<PAGE>
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
OR
[ ] 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: 000-26103
---------------------------------------------------------
CAIS INTERNET, INC.
(Exact name of registrant as specified in it charter)
---------------------------------------------------------
<TABLE>
<S> <C>
Delaware 52-2066769
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1255 22nd Street, N.W., Fourth Floor, Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 715-1300
Former name, former address, and former
year, if changed since last report: Not applicable
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of outstanding shares of each of the registrant's
classes of Common Stock, as of the latest practicable date.
Title of each class
- -------------------
Common Stock, $.01 par value
22,428,164 shares outstanding on September 30, 1999
<PAGE>
CAIS INTERNET, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1999
INDEX
<TABLE>
<S> <C>
Page
PART I - FINANCIAL INFORMATION Number
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998. 4
Consolidated Condensed Statements of Operations for the Three
Months and for the Nine Months Ended September 30, 1999 and 1998. 5
Consolidated Condensed Statements of Changes
in Stockholders' Equity (Deficit) for the Nine Months Ended
September 30, 1999. 6
Consolidated Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998. 8
Notes to Consolidated Condensed Financial Statements. 9
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 2. Changes in Securities and Use of Proceeds. 23
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
</TABLE>
2
<PAGE>
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Risks and Other Important Factors,"
among others, and in the Company's Prospectus dated May 20, 1999 under the
caption "Risk Factors," could cause actual results to differ materially from
those indicated by forward-looking statements made herein and presented
elsewhere by management from time to time. Such forward-looking statements
represent management's current expectations and are inherently uncertain.
Investors are warned that actual results may differ from management's
expectations.
CAIS Internet, Inc.'s trademarks and pending trademark applications
include "OVERVOICE," "CAIS," "LANJACK," "MEET JACK" and "DESKJACK." All other
trademarks referred to herein are the property of their respective owners.
3
<PAGE>
CAIS INTERNET, INC
Consolidated Condensed Balance Sheets
(in thousands except share and per share data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents.......................................... $ 52,981 $ 95
Short-term investments............................................. 16,501 -
Accounts receivable, net of allowance for doubtful accounts
of $165 and $137, respectively................................. 1,706 648
Prepaid expenses and other current assets.......................... 2,308 228
Current assets of discontinued operations.......................... - 8,170
-------- ---------
Total current assets.................................. 73,496 9,141
-------- ---------
Property and equipment, net............................................. 61,809 2,638
Deferred offering costs................................................. - 237
Deferred debt financing costs, net...................................... 1,425 292
Intangible assets and goodwill, net..................................... 54,454 277
Receivable from officer................................................. 400 -
Other assets............................................................ 1,392 -
Noncurrent assets of discontinued operations............................ - 1,936
-------- ---------
Total noncurrent assets............................... 119,480 5,380
-------- ---------
Total assets.......................................... $192,976 $ 14,521
======== =========
Current liabilities
Accounts payable and accrued expenses.............................. $ 40,448 $ 4,396
Payable to discontinued operations................................. - 5,342
Unearned revenues.................................................. 632 572
Current liabilities of discontinued operations..................... - 8,205
-------- ---------
Total current liabilities............................. 41,080 18,515
Loan, net of unamortized debt discount of $0 and $817,
respectively....................................................... - 6,183
Notes payable to related parties, net of current portion................ - 1,983
Other long-term liabilities............................................. 717 -
Long-term liabilities of discontinued operations........................ - 2,601
-------- ---------
Total liabilities..................................... 41,797 29,282
-------- ---------
Series C cumulative mandatory redeemable convertible preferred
stock; 125,000 shares authorized, issued and
outstanding as of September 30, 1999 (aggregate
liquidation preference of $15,000)................................. 15,000 -
Put warrants............................................................ 1,267 -
Commitments and contingencies (Note 7)
Stockholders' equity (deficit)
Common stock, $0.01 par value; 100,000,000 shares
authorized; 22,440,930 and 9,965,505 shares issued
and 22,428,164 and 9,965,505 shares outstanding, respectively..... 224 100
Additional paid-in capital......................................... 188,235 7,794
Warrants outstanding............................................... 13,233 1,226
Deferred compensation.............................................. (3,435) (2,888)
Treasury stock, 12,766 shares of common stock...................... (150) -
Accumulated deficit................................................ (63,195) (20,993)
-------- ---------
Total stockholder's equity (deficit).................. 134,912 (14,761)
-------- ---------
Total liabilities and stockholders' equity (deficit).. $192,976 $ 14,521
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
4
<PAGE>
CAIS INTERNET, INC.
Consolidated Condensed Statements of Operations
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues................................................ $ 2,682 $ 1,357 $ 6,102 $ 3,924
Cost of services............................................ 2,558 776 5,126 2,243
Operating expenses:
Selling, general and administrative.................... 13,333 2,471 22,813 6,712
Depreciation and amortization.......................... 1,738 374 2,485 944
Fair value of stock issued to third party for services. - - 723 -
Non-cash compensation.................................. 1,009 356 4,130 1,068
-------- ------- -------- -------
Total operating expenses............... 16,080 3,201 30,151 8,724
-------- ------- -------- -------
Loss from operations........................................ (15,956) (2,620) (29,175) (7,043)
Interest income (expense), net:
Interest income........................................ 1,190 - 1,730 -
Interest expense....................................... (198) (295) (1,330) (469)
-------- ------- -------- -------
Total interest income (expense), net... 992 (295) 400 (469)
-------- ------- -------- -------
Loss from continuing operations before income taxes......... (14,964) (2,915) (28,775) (7,512)
Provision for income taxes............................. - - - -
-------- ------- -------- -------
Loss from continuing operations............................. (14,964) (2,915) (28,775) (7,512)
Income (loss) from discontinued operations............. - (249) (340) 116
-------- ------- -------- -------
Loss before extraordinary item.............................. (14,964) (3,164) (29,115) (7,396)
Extraordinary item -- early extinguishment of debt..... - - (551) -
-------- ------- -------- -------
Net loss................................................... (14,964) (3,164) (29,666) (7,396)
Dividends and accretion on preferred stock............. (3,851) - (4,201) -
-------- ------- -------- -------
Net loss attributable to common stockholders................ $(18,815) $(3,164) $(33,867) $(7,396)
======== ======= ======== =======
Basic and diluted earnings (loss) per share:
Loss attributable to common stockholders before
discontinued operations and extraordinary item....... $(0.91) $ (0.29) (2.20) $ (0.76)
Discontinued operations................................ - (0.03) (0.02) 0.01
Extraordinary item..................................... - - (0.04) -
-------- ------- -------- -------
Total.................................. $(0.91) $ (0.32) $ (2.26) $ (0.75)
======== ======= ======== =======
Basic and diluted weighted-average shares outstanding....... 20,586 9,966 14,955 9,834
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
5
<PAGE>
CAIS INTERNET, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------
SERIES A SERIES B SERIES C
------------------ --------------- ---------------- PUT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998................................. - $ - - $ - - $ - $ -
Issuance of common stock and options in
connection with litigation settlement....... - - - - - - -
Issuance of Series A, Series B and Series C
Preferred Stock, net of offering costs of $175
and amounts allocated to warrants........... 2,827 3,209 1,120 4,557 125 11,149 -
Capital contribution.......................... - - - - - - -
Distribution of Cleartel net assets........... - - - - - - -
Initial public offering gross proceeds, net of
underwriting discounts and commissions and
other IPO fees and expenses................. - - - - - - -
Accrued dividends on preferred shares
and accretion of discount................... - 246 - 104 - - -
Accretion of Series A and Series C Preferred
Stock warrant and issuance costs............ - 8,292 - - - 3,851 -
Conversion of Series A and Series B
Preferred Stock and accrued dividend
to common stock............................. (2,827) (11,747) (374) (1,557) - - -
Redemption of Series B Preferred Stock........ - - (746) (3,104) - - -
Issuance of common stock to third party....... - - - - - - -
Issuance of put warrants...................... - - - - - - 1,267
Deferred compensation pursuant to
issuance of stock options................... - - - - - - -
Amortization of unearned compensation......... - - - - - - -
Issuance of common stock for acquisitions..... - - - - - - -
Exercise of stock options..................... - - - - - - -
Treasury stock................................ - - - - - - -
Net loss...................................... - - - - - - -
------ ------ ------ ------ ------ ------- --------
SEPTEMBER 30, 1999................................ - $ - - $ - 125 $15,000 $1,267
====== ====== ====== ====== ====== ======= ========
(Continued)
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
6
<TABLE>
<CAPTION>
