the Company's knowledge, no foreign person
directly or indirectly holds (within the meaning of Section 897(c)(3) of the
Code), more than 5% of the voting stock of the Company.
(H) Except as set forth on Schedule 3.14(h), neither the Company
nor any of its Subsidiaries is a party to any agreement, contract, arrangement
or plan that has resulted or would result, separately or in the aggregate, in
connection with this Agreement or any change of control of the Company or any of
its Subsidiaries, in the payment of any material "excess parachute payments"
within the meaning of Section 280G of the Code.
(I) For purposes of this Agreement, the term "Tax" or "Taxes"
shall mean all taxes, charges, fees, levies, imposts and other assessments,
including all income, sales, use, goods and services, value added, capital,
capital gains, alternative net worth, transfer, profits, withholding, payroll,
employer health, excise, real property and personal property taxes, and any
other taxes, customs duties, fees, assessments or similar charges in the nature
of a tax, including, without limitation, any interest, fines and penalties
imposed by any governmental authority.
3.15 EMPLOYEES. Neither the Company nor any of its Subsidiaries has any
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened with respect to the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries is aware that any
officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company or any of its Subsidiaries, nor does
the Company or any of its Subsidiaries have a present intention to terminate the
employment of any officer, key employee or group of key employees.
3.16 REGISTRATION RIGHTS. Except as required pursuant to the Purchasers
Rights Agreement, neither the Company nor any of its Subsidiaries is currently
under any obligation, and has not granted any rights, to register (as defined in
the Purchasers Rights Agreement) any of the Company's or any Subsidiary's
currently outstanding securities or any of its securities that may hereafter be
issued.
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3.17 COMPLIANCE WITH LAWS.
(A) Neither the Company nor any of its Subsidiaries has been, or
currently is, in violation, in any material respect, of any material statute,
rule, regulation, order or restriction of any domestic or foreign government
authority thereof in respect of the conduct of its business or the ownership of
its properties. Except as set forth on Schedule 3.17(a), the Company is in
compliance, in all material respects, with all applicable material FCC and state
regulatory agency tariffing requirements, reporting requirements, universal
service and telecommunications relay service funding obligations and other
telecommunications regulations. Except as set forth on Schedule 3.17(a), 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 Shares.
(B) Except as set forth on Schedule 3.17(b), there are no
proceedings or investigations pending or threatened, before the FCC or any state
regulatory agency directed specifically at the Company or, in the case of
matters of general applicability to the telecommunications industry, in which
the Company is identified for possible disparate treatment or whose outcome may
have a disparate impact on the Company in which any of the following matters are
being considered which are reasonably likely to have a Material Adverse Effect,
nor has the Company or any of its Subsidiaries received written notice or
inquiry from the FCC or any state regulatory agency, indicating that any of such
matters should be considered or may become the object of consideration or
investigation specifically regarding the Company which are reasonably likely to
have a Material Adverse Effect, or, in the case of matters of general
applicability to the telecommunications industry, in which the Company is
identified for possible disparate treatment or whose outcome may have a
disparate impact on the Company or which otherwise involves: (a) increases or
reductions in access charges, universal service contributions or the like; (b)
traffic routing restrictions or restrictions on use of facilities; (c) reduction
or restriction of rates charged to customers; (d) reduction of earnings; (e)
refunds or other forfeitures of amounts previously charged to customers; (f) use
of NXX codes; or (g) failure to meet any expense, infrastructure, service
quality or other commitments previously made to or imposed by the FCC or any
state regulatory agency.
(C) Except as set forth on Schedule 3.17(c), neither the Company
nor any of its Subsidiaries has any outstanding commitments made in the context
of a matter or proceeding related specifically to the Company or, in the case of
matters of general applicability to the telecommunications industry, in which
the Company is identified for possible disparate treatment or whose outcome may
have a disparate impact on the Company (and no such obligations have been
imposed upon the Company and remain outstanding), regarding: (a) increases or
reductions in access charges, universal service contributions or the like; (b)
traffic routing restrictions or restrictions on use of facilities; (c) reduction
or restriction of rates charged to customers; (d) reduction of earnings; (e)
refunds or other forfeitures of amounts previously charged to customers; (f) use
of NXX codes; or (g) expenses, infrastructure expenditures, service quality or
other regulatory requirements, to or by the FCC or any state regulatory agency,
in each case which are reasonably likely to have a material adverse effect on
the Company.
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3.18 ENVIRONMENTAL AND SAFETY LAWS.
(A) All material licenses or permits which are required under
Environmental Laws (as defined below) (each an "Environmental Permit") for the
conduct of the business of the Company or any Subsidiary or the operation of any
property owned, leased or occupied by the Company or any of its Subsidiaries
which are required to be obtained or applied for by the Company or any of its
Subsidiaries have been so obtained or applied for.
(B) Neither the Company nor any Subsidiary has failed to comply in
any material respect with any Environmental Laws or any Environmental Permit and
neither the Company nor any Subsidiary has been notified by any governmental
authority of any such non-compliance and, to the Company's knowledge no
Environmental Permit will be modified, suspended, canceled or revoked or cannot
be renewed in the ordinary course of business.
(C) To the Company's knowledge, no Hazardous Substance (as defined
below) is currently or has been in the past generated, stored, handled, treated,
transported to or from or disposed of on any property currently or formerly
owned by the Company or any of its Subsidiaries, or operated or leased by the
Company or any of its Subsidiaries. To the Company's knowledge, neither the
Company nor any Subsidiary has generated, disposed of, transported or arranged
for the transportation (directly or indirectly) of any Hazardous Substances to
any location that is listed or, to the knowledge of the Company, proposed for
listing on the National Properties List or the CERCLA Information System under
CERCLA, or under any similar state, local or foreign list, or where there has
been a Release (as defined below) or suspected Release of a Hazardous Substance.
Neither the Company nor any Subsidiary has generated or disposed of any
Hazardous Substance in a manner which could reasonably be expected to give rise
to a material liability under any Environmental Law.
(D) Neither the Company nor any Subsidiary has received any
written notice from any person or entity advising it that it is responsible for
or potentially responsible for cleanup or remediation of any Hazardous
Substances. No capital expenditure is planned or required in respect of the
assets of the Company or any of its Subsidiaries pursuant to or to comply with
any Environmental Law, nor has the Company or any of its Subsidiaries received
any written notice of any such requirement.
(E) There is no claim pending or, to the best knowledge of the
Company, threatened against the Company or any of its Subsidiaries or pending
or, to the knowledge of the Company, threatened against any other person or
entity whose liability for any environmental claim the Company or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law under any Environmental Law. To the Company's knowledge, no
real property currently or formerly owned by the Company or any of its
Subsidiaries, or operated or leased by the Company or any of its Subsidiaries
(during the period of such operation or lease) has been impacted by any Release
or threatened Release of any Hazardous Substance.
(F) Each of the Company and its Subsidiaries has delivered or
otherwise made available for inspection to the Purchaser true, accurate and
complete copies and results of any reports, studies, analyses, tests or
monitoring possessed or initiated by the Company or any of its Subsidiaries
pertaining to Hazardous Substances in, on, beneath or adjacent to any property
or
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regarding compliance by the Company or any of its Subsidiaries with applicable
Environmental Laws.
(G) To the Company's knowledge, there are no underground or
above-ground storage tanks (whether or not currently in use) located on or under
any real property currently owned, leased or operated by the Company or any of
its Subsidiaries.