CAIS INTERNET, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------- PAID-IN WARRANTS DEFERRED TREASURY ACCUMULATED
SHARES PAR CAPITAL OUTSTANDING COMPENSATION STOCK DEFICIT TOTAL
------- ------ ------- ----------- ------------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998................................. 9,965 $ 100 $ 7,794 $ 1,226 $(2,888) $ - $ (20,993) (14,761)
Issuance of common stock and options in
connection with litigation settlement....... 25 - - - - - - -
Issuance of Series A, Series B and Series C
Preferred Stock, net of offering costs of $175
and amounts allocated to warrants.......... - - - 12,007 - - - 12,007
Capital contribution.......................... - - 1,083 - - - - 1,083
Distribution of Cleartel net assets........... - - - - - - (43) (43)
Initial public offering gross proceeds, net of
underwriting discounts and commissions and
other IPO fees and expenses................. 6,842 68 118,165 - - - - 118,233
Accrued dividends on preferred shares
and accretion of discount................... - - - - - - (350) (350)
Accretion of Series A and Series C Preferred
Stock warrant and issuance costs............ - - - - - - (12,143) (12,143)
Conversion of Series A and Series B
Preferred Stock and accrued dividend
to common stock............................. 2,909 29 13,275 - - - - 13,304
Redemption of Series B Preferred Stock........ - - - - - - - -
Issuance of common stock to third party....... 67 1 722 - - - - 723
Issuance of put warrants...................... - - - - - - - -
Deferred compensation pursuant to
issuance of stock options................... - - 4,677 - (4,677) - - -
Amortization of unearned compensation......... - - - - 4,130 - - 4,130
Issuance of common stock for acquisitions..... 2,615 26 42,461 - - - - 42,487
Exercise of stock options..................... 18 - 58 - - - - 58
Treasury stock................................ - - - - - (150) - (150)
Net loss...................................... - - - - - - (29,666) (29,666)
------- ----- -------- -------- --------- ------- -------- -------
SEPTEMBER 30, 1999................................ 22,441 $224 $188,235 $13,233 $(3,435) $ (150) $(63,195) $134,912
======== ===== ======== ======== ========= ======= ======== =======
(Concluded)
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
7
<PAGE>
CAIS INTERNET, INC.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (29,666) $ (7,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation.................................................. 4,130 1,068
Amortization of debt discount and deferred financing costs............. 877 102
Extraordinary item -- early extinguishment of debt..................... 551 -
Fair value of shares issued to third party for services................ 723 -
Depreciation and amortization.......................................... 2,485 944
Depreciation and amortization of discontinued operations............... 58 396
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, net........................................... (728) (22)
Prepaid expenses and other current assets.......................... (2,023) 104
Other long term assets............................................. (784) -
Accounts payable and accrued liabilities........................... 9,667 1,192
Payable to discontinued operations................................. (3,892) 2,085
Unearned revenue................................................... 60 82
Deferred rent, net................................................. 609 -
Changes in operating assets and liabilities of
discontinued operations......................................... (73) 468
---------- --------
Net cash used in operating activities (18,006) (978)
---------- --------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (43,710) (1,187)
Purchases of property and equipment of discontinued operations............... (14) (279)
Purchases of short-term investments.......................................... (16,501) -
Purchase of restricted investments........................................... (350) -
Cash paid for acquisitions, net of cash acquired............................. (59) -
Acquisition costs............................................................ (1,268) -
Payment of contract fees..................................................... (2,006) -
Net payments advanced on notes receivable.................................... (538) (350)
Net payments advanced on related party accounts receivable................... - (423)
---------- --------
Net cash used in investing activities (64,446) (2,239)
---------- --------
Cash flows from financing activities:
Net borrowings (repayments) under receivables-based credit facility of
discontinued operations................................................ 313 (30)
Borrowings under Loan........................................................ - 5,000
Repayments under Loan........................................................ (7,000) -
Repayments under long-term debt.............................................. - (2,000)
Borrowings under notes payable - related parties............................. 1,000 936
Principal payments under capital lease obligations........................... (11) -
Net proceeds from issuance of Series A Preferred Stock....................... 11,365 -
Redemption of Series B Preferred Stock....................................... (3,104) -
Net proceeds from issuance of Series C Preferred Stock and warrants.......... 15,000 -
Net proceeds from initial public offering.................................... 118,233 -
Payment of debt financing costs.............................................. (366) (476)
Proceeds from issuance of common stock....................................... 58 1,000
Repurchase of common stock................................................... (150) -
----------- --------
Net cash provided by financing activities 135,338 4,430
----------- --------
Net increase in cash and cash equivalents 52,886 1,213
Cash and cash equivalents, beginning of period 95 149
----------- --------
Cash and cash equivalents, end of period $ 52,981 $ 1,362
=========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
8
<PAGE>
CAIS INTERNET, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
1. Business Description:
Overview
CAIS Internet, Inc. (the "Company") delivers end-to-end high-speed Internet
access and content solutions. The Company operates two business segments: the
visitor-based and multi-family networks segment provides high-speed Internet
access and content solutions for hotels, apartment communities and other public
areas using its patented OverVoice solution and IPORT server software; and the
Internet services segment provides high-speed Internet access and content
solutions for businesses and consumers, including digital subscriber line
("DSL") services using HyperDSL lines, always-on access solutions for ISPs and
businesses, and web hosting and other Internet services.
Organization
CAIS Internet, Inc. was incorporated under the name CGX Communications,
Inc. ("CGX") as a "C" corporation in Delaware in December 1997 to serve as a
holding company for two operating entities, CAIS, Inc., a Virginia "S"
Corporation, and Cleartel Communications Limited Partnership ("Cleartel"), a
District of Columbia limited partnership. The Company completed a reorganization
in October 1998 such that CAIS and Cleartel became wholly owned subsidiaries of
the Company. In February 1999, the Company spun-off Cleartel to the Company's
stockholders (see Note 3) and changed its name from CGX Communications, Inc. to
CAIS Internet, Inc.
Initial Public Offering
In May 1999, the Company completed an initial public offering of its
common stock (the "IPO"). The Company sold 6,842,100 shares (including the over-
allotment option), yielding net proceeds to the Company of approximately $118.2
million, after deducting underwriting discounts and commissions and other fees
and expenses of approximately $11.8 million. The Company used approximately $12
million of the net proceeds in the second quarter of 1999 to repay indebtedness
and redeem shares of Series B cumulative mandatory redeemable convertible
preferred stock.
Risks and Other Important Factors
The Company historically has experienced losses and negative cash flows
due to the development and deployment of its services and execution of its
business plan. Further, there can be no assurance that the Company will generate
positive cash flows or income from operations in the future.
As of September 30, 1999, the Company had cash, cash equivalents, and
short-term investments of approximately $69.5 million. The Company expects that
it will require additional financing to meet its anticipated cash needs for the
next twelve months, and is actively exploring alternatives for such financing.
If such sources of financing are insufficient or unavailable, or if the Company
experiences shortfalls in anticipated revenues or increases in anticipated
expenses, the Company would curtail the planned roll-out of its services and
reduce marketing and development activities.
The Company is subject to various risks in connection with the operation
of its business. These risks include, but are not limited to, regulations,
dependence on effective billing and information systems, intense competition,
rapid technological change, and any effects on the Company or its suppliers
relating to the Year 2000 Issue. The Company's future plans are substantially
dependent on the successful roll-out of its visitor-based and multi-family
networks. Net revenues generated from visitor-based and multi-family networks
were approximately $702,000 and $858,000 for the three and nine month periods
ended September 30, 1999, respectively. There can be no assurance that the
Company will be successful in its roll-out of services nor can there be any
assurance that the Company will be successful in defending its related patent
rights. Many of the Company's competitors are significantly larger and have
substantially greater financial, technical, and marketing resources than the
Company.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
9
<PAGE>
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
nine month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's registration statement on Form S-1.
Consolidated Financial Statements
The consolidated condensed financial statements include the results of the
Company and its wholly-owned subsidiaries. These results include CAIS, Inc. for
all periods presented, and Atcom, Inc. ("Atcom") and Business Anywhere USA, Inc.
("Business Anywhere") for the period from their respective acquisition dates in
September, 1999 through the end of the third quarter. The Company acquired
Atcom, which it renamed CAIS Software Solutions, and Business Anywhere in
September 1999 (see Note 8).
In February 1999, the Company spun-off its operator and long-distance
services subsidiary, Cleartel, to its stockholders as a non-cash distribution
(See Note 3). The spin-off has been presented as discontinued operations and,
accordingly, the Company has presented its financial statements for all periods
prior to that date in accordance with Accounting Principles Board ("APB")
Opinion No. 30. All expenses related to members of senior management who
continued with the Company are included within loss from continuing operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Net Loss Per Share
Basic and diluted loss per share is based on the weighted-average number of
shares of common stock outstanding during the period. Stock options and warrants
are not reflected in diluted loss per share since their effect would be
antidilutive. As of September 30, 1999, there were approximately 6,858,000
options and warrants that would have been included in this calculation had the
effect not been antidilutive.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting of
Comprehensive Income", requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements and/or
notes thereto. Since the Company does not have any components of "other
comprehensive income", reported net income is the same as "comprehensive income"
for the three and nine months ended September 30, 1999 and 1998.
Recently Adopted Accounting Pronouncements
In July 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for fiscal years beginning after December 31, 2000,
and its purpose is to replace existing pronouncements with a single, integrated
accounting framework for derivatives and hedging activities. The Company has not
yet evaluated the effect of this standard on the financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." It provides
guidance on accounting for costs of computer software developed or obtained for
internal use. It is effective for fiscal years beginning after December 15,
1998, for projects in progress and prospectively, with earlier application
encouraged. The Company has adopted this standard which had no significant
impact on its financial statements to date.
Excess of Cost over Net Assets Acquired (Goodwill)
Goodwill and other intangibles were recorded as a result of the
acquisitions by the Company of
10
<PAGE>
Capital Area Internet Service, Inc. ("Capital Area") in May 1996, and of Atcom
and Business Anywhere in September 1999. Goodwill and acquired intangibles are
amortized on a straight-line basis over three years. Amortization of goodwill
and intangibles was approximately $1,163,000 and $1,440,000 for the three and
nine months ended September 30, 1999, respectively. Goodwill with respect to the
Capital Area acquisition was fully amortized in May 1999.
Non-cash compensation
Non-cash compensation is recorded for stock options granted to certain
executives at exercise prices less than the estimated fair market value at the
dates of the grants. The non-cash compensation expense is recorded over the
vesting periods of the options and was approximately $1,009,000 and $4,130,000
for the three and nine month periods ended September 30, 1999, respectively.
Visitor-based and Multi-family Network Contract Rights
The Company makes up-front contract payments to its contract partners in
connection with entering into long-term master agreements for visitor-based and
multi-family networks. These payments give the Company various installation and
marketing rights to provide high speed Internet services to customers in hotels
and apartment buildings. The net total balance of these payments was
approximately $10,859,000 and $0 as of September 30, 1999 and December 31, 1998,
respectively, and is included in intangible assets and goodwill in the
consolidated condensed balance sheets. The payments are amortized over the term
of the agreements, ranging from five to seven years. Amortization expense of
these costs for the three and nine month periods ended September 30, 1999 was
approximately $69,000 for both periods.
Short-Term Investments
The Company considers all investments with original maturities of between
91 and 270 days inclusive to be short-term investments. Short-term investments
consist of investment-grade securities. The carrying amount in the consolidated
condensed balance sheets approximates fair value.
Treasury Stock
In connection with the acquisition of Atcom in September 1999, the Company
purchased approximately 13,000 shares of its common stock at fair market value
from a former shareholder of Atcom, which are currently being held by the
Company.
3. Spin-off/Discontinued Operations:
Through the date of the spin-off of Cleartel in February 1999, profits and
cash flows from Cleartel were used to finance operating losses at the Company.
This obligation of the Company as of February 12, 1999, was approximately
$4,941,000 and was reduced to $1,991,000 in February 1999 upon cash payments of
$1,500,000 and the Company's assumption of related party debt totaling
$1,450,000 from Cleartel. The remaining obligation and additional transactions
after the spin-off date were paid to Cleartel in May 1999.
During the nine months ended September 30, 1999 and 1998, the Company and
Cleartel shared certain support services such as bookkeeping, information
systems, and advertising and marketing support. After the spin-off of Cleartel
in February 1999, the Company has been providing these services at cost plus a
fixed percentage until Cleartel replaces this arrangement with its own services
in 1999. Amounts charged for services are included as an offset to the
respective operating expenses in the accompanying statements of operations. A
summary of these transactions is as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Bookkeeping, MIS, advertising, and marketing support.. $141 $163
Office lease.......................................... $ 40 $122
</TABLE>
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Qwest Communications Corp
Indefeasible Right of Use (see Note 7) $ 14,521 $ -
Visitor-based and multi-family network
contract rights (see Note 2) 8,922 -
Other 17,005 4,396
--------- ------------
$ 40,448 $ 4,396
========= ============
</TABLE>
5. Extinguishment of Debt:
In September 1998, the Company entered into a $7 million loan facility
(the "Loan") with an investment banking firm. In connection with the Loan, the
Company issued the investment banking firm warrants to acquire 3 percent of the
fully diluted outstanding shares of common stock of the Company or 390,000
shares at September 4, 1998. The $7 million loan was repaid in full from net
proceeds from the IPO.
The Company recorded debt discount costs of $1,226,000 attributable to the
redeemable warrants issued and other direct financing costs in connection with
the Loan. The unamortized debt discount and deferred debt financing costs were
approximately $817,000 and $292,000, respectively, as of December 31, 1998. Upon
11
<PAGE>
the early extinguishment of the Loan in May 1999, the Company recognized an
extraordinary charge of $551,000 related to the write-off of the unamortized
debt discount and deferred financing costs.
6. Convertible Preferred Stock and Warrants:
On April 23, 1999, in connection with an amendment to the Company's master
agreement with a hotel customer (the "Customer") to provide the Company with
exclusive rights and to extend the contract term, the Company issued warrants to
the Customer to purchase 66,667 shares of common stock at an exercise price of
$0.01 per share, as an additional contribution by the Company in support of the
Customer's marketing of the Company's services. The warrants have been valued at
their estimated fair value of $19.00 per share (or approximately $1,267,000 in
the aggregate) based upon a Black-Scholes valuation model. The fair value of the
warrants has been recorded as an intangible asset and will be amortized over the
expected benefit life of the five year contract term. In connection with the
warrants, the Customer received certain demand and incidental registration
rights. The warrants expire on April 23, 2004. The Customer has a put option to
sell all of the warrants (or shares of the Company issued pursuant to the
exercise of the warrants) back to the Company at $19.00 per share. The put
option expires ninety days following the earlier of: (1) the effective date of
the first registration statement that includes any warrant shares for resale and
(2) the date on which the Customer may sell all of the warrant shares within a
three-month period pursuant to the 1933 Securities Act Rule 144. Due to the
existence of the put rights, the value ascribed to the warrants will not be
included within stockholders' equity until the put option expires.
Following the completion of the IPO, the Company converted 2,827,168
shares of Series A convertible preferred stock into an equal number of common
shares. In addition, the Company redeemed 745,645 Series B shares for cash
totaling $3,000,000 (plus accrued dividends of $104,000), and converted the
remaining Series B Shares into 81,946 shares of common stock.
In September 1999, the Company issued 125,000 shares of Series C Cumulative
Mandatory Redeemable Convertible Preferred Stock (the "Series C Preferred
Stock") and warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share to Qwest Communications Corporation ("Qwest") for total gross
proceeds of $15,000,000, less approximately $40,000 of offering costs paid to
third parties. The Series C Preferred Stock ranks prior to the Company's common
stock with respect to dividends and rights upon liquidation, dissolution, or
winding up of the Company. Each holder of Series C Preferred Stock is entitled:
(i) to receive, when, as and if declared by the Company's Board of Directors,
cumulative dividends of $10.20 per annum per share; (ii) to a liquidation
preference equal to the sum of $120.00 per share, plus any accrued but unpaid
dividends; (iii) to the number of votes equal to the number of whole shares of
Common Stock into which all of the shares of Series C Preferred Stock held by
such holder are convertible; and (iv) to certain demand and piggyback
registration rights. Subject to certain limitations, each share of Series C
Preferred Stock is convertible, at the option of the holder, into such number of
fully paid and nonassessable shares of common stock at the ratio of ten common
shares for each share of Series C Preferred Stock. The Company shall redeem (i)
up to 41,667 shares of the Series C Preferred Stock by the second anniversary of
the date of issuance of the Series C Preferred Stock; and (ii) the remaining
shares of the Series C Preferred Stock upon the third anniversary of the date of
issuance of the Series C Preferred Stock.