(H) For purposes of this Agreement, the term (i) "Environmental
Laws" shall mean all federal, foreign, state, local or municipal environmental,
health or safety-related laws, regulations, by-laws, rules, ordinances, judicial
or administrative decrees or decisions, orders or requirements applicable to the
Company or any of its Subsidiaries relating to the physical or environmental
condition or use of their respective properties, their respective businesses or
pollution or protection of human health or the Environment, including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C., ss.9601, et seq., as amended ("CERCLA"), the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., as amended, the
Clean Air Act, 42 U.S.C. Section 7401 et seq., as amended, the Clean Water Act,
33 U.S.C. Section et seq., the Toxic Substance Control Act, 15 U.S.C ss.2601 et
seq., the Occupational Safety and Health Act, laws relating to Releases or
threatened Releases of Hazardous Substances into the Environment or otherwise
relating to the manufacture, generation, processing, distribution, use,
treatment, storage, abatement, existence, holding, Release, transport or
handling of Hazardous Substances, and all laws and regulations with regard to
recordkeeping, notification, disclosure and reporting requirements respecting
Hazardous Substances; (ii) "Hazardous Substances" shall mean any pollutant,
contaminant, toxic substance, hazardous waste, hazardous material, or hazardous
substance, or any oil, petroleum or petroleum product, each as defined or listed
in, or classified pursuant to, any Environmental Laws; and (iii) "Release" shall
have the meaning ascribed to such term in any Environmental Laws.
3.19 OFFERING VALID. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Section 4 hereof, the offer, sale and
issuance of the Shares will be exempt from the registration requirements of the
Securities Act and will have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
3.20 EMPLOYEE BENEFIT PLANS.
(A) Schedule 3.20 contains a true and complete list of each
"employee benefit plan" (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), stock purchase,
stock option, severance, employment, change-in-control, fringe benefit, bonus,
incentive, deferred compensation and all other employee benefit plans,
agreements, programs, policies or other arrangements, whether or not subject to
ERISA, under which any employee or former employee of the Company or its
Subsidiaries has any present or future right to benefits and under which the
Company or its Subsidiaries has any present of future liability. All such plans,
agreements, programs, policies and arrangements shall be collectively referred
to as the "Company Plan".
(B) With respect to each Company Plan, the Seller has delivered to
the Buyer a current, accurate and complete copy thereof and, to the extent
applicable: (i) any related trust
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agreement or other funding instrument; (ii) the most recent determination
letter, if applicable; (iii) any summary plan description; and (iv) for the most
recent year (A) the Form 5500 and attached schedules, (B) audited financial
statements and (C) actuarial valuation reports.
(C) Each Company Plan has been established and administered in
accordance with its terms, in all material respects, and in material compliance
with the applicable provisions of ERISA, the Code and other applicable laws,
rules and regulations and neither the Company nor any of its Subsidiaries has
incurred any material tax, fine, lien, penalty or other liability imposed by
ERISA, the Code or other applicable law, rule and regulations; and (ii) each
Company Plan which is intended to be qualified within the meaning of Code
section 401(a) has received a favorable determination or if such plan is a
prototype plan, the prototype plan has received a favorable determination
letter, in all material respects, to its qualifications, or is in a form in
which the Internal Revenue Service consider the terms of such Company Plan to be
qualified without the need to receive such a letter, and subsequent to that term
nothing has occurred, whether by action or failure to act, that could reasonably
be expected to cause the loss of such qualification.
(D) No Company Plan is (i) subject to Title IV or ERISA or (ii)
a "multiemployer plan" (as such term is defined in section 3(37) of ERISA) and
neither the Company nor any of its Subsidiaries has incurred any withdrawal
liability or termination liability with respect to any such plan that remains
unsatisfied. The Company has not engaged in, and is not a successor or parent
corporation to any entity that has engaged in, a transaction described in
Section 4069 or 4212(c).
(E) Except as disclosed on Schedule 3.21(e), with respect to any
Company Plan, no actions, suits or claims (other than routine claims for
benefits in the ordinary course) are pending or, to the knowledge of the Company
or any of its Subsidiaries, threatened or reasonably expected to arise.
(F) Except as disclosed on Schedule 3.21(f), no Company Plan
exists that could result in the payment to any present or former employee of the
Company or its Subsidiaries of any money or other property or accelerate or
provide any other rights or benefits to any present or former employee of the
Company or its Subsidiaries as a direct result of the transaction contemplated
by this Agreement, whether or not such payment would constitute a parachute
payment within the meaning of Code section 280G.
3.21 INSURANCE. Schedule 3.21 sets forth a true and complete summary of
each insurance policy pertaining to the assets or operations of the Company and
each Subsidiary. Each such insurance policy is in full force and effect and
neither the Company nor any Subsidiary has any claims pending under any such
policies nor has the Company or any Subsidiary been denied coverage with respect
to any claim or potential claim filed under any such policies.
3.22 BOOKS AND RECORDS. The books of account, stock records, minute
books and other records of the Company and each of its Subsidiaries are
accurate, up-to-date and complete in all material respects, and have been
maintained in accordance with prudent business practices.
3.23 BUSINESS PLAN; PROJECTIONS. Attached as Schedule 3.23(a) is the
Company's Business Plan, dated June 23, 1999 ("1999 Business Plan"), which
consists of the budget for the Company and its Subsidiaries for 1999 on a
consolidated basis, and attached as Schedule 3.23(b) are
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the projections of the future performance of the Company and its Subsidiaries,
on a consolidated basis, including annual income, net profits and cash flows for
each year of the five-year period ending 2003 (the "Projections"). The
Projections have been prepared in good faith and are based on what the Company
and its management believe to be a reasonable assessment of the future
performance of the Company and its Subsidiaries. All material assumptions used
in the preparation of the Projections are set forth in the notes thereto.
Notwithstanding the foregoing, no representation is made that the projections
will be attained.
3.24 ACCOUNTS RECEIVABLE AND BAD DEBTS. All notes and accounts
receivable of the Company and its Subsidiaries shown on the Statement Date
Balance Sheet were generated for valid consideration in the ordinary course of
business. Attached as Schedule 3.24 is an aging of the accounts receivable of
the Company and its Subsidiaries. Schedule 3.24 also sets forth the aggregate
amount of accounts receivable of the Company and its Subsidiaries that were
written off in each of 1997 and 1998.
3.25 LICENSES. Schedule 3.25 sets forth a list of each license used by
the Company or any of its Subsidiaries and which is material to the conduct and
operation of the Company business (the "Licenses"). True and correct copies of
the Licenses and all amendments thereto to the date hereof, have been delivered
by the Company to the Purchaser. All Licenses are in full force and effect. The
Company and its Subsidiaries have complied in all material respects with the
terms of the Licenses and there are no pending modifications, amendments or
revocations of the Licenses which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect. All fees due and
payable from the Company or any of its Subsidiaries to governmental authorities
pursuant to the Licenses have been paid. All reports required of the Company or
any of its Subsidiaries to be filed in connection with the Licenses have been
timely filed and are accurate and complete. The Company believes it can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. Except as specified in Schedule 3.25, no
registrations, filings, applications, notices, transfers, consents, approvals,
audits, qualifications, waivers or other action of any kind is required by
virtue of the execution and delivery of this Agreement or any Related Agreement,
or of the consummation of the transactions contemplated hereby or thereby (a) to
avoid the loss of any license or any asset, property or right pursuant to the
terms thereof or the violation or breach of any law applicable thereto, or (b)
to enable the Company and its Subsidiaries to hold and enjoy the same after the
Closing Date in the conduct of its business as conducted immediately prior to
the Closing Date. The Company has filed with the FCC an application for
authorization to provide international telecommunications service and no party
has opposed the granting of such application.
3.26 NETWORK. Schedule 3.26 sets forth, as of June 30, 1999 (i) the
location of each switch owned by the Company or any Subsidiary and the switch's
make and model and (ii) the location of all of the Company's or any Subsidiary's
collocation sites. The Company's and its Subsidiaries' switches are (i) fully
installed, (ii) interconnected to the incumbent telephone company's local
network and (iii) capable of carrying commercial traffic. The Company's and its
Subsidiaries' collocation sites possess all of the necessary equipment to carry
commercial traffic and are linked via leased or owned transmission cable to a
switch owned by the Company or any Subsidiary.
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3.27 CUSTOMERS. No single customer of the Company accounted for more
than five percent (5%) of the Company's consolidated net sales for 1998, and the
Company does not anticipate any single customer accounting for more than five
percent (5%) of the Company's consolidated net sales in 1999. Schedule 3.27 sets
forth as of March 31, 1999, the total number of lines in service.
3.28 YEAR 2000 COMPLIANCE. The Company has implemented a Year 2000
readiness program to evaluate date-sensitive material hardware and software
systems used by the Company to determine if such systems are Year 2000 Compliant
or will be Year 2000 Compliant by December 31, 1999, and, based on that, has
formulated a plan to make such systems Year 2000 Compliant, as more particularly
described on Schedule 3.28 (the "Year 2000 Compliance Plan"). The term "Year
2000 Compliant" as used herein means that under the conditions of the Company's
internal testing the computer systems at issue will neither cause any abnormal
termination of performance nor generate inconsistent results when processing
date data from, into, and between the twentieth and twenty-first centuries,
including the years 1999 and 2000, and leap year calculations. The Company
represents that it is using commercially reasonable efforts to achieve the goals
set forth in its Year 2000 Compliance Plan, and that if such goals are achieved,
the material hardware and software systems used by the Company will be Year 2000
Compliant by December 31, 1999. The Company does not control third party
hardware or software systems that may interfere or exchange data with the
Company's material hardware and software systems and the foregoing
representation specifically excludes any representation that such third party
hardware and software systems are Year 2000 Compliant.
3.29 NO BROKER. Except as set forth in Schedule 3.29, neither the
Company nor any of its Subsidiaries has employed any broker or finder, or
incurred any liability for any brokerage or finders' fees or any similar fees or
commissions in connection with the transactions contemplated by this Agreement.
3.30 DISCLOSURE. No representation or warranty contained in this
Agreement or any statement or information contained in any schedule, exhibit,
certificate, written statement, document or instrument, or other information
attached to, delivered or required to be delivered pursuant to this Agreement
contains any untrue statement of material fact or omits to state a material fact
necessary in order to make the statements contained herein not misleading or
necessary in order to fully and fairly provide the information required to be
provided in any such document.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
Purchaser hereby represents and warrants to the Company as follows:
4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions. All
action on Purchaser's part required for the lawful execution and delivery of
this Agreement and the Related Agreements have been or will be effectively taken
prior to the Closing. Upon their execution and delivery, this Agreement and the
Related Agreements will be valid and binding obligations of Purchaser,
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, (b) general principles
of equity that restrict the availability of equitable remedies, and (c) to the
extent
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that the enforceability of the indemnification provisions of Section 2.5 of the
Purchasers Rights Agreement may be limited by applicable laws.
4.2 INVESTMENT REPRESENTATIONS. Purchaser understands that neither the
Shares nor the Conversion Shares have been registered under the Securities Act.
Purchaser also understands that the Shares are being offered and sold pursuant
to an exemption from registration contained in the Securities Act based in part
upon Purchaser's representations contained in this Agreement. Purchaser hereby
represents and warrants as follows:
(A) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Shares are registered pursuant to the
Securities Act, or an exemption from registration is available. Purchaser
understands that the Company has no present intention of registering the Shares,
the Conversion Shares or any shares of its Common Stock. Purchaser also
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the Shares
under the circumstances, in the amounts or at the times Purchaser might propose.
(B) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Shares
for its own account for investment only, and not with a view towards their
distribution.
(C) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that
by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Related Agreements.
Further, Purchaser is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement.
(D) ACCREDITED INVESTOR. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(E) COMPANY INFORMATION. Purchaser has received and read the
Financial Statements and has had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the Company's
operations and facilities. Purchaser has also had the opportunity to ask
questions of and receive answers from, the Company and its management regarding
the terms and conditions of this investment.
(F) RULE 144. Purchaser acknowledges and agrees that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
has been advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act as in effect from time to time, which permits limited resale of
shares purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things: the availability of certain current
public information about the Company, the
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resale occurring following the required holding period under Rule 144 and the
number of shares being sold during any three-month period not exceeding
specified limitations.
4.3 TRANSFER RESTRICTIONS. Purchaser acknowledges and agrees that the
Shares and Conversion Shares are subject to restrictions on transfer as set
forth in the Purchasers Rights Agreement.
5. COVENANTS OF THE COMPANY.
5.1 ORDINARY COURSE OF BUSINESS.
(A) Except, as otherwise contemplated by the terms of this
Agreement, during the period from the date of this Agreement to the First
Closing Date (the "Pre-Closing Period"), the Company shall use commercially
reasonable efforts to preserve intact its and its Subsidiaries' current business
organizations, keep available the services of their current officers and
employees and preserve their relationships with customers, suppliers, licensors,
licensees, advertisers, distributors and others having business dealings with
them to the end that their goodwill and ongoing businesses shall be unimpaired.
(B) Without limiting the generality of the foregoing, during the
Pre-Closing Period, each of the Company and its Subsidiaries shall not, without
the prior consent of Purchaser (i) amend its certificate of incorporation or
by-laws, except as contemplated by the Restated Certificate; (ii) issue,
deliver, sell, pledge, dispose of or encumber, or authorize or commit to the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest or amend the terms of its capital stock or enter into any
agreement or understanding with respect to its capital stock, except (A) for the
Recapitalization (as hereafter defined), (B) the Series C Repurchase (as
hereinafter defined), (C) the Series E Redemption (as hereinafter defined), (D)
issuances of Common Stock upon valid exercise of outstanding stock options or
warrants, (E) issuances of Series D Preferred Stock in accordance with the
provisions of the Series D Preferred Stock Purchase Agreement dated July 2, 1999
and (F) the pledge of stock of Subsidiaries in connection with the Company's new
credit facility; (iii) combine, split, reverse split, or reclassify or otherwise
alter the Company's capital stock (whether by recapitalization, reorganization
or otherwise) or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock,
except for (A) the Recapitalization, (B) the Series C Repurchase, and (C) the
Series E Redemption; (iv) pay any dividends on its capital stock or redeem or
repurchase any shares of capital stock, except for (A) for Recapitalization, (B)
the Series C Repurchase, and (C) the Series E Redemption; (v) acquire any
corporation, partnership, business organization or material assets or enter into
any merger or business combination transaction; (vi) dispose, transfer or
encumber any material assets; (vii) incur any indebtedness for borrowed money
(including draws under the Company's senior credit facilities) in excess of
$5,000,000; (viii) enter into any arrangements with any affiliate; (ix) enter
into any new material line of business or any joint venture or similar
transaction; (x) authorize or make any capital expenditures other than
expenditures consistent with the 1999 Business Plan not in excess of $3,000,000
individually or $14,000,000 in the aggregate; (xi) enter into or amend or
modify, in any material respect, any material contract, except in the ordinary
course of business consistent with past practice; (xii) increase or otherwise
amend or modify, in any material respect, the compensation or benefit
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arrangements of the directors, officers, employees and consultants or enter
into, renew, terminate or otherwise take any action with respect to any new
compensation or benefit arrangements for such persons (except for salary
increases to employees in the ordinary course of business consistent with past
practice); (xiii) change any material accounting principles or make any material
Tax elections; (xiv) settle or compromise any material claims; (xv) liquidate,
dissolve or wind up the business of the Company; or (xvi) agree to take or
authorize to take any of the foregoing actions.