Approximately $3.9 million of the proceeds received were allocated to the
value of the warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share. The warrants have been valued at their estimated fair value
of $7.70 per share (or approximately $3,851,000 in the aggregate) based on the
Black-Scholes valuation model. The warrants expire on October 28, 2002.
As the Series C Preferred Stock is immediately convertible into common
stock, the discount on the preferred stock (as a result of the allocation of
proceeds to the warrants) was fully accreted on the date of issuance and is
reflected as a dividend on preferred stock in the accompanying financial
statements.
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<PAGE>
7. Commitments and Contingencies:
Litigation
On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. ("LodgeNet") in Maryland U.S. District Court. The
complaint charged LodgeNet with infringement of one of the OverVoice patents,
which is directed to the delivery of high-speed audio and video signals over
active telephone wiring. On September 15, 1999 the Company and LodgeNet entered
into a settlement agreement, and on September 16, 1999 the Company submitted a
Stipulation of Dismissal of the lawsuit, under terms satisfactory to the
Company.
The Company is not a party to any lawsuit or proceeding which, in the
opinion of its management, is likely to have a material adverse effect on its
business, financial condition or results of operation.
Network Capacity
The Company and Qwest entered into a twenty-year Indefeasible Right of Use
("IRU") agreement, dated as of September 28, 1999. The Company purchased
$44 million of capacity on Qwest's fiber network. The Qwest capacity will
support the delivery of the Company's network services to 38 metropolitan areas
across the United States. The Company also committed to purchase $10 million of
Qwest's communications services over five years. The IRU agreement terminates
the Company's $100 million commitment in the parties' June 1998 Memorandum of
Understanding.
Equipment Financing
The Company and Nortel Networks, Inc. ("Nortel Networks") entered into a
five-year, $30 million equipment financing line of credit, dated as of June 4,
1999. As of September 30, 1999, the Company had not yet borrowed under this
credit facility, and $30 million was available. In addition, the Company entered
into a purchase agreement with Nortel Networks, dated as of April 1, 1999, and
committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition, the Company will be subject to a reduction in its purchase discount
percentages after that date if its annual purchases do not exceed $10 million
for the year ended April 1, 2001 and $9.9 million for the year ended April 1,
2002. The Company and Nortel Networks entered into a First Amendment to Credit
Agreement effective as of September 7, 1999 to amend certain provisions of the
original credit agreement.
The Company and Cisco Systems Capital Corporation entered into a three-
year, $50 million equipment financing line of credit, dated as of June 30, 1999.
Under the facility, $25 million is available during the first year of the
facility and an additional $25 million is available during the second year of
the facility, provided the Company meets certain financial performance
requirements. As of September 30, 1999, the Company had not yet borrowed under
this credit facility, and $25 million was available.
Deferred debt financing costs represent direct financing costs incurred in
connection with entering into the equipment financing agreements. The Company
accrued debt financing costs of approximately $1.3 million as of September 30,
1999 in connection with completing the Nortel and Cisco lines of credit. The
deferred debt financing costs are being amortized over the terms of the
equipment financing agreements and are included in interest expense. The
amortization was approximately $162,000 and $177,000 for the three and nine
month periods ended September 30, 1999, respectively.
Regulatory Matters
At the present time, ISPs like the Company are not subject to direct
regulation by the Federal Communications Commission ("FCC") even though they
provide Internet access through transmission over public telephone lines.
However, as the growth of the Internet industry continues, there has been
considerable discussion and debate about whether the industry should be
subjected to regulation. This regulation could include universal service
subsidies for local telephone services and enhanced communications systems for
schools, libraries and certain health care providers. Local telephone companies
could be allowed to charge ISPs for the use of their local telephone network to
originate calls, similar to charges currently assessed on long distance
telecommunications companies. In addition, many state and local government
officials have asserted the right or indicated a willingness to impose taxes on
Internet-related services and commerce, including sales, use and excise taxes.
8. Acquisitions
In September 1999, the Company acquired Atcom, which it renamed CAIS
Software Solutions, for a purchase price of approximately $30,856,000 in the
form of shares of the Company's common stock, and options valued at
approximately $10,131,000 based on the Black-Scholes valuation model to acquire
shares of common stock. The Company issued approximately 2,493,000 shares of
common stock valued at $12.375 per share, and options to acquire approximately
839,000 shares of common stock. The Company also incurred approximately
$1,469,000 for direct acquisition costs. The Atcom transaction combines the
Company's OverVoice hardware technology with Atcom's IPORT server software and
kiosk products to deliver high speed Internet access solutions to hotels,
apartment communities and public areas. The acquisition was accounted for under
the purchase method of accounting for business combinations, and accordingly,
the operating results of CAIS Software Solutions have been included in the
Company's consolidated condensed financial statements from the date of
acquisition. The purchase price was allocated on a preliminary basis as follows:
tangible assets, principally cash, accounts receivable and
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<PAGE>
property and equipment of approximately $3,163,000; assumed liabilities of
approximately $2,481,000; and intangible assets including but not limited to
acquired technology, existing work-force, installed customer base, and goodwill
of approximately $41,774,000. The purchase price allocation is preliminary and
may change upon final determination of the fair value of net assets acquired.
The Company has not specifically identified amounts to assign to certain
intangibles; changes in amounts allocated to such assets could result in changes
to the amount of goodwill recorded. An amortization period of three years has
been selected, which is expected in all material respects to be representative
of the amortization expense that will result from the ultimate allocation to the
specific intangible assets.
In September 1999, the Company acquired Business Anywhere for a purchase
price of approximately $200,000 in cash and $1,500,000 in the Company's common
stock. The Company issued approximately 122,000 shares of common stock valued at
$12.325 per share. The Company will issue $1,000,000 in additional common stock
at each of the first and second annual anniversaries of the transaction based
upon the fair market value of the stock at that time, provided Business Anywhere
meets certain revenue targets. The Company also incurred approximately $94,000
for direct acquisition costs. The Business Anywhere transaction expands the
Company's services to include Internet-ready twenty-four hour automated self-
service business centers in hotels. The acquisition was accounted for under the
purchase method of accounting for business combinations, and accordingly, the
operating results of Business Anywhere have been included in the Company's
consolidated condensed financial statements from the date of acquisition. The
purchase price was allocated on a preliminary basis as follows: tangible assets,
principally cash, accounts receivable and property and equipment of
approximately $658,000; assumed liabilities of approximately $687,000; and
intangible assets including but not limited to acquired technology, existing
work-force, installed customer base, and goodwill of approximately $1,822,000.
The purchase price allocation is preliminary and may change upon final
determination of the fair value of net assets acquired. The Company has not
specifically identified amounts to assign to certain intangibles; changes in
amounts allocated to such assets could result in changes to the amount of
goodwill recorded. An amortization period of three years has been selected,
which is expected in all material respects to be representative of the
amortization expense that will result from the ultimate allocation to the
specific intangible assets.
The following pro forma results give effect to the foregoing acquisitions
as if such transactions had been consummated on January 1, 1998 (in thousands
except per share amounts, unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Net revenues $ 7,896 $ 5,634
Net loss $(46,534) $(19,804)
Basic and diluted loss per share $ (2.69) $ (1.59)
Weighted-average common shares outstanding 17,310 12,449
</TABLE>
9. Segment Reporting
The Company has two reportable segments: visitor-based and multi-family
networks ("Networks") and Internet Services (see Note 1). Networks includes the
Company's wholly-owned subsidiaries, CAIS Software Solutions and Business
Anywhere. The accounting principles of the segments are the same as those
applied in the consolidated condensed financial statements. Since Networks is a
new segment, its revenues and costs are being reported on an incremental basis
without any allocations of corporate overhead. Interest is allocated based upon
the respective percentage of losses before interest of the two segments. The
evaluation of the Networks segment's performance is based on the accumulation of
revenues and specific costs identified to Networks operations.
The following is a summary of information about each of the Company's
reportable segments that is used by the Company to measure the segment's
operations (in thousands, unaudited):
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------
<S> <C> <C> <C>
Revenues $ 1,980 $ 702 $ 2,682
Depreciation and amortization 297 1,441 1,738
Interest income (expense), net 726 266 992
Segment losses (10,955) (4,009) (14,964)
Segment assets 55,048 66,621 121,669
Expenditures for segment assets 46,926 7,633 54,559
<CAPTION>
Three Months Ended September 30, 1998
-------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------
<S> <C> <C> <C>
Revenues $ 1,341 $ 16 $ 1,357
Depreciation and amortization 372 2 374
Interest income (expense), net (235) (60) (295)
Segment losses (2,326) (589) (2,915)
Segment assets 1,859 614 2,473
Expenditures for segment assets 482 512 994
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------
<S> <C> <C> <C>
Revenues $ 5,245 $ 857 $ 6,102
Depreciation and amortization 972 1,513 2,485
Interest income (expense), net 250 150 400
Segment losses (21,954) (6,821) (28,775)
Segment assets 55,048 66,621 121,669
Expenditures for segment assets 50,214 10,575 60,789
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------
<S> <C> <C> <C>
Revenues $ 3,903 $ 21 $ 3,924
Depreciation and amortization 942 2 944
Interest income (expense), net (394) (75) (469)
Segment losses (5,884) (1,628) (7,512)
Segment assets 1,859 614 2,473
Expenditures for segment assets 652 736 1,388
</TABLE>
15
<PAGE>
The following is a reconciliation of the reportable segments' losses and
assets to the Company's consolidated totals (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Losses
Total losses for reportable segments $(14,964) $ (2,915) $(28,775) $ (7,512)
Income (loss) from discontinued operations - (249) (340) 116
Extraordinary item - - (551) -
-------- -------- -------- --------
Consolidated net loss $(14,964) $ (3,164) $(29,666) $ (7,396)
======== ======== ======== ========
<CAPTION>
September 30, September 30,
1999 1998
------------- ------------
Assets
Total assets for reportable segments $ 121,669 $ 2,473
Total current assets, excluding reportable segment assets 69,482 11,332
Deferred financing and offering costs, net 1,425 476
Intangible assets and goodwill, net - 469
Receivable from officer 400 -
Noncurrent assets of discontinued operations - 2,308
------------ ------------
Consolidated total assets $ 192,976 $ 17,058
============ ============
</TABLE>
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Condensed Financial Statements and the Notes thereto contained
herein under Item 1.
The cautionary statements set forth below and elsewhere in this Report
identify important risks and uncertainties that could materially adversely
affect our business, financial condition, results of operations or prospects.
Overview
The Company delivers end-to-end high-speed Internet access and content
solutions. The Company operates two business segments: the visitor-based and
multi-family networks segment provides high-speed Internet access and content
solutions for hotels, apartment communities and other public areas using its
patented OverVoice solution and IPORT server software; and the Internet services
segment provides high-speed Internet access and content solutions for businesses
and consumers, DSL services using HyperDSL lines, always-on access solutions for
ISPs and businesses, and web hosting and other Internet services. The Company
operates a clear-channel Internet and ATM network, and currently peers with
public and private partners, and at national exchange points MAE East, MAE East
ATM, MAE West, and AADS. The Company entered into an agreement with Qwest to
expand the Company's network to 38 metropolitan areas across the United States.
During 1998 and the first three quarters of 1999, the Company derived most
of its revenue from the sale of various Internet services, including always-on
Internet access services, web hosting and domain registration services and, to a
lesser extent, dial-up Internet access. During the third quarter of 1999, the
Company began to increase its visitor-based and multi-family networks revenues,
as it began to install its services in various hotels and apartment communities,
and acquire complementary businesses. The Company incurred significant costs and
devoted substantial resources associated with the research, development and
deployment of its visitor-based and multi-family networks services. The costs
included equipment, contract labor for surveys and the actual property
installation, and Internet bandwidth and local loop connection charges. The
Company capitalizes the costs of installations in hotels and apartment
buildings, including equipment and labor.
Through its bandwidth purchase in the Qwest IRU, the Company has made a
significant investment in its nationwide network infrastructure. The Company's
business plan will require substantial capital to fully develop, deploy, and to
fund start-up losses. The Company also plans to devote considerable sales and
marketing resources to the sale of its services in hotels and apartment
communities and its DSL services in the commercial and residential markets. The
Company plans to continue to expand its research and development activities to
develop new products and services to be offered using its patented OverVoice and
IPORT technologies.
The Company's nationwide deployment of its services, and the expansion of
its network, will result in increased cost of services, selling, general and
administrative expenses and capital expenditures. The Company's ability to
generate positive cash flow from operations and achieve profitability is
dependent upon its ability to successfully expand its customer base for visitor-
based and multi-familty networks and other services and achieve further
operating efficiencies. The Company might not be able to achieve or sustain
revenue growth, positive cash flow or profitability in the future.
Key Developments in the Three Months Ended September 30, 1999
Qwest investment and bandwidth purchase. Qwest invested $15 million in the
Company in Series C Preferred Stock and warrants to purchase 500,000 shares of
the Company's common stock at $12.00 per share. Additionally, the Company and
Qwest entered into a twenty-year IRU agreement. The Company purchased $44
million of capacity on Qwest's fiber network. The Qwest capacity will support
the delivery of the Company's network services to 38 metropolitan areas by year-
end 1999. The Company also committed to purchase $10 million of Qwest's
communications services over five years. The IRU agreement terminates the
Company's $100 million commitment in the parties' June 1998 Memorandum of
Understanding.
Cendant and VirtuaLINC. The Company entered into a five-year agreement
with Cendant Corporation ("Cendant") to offer the Company's services to
approximately 6,000 properties and 700,000 rooms of Cendant's hotel franchise
systems. Cendant property names include Ramada (R), Howard Johnson(R), and Days
Inns(R) and resort properties affiliated with Resort Condominiums International,
LLC (RCI), Cendant's timeshare exchange company.
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<PAGE>
Staybridge Suites by Holiday Inn. The Company entered into a master
agreement to offer the Company's services to 60 hotels and 6,700 rooms access
and content with Staybridge Suites by Holiday Inn. The agreement marked the
first brand standard for broadband Internet access in the extended stay
hospitality market.
Carlson Properties Worldwide. The Company entered into an agreement with
VirtualLINC Corporation ("VirtuaLINC") to service approximately 450 Carlson
hotels and 83,000 rooms, including hospitality brands like Radisson, and others.
Tarragon Realty Trust. The Company entered into an agreement with Tarragon
Realty Trust to provide its services as the in-residence solution for
approximately 75 properties and 16,000 residences. Tarragon announced its plans
to use the CAIS customer support, lobby Internet kiosk powered by IPORT, content
and access system to create a property-wide network to serve its residents.
Acquisition - CAIS Software Solutions (formerly Atcom, Inc.). The Company
acquired Atcom (subsequently renamed CAIS Software Solutions) to combine the
Company's OverVoice hardware technology with Atcom's IPORT server software and
kiosk products to deliver high speed Internet access solutions to hotels,
apartment communities and public areas, including like shopping centers,
airports, travel plazas and lobbies and common areas.
Acquisition - Business Anywhere. The Company acquired Business Anywhere to
expand its public area services portfolio. Business Anywhere centers are self-
operated, self-contained units that offer the most popular business services to
travelers on-the-go, including round-the-clock access to printers, fax machines,
copiers, and PCs with Internet connectivity. The services are activated by
touch-screen, and are remotely monitored.
Unisys. The Company entered into an alliance with Unisys Corporation to
accelerate a full range of Unisys installation, maintenance, and end-user and
network support services for CAIS Internet's solutions in hotels and apartment
communities. The partnership mobilizes a global workforce of Unisys field
operations, project managers and installers to install more than 200 hotel and
apartment properties, or 60,000 units, per month.
Business Segments
Visitor-based and Multi-family Networks. The Company delivers high-speed
Internet access and content solutions to hotels, apartment communities and other
public areas on top of the property's existing telephone system at speeds up to
175 times faster than 56K dial-up modems. As of September 30, 1999, the Company
had master contracts to roll-out services in approximately 6,700 properties and
870,000 units/rooms in: Hilton Hotels; John Q. Hammons hotels; Haverford Hotels;
Town & Country Trust apartment communities; Tarragon Realty Investors;
Staybridge Suites by Holiday Inn; Carlson Properties; Cendant Corporation hotels
in partnership with VirtuaLINC including Ramada, Howard Johnsons and Days Inn
hotels; and trial agreements with several other hotel and apartment
owner/operators.