5.2 BASIC FINANCIAL INFORMATION. The Company will furnish the following
reports to Purchaser:
(A) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and cash flows of the Company
and its Subsidiaries, if any, for such year, prepared in accordance with GAAP
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and followed
promptly thereafter (to the extent not available) such financial statements
accompanied by the opinion of independent public accountants of recognized
national standing selected by the Company, and a Company-prepared comparison to
the Company's operating plan for such year.
(B) 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 consolidated balance sheet
of the Company and its Subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and cash flows of the
Company and its Subsidiaries, if any, for such period and for the current fiscal
year to date, prepared in accordance with GAAP consistently applied and setting
forth in comparative form the figures for the corresponding periods of the
previous fiscal year and to the Company's operating plan then in effect and
approved by its Board of Directors, subject to changes resulting from normal
year-end audit adjustments, all in reasonable detail and certified by the
principal financial or accounting officer of the Company, except that such
financial statements need not contain the notes required by generally accepted
accounting principles.
(C) As soon as practical after the end of each month and in any
event within twenty (20) days thereafter (within thirty (30) days thereafter for
the first three months following the Closing), the Company will deliver to
Purchaser a consolidated balance sheet of the Company and its Subsidiaries, if
any, as at the end of such month and consolidated statements of income and cash
flows of the Company and its Subsidiaries, for each month and for the current
fiscal year of the Company to date, all subject to normal year-end audit
adjustments, prepared in accordance with GAAP consistently applied and certified
by the principal financial or accounting officer of the Company, together with a
comparison of such statements to the corresponding periods of the prior fiscal
year and to the Company's operating plan then in effect and approved by its
Board of Directors.
(D) The Company will deliver to Purchaser an annual financial plan
for the Company for the next fiscal year, no later than forty-five (45) days
before the start of the Company's next fiscal year, in such manner and form as
approved by the Board of Directors of the Company, which financial plan shall
include at least a projection of income and a projected cash flow statement
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for each fiscal quarter in such fiscal year and a projected balance sheet as of
the end of each fiscal quarter in such fiscal year. Any material changes in such
business plan shall be delivered to each requesting Purchaser as promptly as
practicable after such changes have been approved by the Board of Directors of
the Company.
(E) In lieu of the financial information required pursuant to this
Section 5.2, the Company may deliver copies of its annual reports on Form 10-K
and its quarterly reports on Form 10-Q, respectively.
5.3 ACCESS. The Company shall, and shall cause its Subsidiaries,
officers, directors, employees, auditors and other agents to, afford the
officers, employees, auditors and other agents of Purchaser, during normal
business hours reasonable access at all reasonable times to its officers,
employees, auditors, legal counsel, properties, offices, plants and other
facilities and to all books and records, and shall furnish Purchaser with all
financial, operating and other data and information as Purchaser, through its
officers, employees or agents, may from time to time reasonably request.
5.4 KEY PERSON LIFE INSURANCE; D&O INSURANCE.
(A) The Company agrees to maintain term life insurance on the life
of David E. Scott in the amount of $5,000,000, during the period of time that
Purchaser owns at least 6,500,000 Shares or Conversion Shares (subject to
adjustment for any stock split, reverse stock split and the like). A copy of
such policy has been provided by the Company to the Purchaser. The Company
agrees to use commercially reasonable efforts to obtain from financially
approved and reputable insurers term life insurance on the life of each of
Jeffrey Shackelford, Bradley Moline and Gregory Lawhon, in each case in the
amount of $2,000,000, and maintain such policies during the period of time that
Purchaser owns at least 6,500,000 Shares or Conversion Shares (subject to
adjustment for any stock split, reverse stock split and the like). Each such
policy shall not be cancelable by the Company.
(B) During the period that Purchaser owns at least 6,500,000 Shares
or Conversion Shares (subject to adjustment for any stock split, reverse stock
split and the like), the Company agrees to maintain Directors and Officers
Insurance in the amount of $25,000,000, or the maximum lesser amount of coverage
that can be obtained with an annual premium of $175,000.
5.5 INDEPENDENT ACCOUNTANTS. The Company will retain independent public
accountants of recognized national standing who shall opine on the Company's
financial statements at the end of each fiscal year. In the event the services
of the independent public accountants so selected, or any firm of independent
public accountants hereafter employed by the Company, are terminated, the
Company will promptly thereafter notify the Purchaser and will request the firm
of independent public accountants whose services are terminated to deliver to
the Purchaser a letter from such firm setting forth the reasons for the
termination of their services. In the event of such termination, the Company
will promptly thereafter engage another firm of independent public accountants
of recognized national standing. In its notice to the Purchaser the Company
shall state whether the change of accountants was recommended or approved by the
Board of Directors of the Company or any committee thereof.
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5.6 USE OF PROCEEDS. The Company shall use the proceeds from the sale
of the Firm Shares as follows: $9,999,999 to repurchase 2,222,222 shares of
Series C Preferred Stock on the First Closing Date from Stephen L. Sauder (the
"Series C Repurchase"); $8,572,041 to redeem all of the outstanding shares of
Series E Preferred Stock on the First Closing Date (the "Series E Redemption");
and the remaining proceeds shall be used for working capital and general
corporate purposes.
5.7 EFFORTS. Each party hereto agrees to use commercially reasonable
efforts to take any and all actions required in order to consummate the
transactions contemplated in this Agreement and the Related Agreements.
5.8 NOTIFICATION OF CERTAIN MATTERS. During the Pre-Closing Period, the
Company shall give prompt notice to Purchaser of the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty contained in Section 3 to be
untrue, or the failure of the Company to comply with or satisfy any covenant or
agreement under this Agreement.
5.9 RECAPITALIZATION. The Company shall take all necessary corporate
action to amend and restate its existing certificate of incorporation as the
Restated Certificate, and in connection therewith will recapitalize the Company
with the issuance immediately prior to the First Closing of 1,904,898 shares of
Series E Preferred Stock, on a prorata basis, to the existing holders of Series
B Preferred Stock (the "Recapitalization").
5.10 BANK FINANCING. The Company shall permit Purchaser to participate
with the Company in the negotiation of the terms of any new senior secured
credit facility and shall not execute the definitive senior secured credit
facility agreements without Purchaser's consent, which consent shall not
unreasonably withheld.
5.11 MANAGEMENT STOCKHOLDER AGREEMENTS. The Company shall use
commercially reasonable efforts to cause the officers listed on Schedule 5.11 to
execute and deliver Management Stockholder Agreements and/or the Purchasers
Rights Agreement which shall provide that such officers have the rights and are
subject to the obligations described on Exhibit D attached hereto; provided,
however, that such commercially reasonable efforts shall not include the
obligation to seek such execution unless the Company has been informed of the
consideration to be given to such officers in exchange for the execution of such
Agreement(s).