Internet Services. The primary services in the Company's Internet Services
segment include HyperDSL, always-on access and web hosting:
HyperDSL Services: The Company has initiated its roll-out of a new
always-on, high-speed Internet access service using DSL technology
under the name HyperDSL. The Company partners with Covad
Communications Group to provide HyperLAN DSL services to small and
medium-sized businesses, and Bell Atlantic to provide HyperLINK DSL
services to the residential and SOHO (small office, home office)
markets. During the quarter ended September 30, 1999, the Company
began to offer HyperDSL services in nine additional U.S. metro areas,
raising its service coverage to twelve metro areas. The Company
intends to enter additional markets in 1999 and 2000 as it expands its
network with Qwest.
High-Speed Always-On Access and Other Services: The Company
provides dedicated Internet access to businesses and other Internet
providers, including T-1, fractional T-1, DS-3 and fractional DS-3
services. The Company also provides web hosting and collocation
services. In addition, the Company provides dial-up and other
narrowband connectivity services which are not marketed generally.
Statements of Operations
18
<PAGE>
The Company records revenues for all services, including installation fees,
when the services are provided to customers. For visitor-based services in
hotels and other public areas, the hotel or other partner bills the end-user
customer and the Company bills the partner according to the parties' revenue
sharing agreement. For multi-family services in apartment buildings, the Company
bills the end-user directly. Amounts for services billed in advance of the
service period and cash received in advance of revenues earned are recorded as
unearned revenues and recognized as revenue when earned. Customer contracts for
Internet access and web hosting services are typically for periods ranging from
one month to three years. Internet access services typically require the
customer to purchase equipment and incur the related installation fees. Revenues
from equipment sales are recorded when the related equipment is shipped to the
customer. Dial-up access customers typically subscribe to service contracts on a
monthly or annual basis .
Cost of services represents primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These costs include
long haul bandwidth and local interconnection charges. Cost of services also
includes charges for installation and customer equipment.
Selling, general and administrative expenses are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, research and development, accounting and administration. Selling,
general and administrative expenses will increase over time as the Company's
operations, including the nationwide deployment of hotel and multi-family
services and the expansion of its HyperDSL services, increase. In addition,
significant levels of marketing activity may be necessary for the Company to
build or increase its customer base among hotel guests and apartment residents
to a significant enough size in a particular building or market. Any such
increased marketing efforts may have a negative effect on earnings.
Operating results for any period are not necessarily indicative of results
for any future period. Also, the operating results for interim periods are not
necessarily indicative of the results that might be expected for the entire
year.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net revenues. Net revenues for the three months ended September 30, 1999
increased 98% to approximately $2,682,000, from approximately $1,357,000 for the
three months ended September 30, 1998. Net revenues increased primarily due to
an increase of $686,000 in visitor-based and multi-family network revenues,
$284,000 in DSL revenues, $296,000 in Internet access services, and $59,000 in
web hosting services. The increases were due to an increase in the number of
properties and customers for these services, and the acquisitions of Atcom and
Business Anywhere.
Cost of services. Cost of services for the three months ended September 30,
1999 totaled approximately $2,558,000 or 95% of net revenues, compared to
approximately $776,000 or 57% of net revenues for the three months ended
September 30, 1998. This increase resulted primarily from an increase of
$762,000 in visitor-based and multi-family network charges for equipment,
bandwidth and network installation, $712,000 in additional nationwide bandwidth,
and $308,000 in DSL charges for customer connectivity, equipment and
installation.
Selling, general and administrative. Selling, general and administrative
expenses for the three months ended September 30, 1999 totaled approximately
$13,333,000 or 497% of net revenues, compared to approximately $2,471,000 or
182% of net revenues for the three months ended September 30, 1998. This
increase resulted primarily from an increase of $997,000 related to visitor-
based and multi-family network payroll, $2,041,000 related to Internet services
payroll, $1,232,000 related to visitor-based and multi-family network costs
(e.g. marketing and professional fees and expenses), and $6,592,000 in
advertising and other sales, marketing and administrative expenses.
Depreciation and amortization. Depreciation and amortization totaled
approximately $1,738,000 for the three months ended September 30, 1999, compared
to approximately $374,000 for the three months ended September 30, 1998. This
increase
19
<PAGE>
resulted from an increase of $297,000 in depreciation of capital assets to
support the expansion of the Company's network, $132,000 related to the
amortization of purchased contract rights from visitor-based and multi-family
network partners, and $935,000 related to the amortization of goodwill and
intangibles as a result of acquisitions.
Non-cash compensation. Non-cash compensation totaled approximately
$1,009,000 for the three months ended September 30, 1999, compared to
approximately $356,000 for the three months ended September 30, 1998. This
increase resulted from the amortization of deferred compensation related to
additional stock options granted in 1999.
Interest income (expense). Interest income (expense) totaled income of
approximately $992,000 for the three months ended September 30, 1999, compared
to expense of approximately $295,000 for the three months ended September 30,
1998. This income total was attributable primarily to interest income earned
from the proceeds of the IPO, offset by the amortization of financing costs
related to the Company's equipment financing agreements.
Loss from continuing operations. Loss from continuing operations totaled
approximately $14,964,000 for the three months ended September 30, 1999,
compared to approximately $2,915,000 for the three months ended September 30,
1998, due to the foregoing factors.
Income (loss) from discontinued operations. There was no income or loss
from discontinued operations for the three months ended September 30, 1999 due
to the spinoff of Cleartel in February 1999. Loss from discontinued operations
totaled approximately $249,000 for the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Net revenues. Net revenues for the nine months ended September 30, 1999
increased 56% to approximately $6,102,000, from approximately $3,924,000 for the
nine months ended September 30, 1998. Net revenues increased primarily due to
an increase of $837,000 in visitor-based and multi-family network revenues,
$472,000 in DSL revenues, $671,000 in Internet access services, and $198,000 in
web hosting services. The increases were due to an increase in the number of
properties and customers for these services, and the acquisitions of Atcom and
Business Anywhere.
Cost of services. Cost of services for the nine months ended September 30,
1999 totaled approximately $5,126,000 or 84% of net revenues, compared to
approximately $2,243,000 or 57% of net revenues for the nine months ended
September 30, 1998. This increase resulted primarily from an increase of
$905,000 in visitor-based and multi-family network charges for equipment,
bandwidth and network installation, $1,445,000 in additional nationwide
bandwidth, and $533,000 in DSL charges for customer connectivity, equipment and
installation.
Selling, general and administrative. Selling, general and administrative
expenses for the nine months ended September 30, 1999 totaled approximately
$22,813,000 or 374% of net revenues, compared to approximately $6,712,000 or
171% of net revenues for the nine months ended September 30, 1998. This increase
resulted primarily from increases of $1,612,000 related to visitor-based and
multi-family network payroll, $4,275,000 related to Internet services payroll,
$1,469,000 related to visitor-based and multi-family network costs (e.g.
marketing and professional fees and expenses), and $8,745,000 in advertising and
other sales, marketing and administrative expenses.
Depreciation and amortization. Depreciation and amortization totaled
approximately $2,485,000 for the nine months ended September 30, 1999, compared
to approximately $944,000 for the nine months ended September 30, 1998. This
increase resulted from an increase of $556,000 in depreciation of capital assets
to support the expansion of the Company's network, $175,000 related to the
amortization of purchased contract rights from visitor-based and multi-family
network partners, and $810,000 related to the amortization of goodwill and
intangibles as a result of acquisitions.
20
<PAGE>
Fair value of stock issued to third party for services. Fair value of stock
issued to a third party for services totaled approximately $723,000 for the nine
months ended September 30, 1999. There was no comparable expense for the nine
months ended September 30, 1998.
Non-cash compensation. Non-cash compensation totaled approximately
$4,130,000 for the nine months ended September 30, 1999, compared to
approximately $1,068,000 for the nine months ended September 30, 1998. This
increase resulted from the acceleration of deferred compensation charges that
occurred as a result of the IPO, and from the amortization of deferred
compensation related to additional stock options granted in 1999.
Interest income (expense). Interest income (expense) totaled income of
approximately $400,000 for the nine months ended September 30, 1999, compared to
expense of approximately $469,000 for the nine months ended September 30, 1998.
This income total was attributable primarily to interest income earned from the
proceeds of the IPO, offset by the amortization of financing costs related to
the Company's financing agreements.