6. CONDITIONS TO CLOSING.
6.1 CONDITIONS TO PURCHASER'S OBLIGATION TO PURCHASE THE SHARES.
(A) EACH CLOSING. Purchaser's obligation to purchase the Firm
Shares or Option Shares, as applicable, at each Closing is subject to the
satisfaction of the following conditions:
(I) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all materials respects as of such Closing
Date with the same force and effect as if they had been made as of such Closing
Date, except (A) for changes contemplated by this Agreement, (B) for those
representations and warranties which address matters only as of a particular
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date (which representation and warranties shall be true and correct in all
material represents as of such particular date) and (C) all Material Adverse
Effect qualifications and other qualifications based on the word "material" or
similar phrases contained in such representations and warranties shall be
disregarded. The Company shall have performed all obligations and conditions
herein required to be performed or observed by it on or prior to such Closing
Date.
(II) LEGAL INVESTMENT. On such Closing Date, the sale and
issuance of the Firm Shares or Option Shares, as applicable, shall be legally
permitted by all laws and regulations to which Purchaser and the Company are
subject.
(III) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Related
Agreements (except for such as Purchaser determines may be properly obtained
subsequent to such Closing Date).
(IV) CORPORATE DOCUMENTS. The Company shall have delivered to
Purchaser or their counsel, copies of all corporate documents of the Company as
Purchaser shall reasonably request.
(V) COMPLIANCE CERTIFICATE; SECRETARY'S CERTIFICATE; GOOD
STANDING CERTIFICATE. The Company shall have delivered to Purchaser a Compliance
Certificate, executed by the President of the Company, dated such Closing Date,
to the effect that the conditions specified in Section 6.1(a)(i) have been
satisfied. The Company shall have delivered to the Purchaser a certificate
executed by the Secretary of the Company, dated such Closing Date, certifying as
to (i) the resolutions of the Board of Directors of the Company evidencing
approval of the transactions contemplated by and from this Agreement and the
Related Agreements and the authorization of the named officer or officers to
execute and deliver this Agreement and the Related Agreements and (ii) certain
of the officers of the Company, their titles and examples of their signatures.
The Company shall have delivered to the Purchaser certificates of the Secretary
of State of the State of Delaware, dated a recent date, that the Company is in
good standing.
(VI) LEGAL OPINION. The Purchaser shall have received from
legal counsel to the Company an opinion addressed to them, dated as of such
Closing Date, in a form reasonably satisfactory to Purchaser.
(VII) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at such Closing
hereby and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to Purchaser and its counsel, and
Purchaser and its counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.
(VIII) NO MATERIAL ADVERSE EFFECT. No event or change has
occurred which has had, or could reasonably be expected to have, a Material
Adverse Effect.
(B) FIRST CLOSING. Purchaser's obligation to purchase the Firm
Shares at the First Closing is subject to the satisfaction of the following
additional conditions:
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(I) RESTATED CERTIFICATE. The Restated Certificate, in the
form set forth in Exhibit A (or otherwise satisfactory to Purchaser) shall have
been filed with and certified by the Secretary of State of the State of
Delaware.
(II) PURCHASERS RIGHTS AGREEMENT. The Purchasers Rights
Agreement in the form attached hereto as Exhibit B (or otherwise satisfactory to
Purchaser), as modified as may be necessary to reflect the terms of the
Management Stockholder Agreements described in Section 6.1(b)(vii), shall have
been executed and delivered by each of the parties listed on Exhibit A thereto.
(III) INDENTURE AND WARRANT CONSENT. The holders of the
Company's 14% Senior Notes Due 2008 and related Warrants shall have agreed to
consent to the amendments to the Indenture and Warrant Agreement pursuant to the
terms of the Consent Solicitation materials attached hereto as Exhibit C.
(IV) HSR COMPLIANCE. Any waiting period applicable to the
purchase of the Shares under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and any applicable foreign antitrust or competition laws shall have
terminated or expired.
(V) WAIVER OF PREEMPTIVE RIGHTS. The holders of the Company's
outstanding equity securities shall have waived their preemptive rights in
connection with issuance of the Firm Shares or Option Shares, as applicable, to
be issued to Purchaser pursuant to this Agreement.
(VI) BOARD OF DIRECTORS. Upon the First Closing, the authorized
size of the Board of Directors of the Company shall consist of seven (7) members
and the Board shall consist of David E. Scott, Henry H. Bradley, Thomas R.
Palmer, Alexander Navab, Jr., James H. Greene, Jr., and Adam H. Clammer. The
remaining director's position will be vacant at the First Closing.
(VII) MANAGEMENT STOCKHOLDER AGREEMENTS. Each of the officers
listed on Schedule 6.1(b)(vii) shall have executed Management Stockholder
Agreements, and/or the Purchasers Rights Agreement which shall provide that such
officers have the rights and are subject to the obligations described on Exhibit
D attached hereto.
(VIII) NO IMPEDIMENTS TO REPURCHASE OR REDEMPTION. No statute,
regulation, order, decree or preliminary or permanent injunction of any court or
administrative agency shall be enacted, promulgated, entered or otherwise in
effect which would prohibit consummation of the Series C Repurchase or Series E
Redemption immediately following the First Closing and there shall be no other
impediment that would prohibit the consummation of the Series C Repurchase and
the Series E Redemption on the First Closing Date . All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization of the Series C Repurchase and Series E Redemption and the
performance of all obligations of the Company in connection therewith shall have
been taken. The Company and Stephen L. Sauder shall have entered into a binding
agreement providing for the Series C Repurchase immediately following the First
Closing, which agreement shall be in full force and effect.
23
<PAGE> 24
6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY.
(A) EACH CLOSING. The Company's obligation to issue and sell the
Firm Shares or Option Shares, as applicable, at each Closing is subject to the
satisfaction, on or prior to such Closing, of the following conditions:
(I) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties made by Purchaser in Section 4 hereof shall be true and correct
in all material respects at the date of such Closing Date with the same force
and effect as if they had been made on and as of such Closing Date, and the
Purchaser shall have performed all obligations and conditions herein required to
be performed or complied with by it on or before such Closing Date.
(II) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Related
Agreements (except for such as may be properly obtained subsequent to such
Closing Date).
(B) FIRST CLOSING. The Company's obligation to issue and sell the
Firm Shares at the First Closing is subject to the satisfaction of the following
conditions:
(I) PURCHASERS RIGHTS AGREEMENT. The Purchasers Rights
Agreement shall have been executed and delivered by Purchaser.
(II) HSR COMPLIANCE. Any waiting period applicable to the
purchase of the Shares under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and any applicable foreign antitrust or competition laws shall have
terminated or expired.
7. MISCELLANEOUS.
7.1 GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. This Agreement
shall be governed in all respects by the laws of the State of New York. No suit,
action or proceeding with respect to this Agreement may be brought in any court
or before any similar authority other than in a court of competent jurisdiction
in the State of New York, as Purchaser may elect in its sole discretion, and the
Company hereby submits to the exclusive jurisdiction of such courts for the
purpose of such suit, proceeding or judgment. The Company hereby irrevocably
waives any right which it may have had to bring such an action in any other
court, domestic or foreign, or before any similar domestic or foreign authority.
Each of the parties hereto hereby irrevocably and unconditionally waives trial
by jury in any legal action or proceeding in relation to this Agreement and for
any counterclaim therein.
7.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Purchaser 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.
24
<PAGE> 25
7.3 SUCCESSORS AND ASSIGNS; ASSIGNMENT. 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 the Shares from time to time. This Agreement may
not be assigned without the prior written consent of the other party, except
that Purchaser may assign its rights and obligations hereunder to any affiliate.
7.4 ENTIRE AGREEMENT; SUPERCEDES PRIOR AGREEMENT. This Agreement and
the Exhibits hereto, the Related Agreements and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
7.5 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.
7.6 AMENDMENT AND WAIVER. This Agreement may be amended or modified,
and the rights of the Company or the Purchaser hereunder may only be waived,
upon the written consent of the Company and Purchaser.
7.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, 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 or in any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on the Purchaser's part of any breach, default
or noncompliance under this Agreement or the Related Agreements or any waiver on
such party's part of any provisions or conditions of the Agreement or the
Related Agreements, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or the Related Agreements, by law, or otherwise afforded to any
party, shall be cumulative and not alternative.
7.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified; (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (d) one (1) business 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 addresses set forth below:
25
<PAGE> 26
If to the Company:
Birch Telecom, Inc.
2020 Baltimore Avenue
Kansas City, MO 64108
Telephone: (816) 300-3000
Fax:(816) 300-3291
Attn: General Counsel
with copies to:
Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Telephone: (650) 843-5004
Fax: (650) 857-0663
Attn: Patrick A. Pohlen, Esq.
If to Purchaser:
c/o Kohlberg Kravis Roberts & Co. L.P.
9 W. 57th Street
New York, NY 10019
Telephone: (212) 750-8300
Fax: (212) 750-0333
Attn: Alexander Navab, Jr.
with copies to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, N.Y. 10017
Telephone: (212) 455-2000
Fax: (212) 455-2502
Attn: Alan G. Schwartz, Esq.
7.9 EXPENSES; INDEMNIFICATION. The Company shall pay all costs and
expenses that it incurs with respect to the negotiation, execution, delivery and
performance of this Agreement and the Related Agreements. The Company shall, at
the First Closing, reimburse the reasonable fees of and expenses of Purchaser
incurred in connection with the transactions contemplated by this Agreement and
the Related Agreements, including the payment of the fees and expenses of
Kohlberg Kravis Roberts & Co. L.P. in the amount previously disclosed to the
Company and Purchaser's financial, legal and accounting advisors. The Company
hereby further agrees to indemnify, exonerate and hold Purchaser and its members
and its shareholders, officers, directors, employees, affiliates and agents
(each an "indemnitee") free and harmless from and against any and all actions,
causes of action, suits, losses, liabilities, damages and expenses, including,
without limitation, reasonable attorneys' fees and disbursements, incurred in
any capacity by any of such indemnitees
26
<PAGE> 27
as a result of or relating to any breach of any representation, warranty,
covenant or agreement of the Company in this Agreement or any Related Agreement.
7.10 TITLES AND SUBTITLES. The titles of the sections and subsections
of the Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.11 KNOWLEDGE. References to "knowledge" in this Agreement shall refer
to the knowledge of each of the officers of the Company after due inquiry into
the matters at issue with the employees of the Company responsible for such
matters.
7.12 TERMINATION. This Agreement may be terminated by (i) mutual
agreement of the parties hereto or (ii) by Purchaser or the Company in the event
the Closing has not occurred within 60 days of the date hereof, provided that
this termination right may not be exercised by a party whose nonperformance has
delayed the Closing.
7.13 COUNTERPARTS; EXECUTION BY FACSIMILE SIGNATURE. This Agreement may
be executed in any number of counterparts, each of which shall be an original,
but all of which together shall constitute one instrument. This Agreement may be
executed by facsimile signature(s).
7.14 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
27
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed the SERIES F
PREFERRED STOCK PURCHASE AGREEMENT as of the date set forth in the first
paragraph hereof.
BIRCH TELECOM, INC. BTI VENTURES L.L.C.
By: /s/ David E. Scott By: /s/ Alex Navab
---------------------------- -------------------------------
Name: David E. Scott Name: Alex Navab
Title: President Title: Member
SIGNATURE PAGE TO
SERIES F PREFERRED STOCK PURCHASE AGREEMENT
<PAGE> 1
EXHIBIT 10.21
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into this 5th day of August, 1999 by and between BIRCH TELECOM, INC., a Delaware
corporation (the "Corporation"), and GARY L. CHESSER ("Employee").
The Corporation and Employee entered into an Employment Agreement dated
February 10, 1998 (the "Employment Agreement") which contains the terms and
conditions of the Corporation's employment of the Employee. The Corporation and
Employee now desire to amend certain provisions of the Employment Agreement. The
Employment Agreement may be amended by the Corporation and Employee in
accordance with section 9.8 of the Employment Agreement upon the mutual consent
of the Corporation and Employee.
NOW, THEREFORE, in consideration of the following promises and mutual
covenants, and intending to be legally bound, the parties agree as follows:
1. DEFINED TERMS. Except as otherwise specifically provided in this
Amendment, the capitalized terms used in this Amendment and defined in the
Employment Agreement shall have the same meanings as provided in the Employment
Agreement.
2. AMENDMENT OF SECTION 6.4. Section 6.4 of the Employment Agreement is
amended by deleting the terms of that section in their entirety and substituting
the following in their place, reading in their entirety as follows:
For purposes of Section 6.1, the term "Good Reason" shall mean (a) a
substantial reduction in the Employee's duties or responsibilities, (b)
any reduction in Employee's Salary, or (c) relocation of the Employee's
primary workplace to a location that is greater than 35 miles from the
Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the
Employee describing the event constituting Good Reason.
3. AMENDMENT OF SUBSECTION 6.5(A). Subsection 6.5(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
If the Employee terminates this Agreement for Good Reason, or if the
Company terminates this Agreement other than for Cause (but not because
of the Disability or death of the Employee), or if the Company notifies
the Employee in accordance with Section 2.2 that this Agreement will
not be renewed as of an applicable expiration date, the Company will
pay the Employee (i) the Employee's Salary for the remainder, if any,
of the calendar month in which such termination is effective and for
twelve consecutive calendar months thereafter, (ii) the amount of the
Employee's targeted incentive compensation for the year during which
the termination is effective (prorated for the period from the
beginning of the year until the effective date of
<PAGE> 2
termination), and (iii) with respect to the Post-Employment Period, an
additional amount equal to the full amount of the Employee's targeted
incentive compensation for the year in which the termination was
effective (such amount to be determined as if the Employee had been
employed for the entire year and not prorated as described in clause
(ii) above), payable in equal monthly installments over the
Post-Employment Period. Notwithstanding the preceding sentence, if the
Employee obtains other employment prior to the end of the twelve
months following the month in which the termination or expiration is
effective, he must promptly give notice thereof to the Company, and
the payments under this Agreement for any period after the Employee
obtains other employment will be reduced by the amount of the cash
compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
4. EFFECT OF AMENDMENT ON EMPLOYMENT AGREEMENT. All provisions of this
Amendment shall be deemed to be incorporated in, and made part of, the
Employment Agreement, and the Employment Agreement, as amended and supplemented
by this Amendment, shall be read, taken, and construed as one and the same
agreement. Other than as expressly set forth herein, this Amendment shall not
constitute a consent or waiver to or modification of any term or condition of
the Employment Agreement. Subject to the express modifications made by this
Amendment, all terms, provisions, covenants, representations, warranties,
agreements, and conditions contained in the Employment Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be signed
by a duly authorized officer and Employee has executed this Amendment, both as
of the day and year first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott /s/ Gary L. Chesser
--------------------------------- --------------------------------
David E. Scott, President Gary L. Chesser
2
<PAGE> 1
EXHIBIT 10.22
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into this 5th day of August, 1999 by and between BIRCH TELECOM, INC., a Delaware
corporation (the "Corporation"), and GREGORY C. LAWHON ("Employee").