Loss from continuing operations. Loss from continuing operations totaled
approximately $28,775,000 for the nine months ended September 30, 1999, compared
to approximately $7,512,000 for the nine months ended September 30, 1998, due to
the foregoing factors.
Income (loss) from discontinued operations. Loss from discontinued
operations totaled approximately $340,000 for the nine months ended September
30, 1999, compared to income of approximately $116,000 for the nine months ended
September 30, 1998. This decrease in income from discontinued operations of
Cleartel resulted primarily from a reduction in net revenues generated from
operator assisted telephone calls.
Extraordinary item - early extinguishment of debt. Extraordinary item -
early extinguishment of debt totaled approximately $551,000 for the nine months
ended September 30, 1999. This charge was related to the write-off of
unamortized debt discount and deferred financing fees associated with the
repayment of the $7 million loan from an investment banking firm. There were no
extraordinary items for the nine months ended September 30, 1998.
Liquidity and Capital Resources
Prior to the IPO, the Company financed its operations with various debt
and private equity placements. During the nine months ended September 30, 1998,
the Company's continuing operations were also financed in part from operating
profits and cash flows generated from its now discontinued operation (Cleartel).
Net cash used in operating activities for the nine month periods ended September
30, 1999 and 1998 was approximately $(18,006) and $(978) respectively. Cash used
in operating activities in each period was primarily affected by the net losses
caused by increased costs relating to the Company's expansion in infrastructure
and personnel and sales and marketing activities for its Internet-related
businesses.
In May 1999, the Company completed the IPO of its common stock. The
Company sold 6,842,100 shares (including the over-allotment option) of common
stock for approximately $130 million, yielding net proceeds to the Company of
approximately $118.2 million after deducting underwriting discounts and
commissions and other fees and expenses. The Company used approximately $12
million of the net proceeds to repay indebtedness and redeem shares of Series B
cumulative mandatory redeemable convertible preferred stock.
At the completion of the IPO, the Company converted 2,827,168 shares of
Series A convertible preferred stock into an equal number of common shares. In
addition, the Company redeemed 745,645 Series B Shares for cash totaling
$3,000,000 (plus accrued interest of $104,000), and converted the remaining
Series B Shares into 81,946 shares of common stock.
In September 1999, the Company issued 125,000 shares of Series C Preferred
Stock and warrants to acquire 500,000 shares of the Company's common stock at an
exercise price of $12.00 per share to Qwest for total gross proceeds of
$15,000,000, less approximately $40,000 of offering costs paid to third parties.
The Series C Preferred Stock ranks prior to the Company's common stock with
respect to dividends and rights upon liquidation, dissolution, or winding up of
the Company. Each holder of Series C Preferred Stock is entitled: (i) to
receive, when, as and if declared by the Company's Board of Directors,
cumulative dividends of $10.20 per annum per share; (ii) to a liquidation
preference equal to the sum of $120.00 per share, plus any accrued but unpaid
dividends; (iii) to
21
<PAGE>
the number of votes equal to the number of whole shares of common stock into
which all of the shares of Series C Preferred Stock held by such holder are
convertible; and (iv) to certain demand and piggyback registration rights.
Subject to certain limitations, each share of Series C Preferred Stock is
convertible, at the option of the holder, into such number of fully paid and
nonassessable shares of common stock at the ratio of ten common shares for each
share of Series C Preferred Stock. The Company shall redeem (i) up to 41,667
shares of the Series C Preferred Stock by the second anniversary of the date of
issuance of the Series C Preferred Stock; and (ii) the remaining shares of the
Series C Preferred Stock upon the third anniversary of the date of issuance of
the Series C Preferred Stock.
Approximately $3.9 million of the proceeds received were allocated to the
value of the warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share. The warrants have been valued at their estimated fair value of
$7.70 per share (or approximately $3,851,000 in the aggregate) based on the
Black-Scholes valuation model. The warrants expire on October 28, 2002.
As the Series C Preferred Stock is immediately convertible into common
stock, the discount on the preferred stock (as a result of the allocation of
proceeds to the warrants) was fully accreted on the date of issuance and is
reflected as a dividend on preferred stock in the accompanying financial
statements.
The Company and Nortel Networks entered into a five-year, $30 million
equipment financing line of credit, dated as of June 4, 1999. The line of credit
bears interest at an annual rate of a commercial prime rate plus 3.75%. The
financing requires the Company to meet certain financial covenants including
EBITDA targets, revenue targets and leverage and debt service ratios. Borrowings
under the financing are secured by a first priority lien on all Nortel Networks
products purchased using the financing. As of September 30, 1999, the Company
had not yet borrowed under this credit facility, and $30 million was available.
In addition, the Company entered into a purchase agreement with Nortel Networks,
dated as April 1, 1999, and committed to purchase $10 million of Nortel
equipment by April 1, 2000. The Company will be subject to a reduction in its
purchase discount percentages after that date if its annual purchases do not
exceed $10 million for the year ended April 1, 2001 and $9.9 million for the
year ended April 1, 2002. The Company and Nortel Networks entered into a First
Amendment to Credit Agreement effective as of September 7, 1999 to amend certain
provisions of the original credit agreement.
The Company and Cisco Systems Capital Corporation entered into a three-
year, $50 million equipment financing line of credit, dated as of June 30, 1999.
Under the facility, $25 million is available during the first year of the
facility and an additional $25 million is available during the second year of
the facility, provided the Company meets certain financial performance
requirements. The line of credit bears interest at an annual rate equal to the
three-month LIBOR plus 6.0%. The facility requires the Company to meet certain
financial covenants including EBITDA targets, revenue targets and leverage and
debt service ratios. Borrowings under the facility are secured by a first
priority lien in all assets of the Company, other than its property securing the
Nortel facility, in which assets Cisco will have a second priority lien. As of
September 30, 1999, the Company had not yet borrowed under this credit facility,
and $25 million was available.
As of September 30, 1999, the Company had cash, cash equivalents, and
short-term investments of approximately $69.5 million. The Company expects that
it will require additional financing to meet its anticipated cash needs for the
next twelve months, and is actively exploring alternatives for such financing.
If such sources of financing are insufficient or unavailable, or if the Company
experiences shortfalls in anticipated revenues or increases in anticipated
expenses, the Company would curtail the planned roll-out of its services and
reduce marketing and development activities.
The Company from time to time engages in discussions involving potential
business acquisitions. Depending on the circumstances, the Company may not
disclose material acquisitions until completion of a definitive agreement. The
Company may determine to raise additional debt or equity capital to finance
potential acquisitions and/or to fund accelerated growth. Any significant
acquisitions or increases in the Company's growth rate could materially affect
the Company's operating and financial expectations and results, liquidity and
capital resources.
Impact of the Year 2000 Issue
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." The
Company's failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the Company's normal business activities and
22
<PAGE>
operations. The Company has formulated and, to a large extent, effected a plan
to address Year 2000 issues.
During 1998, the Company established a Year 2000 compliance program to
coordinate appropriate activity and report to its Board of Directors with regard
to Year 2000 issues. The Company is addressing the Year 2000 issue through a
comprehensive assessment and resolution of both its internal systems and the
systems of its external partners and suppliers.
The Company's internal systems assessment and review consists of
four-phases:
. assessment;
. analysis and planning;
. conversion and testing; and
. implementation.
The Company's assessment of the Year 2000 problem has focused on conducting
an inventory of existing systems, performing risk assessment, prioritizing
systems, and determining resource needs and is substantially complete. The
analysis and planning phase of the Company's Year 2000 compliance program has
involved selecting corrective methods, developing certain standards, determining
conversion sequences, and establishing a detailed time line for correcting Year
2000 issues and is substantially complete. The Company's conversion and testing
phase which has included developing codes and purchasing known fixes,
documenting the effort made, conducting unit and system tests, and scheduling
data migration is substantially complete. As part of the implementation of its
Year 2000 solution, the Company has moved various systems into production,
installed third party solutions, updated operational procedures, and trained
users. This implementation phase is substantially complete. The Company has
completed assessment and remediation of critical systems.
The Company likewise has conducted a four-phase review of the systems of
its partners, suppliers, and other third parties (including equipment providers
and other telecommunications service providers) to monitor both the
vulnerability of such parties to the Year 2000 problem and any potential impact
on the Company. First, the Company identified its critical partners, suppliers,
and vendors. This phase involved requesting information from employees,
analyzing responses, performing risk assessments, prioritizing systems, and
determining resource needs and is fully complete. Secondly, the Company
developed Year 2000 contact standards. This phase, which has involved developing
questionnaires, drafting request letters, and gathering contact addresses and
e-mails is substantially complete. Thirdly, the Company has begun receiving
information through responses to its request letters, researching web sites,
making phone contacts, and summarizing the results of the information received.