The Corporation and Employee entered into an Employment Agreement dated
February 10, 1998 (the "Employment Agreement") which contains the terms and
conditions of the Corporation's employment of the Employee. The Corporation and
Employee now desire to amend certain provisions of the Employment Agreement. The
Employment Agreement may be amended by the Corporation and Employee in
accordance with section 9.8 of the Employment Agreement upon the mutual consent
of the Corporation and Employee.
NOW, THEREFORE, in consideration of the following promises and mutual
covenants, and intending to be legally bound, the parties agree as follows:
1. DEFINED TERMS. Except as otherwise specifically provided in this
Amendment, the capitalized terms used in this Amendment and defined in the
Employment Agreement shall have the same meanings as provided in the Employment
Agreement.
2. AMENDMENT OF SUBSECTION 3.1(A). Subsection 3.1(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
The Employee will be paid a minimum base annual salary of $200,000 (the
"Salary"), which will be payable in equal periodic installments
according to the Company's customary payroll practices, but no less
frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall
then be the minimum base annual salary under this Agreement. The Salary
shall not be reduced below the highest minimum base annual salary fixed
from time to time by the Compensation Committee or Board of Directors
of the Company without the Employee's written consent. When increased
or decreased in accordance with the terms of this Agreement, the new
minimum base annual salary shall be deemed the Employee's "Salary" for
all purposes of this Agreement.
3. AMENDMENT OF SECTION 6.4. Section 6.4 of the Employment Agreement is
amended by deleting the terms of that section in their entirety and substituting
the following in their place, reading in their entirety as follows:
For purposes of Section 6.1, the term "Good Reason" shall mean (a) a
substantial reduction in the Employee's duties or responsibilities, (b)
any reduction in Employee's Salary, or (c) relocation of the Employee's
primary workplace to a location that is greater than 35 miles from the
Employee's current workplace, in each
<PAGE> 2
case which is not cured within 30 days following the Company's receipt
of written notice from the Employee describing the event constituting
Good Reason.
4. AMENDMENT OF SUBSECTION 6.5(A). Subsection 6.5(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
If the Employee terminates this Agreement for Good Reason, or if the
Company terminates this Agreement other than for Cause (but not because
of the Disability or death of the Employee), or if the Company notifies
the Employee in accordance with Section 2.2 that this Agreement will
not be renewed as of an applicable expiration date, the Company will
pay the Employee (i) the Employee's Salary for the remainder, if any,
of the calendar month in which such termination is effective and for
twelve consecutive calendar months thereafter, (ii) the amount of the
Employee's targeted incentive compensation for the year during which
the termination is effective (prorated for the period from the
beginning of the year until the effective date of termination), and
(iii) with respect to the Post-Employment Period, an additional amount
equal to the full amount of the Employee's targeted incentive
compensation for the year in which the termination was effective (such
amount to be determined as if the Employee had been employed for the
entire year and not prorated as described in clause (ii) above),
payable in equal monthly installments over the Post-Employment Period.
Notwithstanding the preceding sentence, if the Employee obtains other
employment prior to the end of the Post-Employment Period or any
extension thereof, he must promptly give notice thereof to the Company,
and the payments under this Agreement for any period after the Employee
obtains other employment will be reduced by the amount of the cash
compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
5. AMENDMENT OF SECTION 8.4. Section 8.4 of the Employment Agreement is
amended by adding a new sentence at the end of that section, reading as follows:
In addition, the period of time applicable to the covenants in Section
8.2 may be extended, at the option of the Company, for a period of one
year after the expiration of the Post-Employment Period, provided that
all of the following conditions have been satisfied: (a) the Company
has, within sixty days of the effective date of termination of
Employee's employment, provided notice to the Employee of the Company's
election to extend the period applicable to the covenants in Section
8.2 for an additional year, (b) the Company has paid all termination
payments it is obligated to pay Employee relating to the Employment
Period and the Post-Employment Period, and (c) for such additional year
after the Post-Employment Period, the Company pays the Employee the sum
of the Employee's Salary plus an amount equal to the full amount of the
Employee's targeted incentive compensation for the year in which the
termination was effective, payable in equal monthly installments over
that year.
2
<PAGE> 3
6. EFFECT OF AMENDMENT ON EMPLOYMENT AGREEMENT. All provisions of this
Amendment shall be deemed to be incorporated in, and made part of, the
Employment Agreement, and the Employment Agreement, as amended and supplemented
by this Amendment, shall be read, taken, and construed as one and the same
agreement. Other than as expressly set forth herein, this Amendment shall not
constitute a consent or waiver to or modification of any term or condition of
the Employment Agreement. Subject to the express modifications made by this
Amendment, all terms, provisions, covenants, representations, warranties,
agreements, and conditions contained in the Employment Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be signed
by a duly authorized officer and Employee has executed this Amendment, both as
of the day and year first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott /s/ Gregory C. Lawhon
------------------------------- -------------------------------
David E. Scott, President Gregory C. Lawhon
3
<PAGE> 1
EXHIBIT 10.23
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into this 5th day of August, 1999 by and between BIRCH TELECOM, INC., a Delaware
corporation (the "Corporation"), and DAVID E. SCOTT ("Employee").
The Corporation and Employee entered into an Employment Agreement dated
February 10, 1998 (the "Employment Agreement") which contains the terms and
conditions of the Corporation's employment of the Employee. The Corporation and
Employee now desire to amend certain compensation and noncompetition provisions
of the Employment Agreement. The Employment Agreement may be amended by the
Corporation and Employee in accordance with section 9.8 of the Employment
Agreement upon the mutual consent of the Corporation and Employee.
NOW, THEREFORE, in consideration of the following promises and mutual
covenants, and intending to be legally bound, the parties agree as follows:
1. DEFINED TERMS. Except as otherwise specifically provided in this
Amendment, the capitalized terms used in this Amendment and defined in the
Employment Agreement shall have the same meanings as provided in the Employment
Agreement.
2. AMENDMENT OF SUBSECTION 3.1(A). Subsection 3.1(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
The Employee will be paid a minimum base annual salary of $250,000 (the
"Salary"), which will be payable in equal periodic installments
according to the Company's customary payroll practices, but no less
frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall
then be the minimum base annual salary under this Agreement. The Salary
shall not be reduced below the highest minimum base annual salary fixed
from time to time by the Compensation Committee or Board of Directors
of the Company without the Employee's written consent. When increased
or decreased in accordance with the terms of this Agreement, the new
minimum base annual salary shall be deemed the Employee's "Salary" for
all purposes of this Agreement.
3. AMENDMENT OF SECTION 6.4. Section 6.4 of the Employment Agreement is
amended by deleting the terms of that section in their entirety and substituting
the following in their place, reading in their entirety as follows:
For purposes of Section 6.1, the term "Good Reason" shall mean (a) a
substantial reduction in the Employee's duties or responsibilities, (b)
any reduction in Employee's Salary, or (c) relocation of the Employee's
primary workplace to a location that is greater than 35 miles from the
Employee's current workplace, in each
<PAGE> 2
case which is not cured within 30 days following the Company's receipt
of written notice from the Employee describing the event constituting
Good Reason.
4. AMENDMENT OF SUBSECTION 6.5(A). Subsection 6.5(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
If the Employee terminates this Agreement for Good Reason, or if the
Company terminates this Agreement other than for Cause (but not because
of the Disability or death of the Employee), or if the Company notifies
the Employee in accordance with Section 2.2 that this Agreement will
not be renewed as of an applicable expiration date, the Company will
pay the Employee (i) the Employee's Salary for the remainder, if any,
of the calendar month in which such termination is effective and for
twenty-four consecutive calendar months thereafter, (ii) the amount of
the Employee's targeted incentive compensation for the year during
which the termination is effective (prorated for the period from the
beginning of the year until the effective date of termination), and
(iii) the sum of two times the amount of the Employee's targeted
incentive compensation for the year in which the termination was
effective (such amount to be determined as if the Employee had been
employed for the entire year and not prorated as described in clause
(ii) above), payable in equal monthly installments over the
Post-Employment Period. Notwithstanding the preceding sentence, if the
Employee obtains other employment prior to the end of the twenty-four
months following the month in which the termination or expiration is
effective, he must promptly give notice thereof to the Company, and the
payments under this Agreement for any period after the Employee obtains
other employment will be reduced by the amount of the cash compensation
received and to be received by the Employee from the Employee's other
employment for services performed during such period.
5. EFFECT OF AMENDMENT ON EMPLOYMENT AGREEMENT. All provisions of this
Amendment shall be deemed to be incorporated in, and made part of, the
Employment Agreement, and the Employment Agreement, as amended and supplemented
by this Amendment, shall be read, taken, and construed as one and the same
agreement. Other than as expressly set forth herein, this Amendment shall not
constitute a consent or waiver to or modification of any term or condition of
the Employment Agreement. Subject to the express modifications made by this
Amendment, all terms, provisions, covenants, representations, warranties,
agreements, and conditions contained in the Employment Agreement shall remain in
full force and effect.
2
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this Amendment to be signed
by a duly authorized officer and Employee has executed this Amendment, both as
of the day and year first written above.
BIRCH TELECOM, INC.
By: /s/ Gregory C. Lawhon /s/ David E. Scott
--------------------------------- ------------------------------
Gregory C. Lawhon, Senior Vice David E. Scott
President
3
<PAGE> 1
EXHIBIT 10.24
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into this 5th day of August, 1999 by and between BIRCH TELECOM, INC., a Delaware
corporation (the "Corporation"), and DAVID W. VRANICAR ("Employee").
The Corporation and Employee entered into an Employment Agreement dated
February 10, 1998 (the "Employment Agreement") which contains the terms and
conditions of the Corporation's employment of the Employee. The Corporation and
Employee now desire to amend certain provisions of the Employment Agreement. The
Employment Agreement may be amended by the Corporation and Employee in
accordance with section 9.8 of the Employment Agreement upon the mutual consent
of the Corporation and Employee.
NOW, THEREFORE, in consideration of the following promises and mutual
covenants, and intending to be legally bound, the parties agree as follows:
1. DEFINED TERMS. Except as otherwise specifically provided in this
Amendment, the capitalized terms used in this Amendment and defined in the
Employment Agreement shall have the same meanings as provided in the Employment
Agreement.
2. AMENDMENT OF SECTION 1.14. Section 1.14 of the Employment Agreement
is amended by deleting the term "one-year period" and substituting "two-year
period" in its place.
3. AMENDMENT OF SUBSECTION 3.1(A). Subsection 3.1(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
The Employee will be paid a minimum base annual salary of $200,000 (the
"Salary"), which will be payable in equal periodic installments
according to the Company's customary payroll practices, but no less
frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall
then be the minimum base annual salary under this Agreement. The Salary
shall not be reduced below the highest minimum base annual salary fixed
from time to time by the Compensation Committee or Board of Directors
of the Company without the Employee's written consent. When increased
or decreased in accordance with the terms of this Agreement, the new
minimum base annual salary shall be deemed the Employee's "Salary" for
all purposes of this Agreement.
4. AMENDMENT OF SECTION 6.4. Section 6.4 of the Employment Agreement is
amended by deleting the terms of that section in their entirety and substituting
the following in their place, reading in their entirety as follows:
<PAGE> 2
For purposes of Section 6.1, the term "Good Reason" shall mean (a) a
substantial reduction in the Employee's duties or responsibilities, (b)
any reduction in Employee's Salary, or (c) relocation of the Employee's
primary workplace to a location that is greater than 35 miles from the
Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the
Employee describing the event constituting Good Reason.
5. AMENDMENT OF SUBSECTION 6.5(A). Subsection 6.5(a) of the Employment
Agreement is amended by deleting the terms of that subsection in their entirety
and substituting the following in their place, reading in their entirety as
follows:
If the Employee terminates this Agreement for Good Reason, or if the
Company terminates this Agreement other than for Cause (but not because
of the Disability or death of the Employee), or if the Company notifies
the Employee in accordance with Section 2.2 that this Agreement will
not be renewed as of an applicable expiration date, the Company will
pay the Employee (i) the Employee's Salary for the remainder, if any,
of the calendar month in which such termination is effective and for
twenty-four consecutive calendar months thereafter, (ii) the amount of
the Employee's targeted incentive compensation for the year during
which the termination is effective (prorated for the period from the
beginning of the year until the effective date of termination), and
(iii) the sum of two times the amount of targeted incentive
compensation for the year in which the termination was effective (such
amount to be determined as if the Employee had been employed for the
entire year and not be prorated as described in clause (ii) above),
payable in equal monthly installments over the Post-Employment Period.
Notwithstanding the preceding sentence, if the Employee obtains other
employment prior to the end of the twenty-four months following the
month in which the termination or expiration is effective, he must
promptly give notice thereof to the Company, and the payments under
this Agreement for any period after the Employee obtains other
employment will be reduced by the amount of the cash compensation
received and to be received by the Employee from the Employee's other
employment for services performed during such period.
6. EFFECT OF AMENDMENT ON EMPLOYMENT AGREEMENT. All provisions of this
Amendment shall be deemed to be incorporated in, and made part of, the
Employment Agreement, and the Employment Agreement, as amended and supplemented
by this Amendment, shall be read, taken, and construed as one and the same
agreement. Other than as expressly set forth herein, this Amendment shall not
constitute a consent or waiver to or modification of any term or condition of
the Employment Agreement. Subject to the express modifications made by this
Amendment, all terms, provisions, covenants, representations, warranties,
agreements, and conditions contained in the Employment Agreement shall remain in
full force and effect.
2
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this Amendment to be signed
by a duly authorized officer and Employee has executed this Amendment, both as
of the day and year first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott /s/ David W. Vranicar
----------------------------- ----------------------------------
David E. Scott, President David W. Vranicar
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,946
<SECURITIES> 31,073
<RECEIVABLES> 8,347
<ALLOWANCES> 310
<INVENTORY> 4,164
<CURRENT-ASSETS> 54,826
<PP&E> 58,084
<DEPRECIATION> 4,937
<TOTAL-ASSETS> 158,013
<CURRENT-LIABILITIES> 22,907
<BONDS> 116,295
61,300
16
<COMMON> 5
<OTHER-SE> (42,510)
<TOTAL-LIABILITY-AND-EQUITY> 158,013
<SALES> 41,633
<TOTAL-REVENUES> 41,633
<CGS> 31,595
<TOTAL-COSTS> 31,595
<OTHER-EXPENSES> 40,072
<LOSS-PROVISION> 329
<INTEREST-EXPENSE> 11,189
<INCOME-PRETAX> (39,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,265)
<EPS-BASIC> (8.06)
<EPS-DILUTED> (8.06)
</TABLE>