Finally, the Company has focused on evaluating different systems,
reviewing such information with senior management, and identifying any
additional resources needed. The Company has developed a contingency plan and a
January 1, 2000 action plan should Year 2000 issues arise.
During the nine months ended September 30, 1999, the Company spent
approximately $43.7 million for capital expenditures related to the upgrade and
continuing build-out of its technical operations and network. The Company
believes that all of this equipment is Year 2000 compliant. The Company expects
to incur additional costs in 1999 in connection with our Year 2000 program,
which the Company believes will not be material. In addition, the Company has
acquired a new billing and customer care system as part of its business
strategy, which the Company believes is Year 2000 compliant. These additional
costs are based on the Company's best estimates and, in management's opinion,
will not have a material adverse effect on its business, financial condition and
results of operations. If the actual costs of implementing the Company's Year
2000 program significantly exceed the Company's estimates, it may have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company currently believes that its most likely, worst case scenario
related to the Year 2000 issue is associated with potential concerns with its
partners' and suppliers' Internet operations. To the extent that one or more of
these third parties experience Year 2000 problems, which would lead to decreased
Internet usage and the delay or inability to obtain necessary data communication
23
<PAGE>
and telecommunication capacity, the Company's network and services could be
adversely affected.
The Company cannot guarantee that it will be able to timely and
successfully modify its products, services and systems to comply with Year 2000
requirements. Any failure to do so could have a material adverse effect on the
Company's operating results. Furthermore, despite the aforementioned testing
performed by the Company and its vendors, the Company's products, services and
systems may contain undetected errors or defects associated with Year 2000 date
functions. In the event any material errors or defects are not detected and
fixed, or third parties cannot timely provide the Company with products,
services or systems that meet the Year 2000 requirements, the Company's
operating results could be materially adversely affected. Known or unknown
errors or defects that affect the operation of the Company's products, services
or systems could result in delay or loss of revenue, interruption of network
services, cancellation of customer contracts, diversion of development
resources, damage to the Company's reputation and litigation costs. The Company
cannot guarantee that these or other factors relating to Year 2000 compliance
issues will not have a material adverse effect on the Company's business.
Subsequent Events
On October 20, 1999, the Company announced that Bass Hotels ("Bass") had
issued a letter of intent for the Company to be a chosen provider of broadband
access, portal content, IPORT kiosk solutions, meeting room and back office
solutions in its hotels and resorts. The letter of intent with Bass gives the
Company entry to negotiate a contract for Bass' 400,000 guest rooms and 2,700
properties worldwide. Bass lodging brands include Holiday Inn(R), Holiday Inn
Express(R), Crowne Plaza(R), Staybridge SuitesSM by Holiday Inn(R) and Inter-
Continental(R) Hotels and Resorts.
On November 10, 1999, the Company announced that it had entered into an
agreement with United Dominion Realty Trust, Inc. ("United Dominion"),
designating the Company as United Dominion's preferred broadband Internet
services provider. The agreement enables the Company to provide services to
more than 80,000 United Dominion apartment homes.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any lawsuit or proceeding which, in the
opinion of its management, is likely to have a material adverse effect on its
business, financial condition or results of operation.
On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet in Maryland U.S. District Court. The complaint charged LodgeNet with
infringement of one of the OverVoice patents, which is directed to the delivery
of high-speed audio and video signals over active telephone wiring. On
September 15, 1999 the Company and LodgeNet entered into a settlement agreement,
and on September 16, 1999 the Company submitted a Stipulation of Dismissal of
the lawsuit, under terms satisfactory to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
All matters discussed in the Registration Statement are hereby
incorporated by reference. The reader is directed to read the entire
Registration Statement, but with regard to this item the reader should read:
Amended and Restated Stock Option Plan, Certain Relationships and Related
24
<PAGE>
Transactions, Description of Capital Stock and Shares Eligible for Future Sale.
The following is a description of the unregistered securities sold by the
Company during the period from July 1, 1999 through September 30, 1999:
The Company granted stock options to employees to purchase an aggregate of
1,316,969 shares of common stock at the fair market value at the dates of the
grants.
The Company issued 2,493,383 and 121,704 shares of common stock in
connection with the acquisitions of Atcom and Business Anywhere, respectively.
The Company issued 17,624 shares of common stock in connection with the
exercise of stock options by former employees.
In September 1999, the Company issued 125,000 Series C Preferred Stock
to Qwest for total gross proceeds of $15,000,000. The Series C Preferred Stock
ranks prior to the Company's common stock with respect to dividends and rights
upon liquidation, dissolution, or winding up of the Company. Each holder of
Series C Preferred Stock is entitled: (i) to receive, when, as and if declared
by the Company's Board of Directors, cumulative dividends of $10.20 per annum
per share; (ii) to a liquidation preference equal to the sum of $120.00 per
share, plus any accrued but unpaid dividends; (iii) to the number of votes equal
to the number of whole shares of Common Stock into which all of the shares of
Series C Preferred Stock held by such holder are convertible; and (iv) to
certain demand and piggyback registration rights. Subject to certain
limitations, each share of Series C Preferred Stock is convertible, at the
option of the holder, into such number of fully paid and nonassessable shares of
common stock at the ratio of ten common shares for each share of Series C
Preferred Stock. The Company shall redeem (i) up to 41,667 shares of the Series
C Preferred Stock by the second anniversary of the date of issuance of the
Series C Preferred Stock; and (ii) the remaining shares of the Series C
Preferred Stock upon the third anniversary of the date of issuance of the Series
C Preferred Stock.
In connection with the Series C Preferred Stock, the Company issued
warrants to Qwest to purchase 500,000 shares of common stock at an exercise
price of $12.00 per share. The warrants have been valued at their estimated fair
value of $7.70 per share (or approximately $3,851,000 in the aggregate) based
upon a Black-Scholes valuation model. The fair value of the warrants has been
recorded as a dividend on preferred stock. The warrants expire on October 28,
2002.
The securities issued in the foregoing transactions were either (i)
offered and sold in reliance upon exemptions from registration set forth in
Sections 3(b) and 4(2) of the Securities Act of 1933, or regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of common stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters or placement agents were involved in the
foregoing issuances and sales.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See Exhibit Index.
B. REPORTS ON FORM 8-K
On September 16, 1999, the Company filed a Current Report on Form 8-K
with respect to the acquisition of Atcom on September 2, 1999. On November 12,
1999, the Company filed an amendment on Form 8-K/A for the purpose of including
financial statements and pro forma financial information with respect to such
acquisition.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C., on
November 15, 1999.
CAIS Internet, Inc.
/s/ Ulysses G. Auger, II
--------------------------------------------
Ulysses G. Auger, II, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/ Barton R. Groh
--------------------------------------------
Barton R. Groh, Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<PAGE>
CAIS INTERNET, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
4.1 Series C Preferred Stock Purchase Agreement between CAIS Internet, Inc. and
U.S. Telesource, Inc. dated September 29, 1999.
4.2 Certificate of Designation of Series C Preferred Stock of CAIS Internet,
Inc.
4.3 Common Stock Warrant of CAIS Internet, Inc.
4.4 Certified Certificate of Amendment of Certificate of Designation of Series
filed in Delaware.
10.1 First Amendment, dated October 27, 1999, to Registration Rights and Lock-Up
Agreement dated September 29, 1999.
10.2 First Amendment to Credit Agreement, made and entered into effective September 7,
1999 by and among the Company and Nortel Networks, Inc.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
Exhibit 4.1
Execution Copy
--------------
CAIS INTERNET, INC.
SERIES C PREFERRED STOCK
PURCHASE AGREEMENT
This SERIES C PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"), dated
---------
as of September __, 1999, by and between CAIS Internet, Inc., a Delaware
corporation (the "Company"), and U.S. Telesource, Inc., a Delaware corporation
-------
(the "Purchaser").
---------
Section 1
Authorization and Sale of Preferred Stock
-----------------------------------------
1.1 Authorization. The Company has authorized the sale and issuance of
-------------
125,000 shares of the Company's Series C Preferred Stock, par value $.01 per
share ("Shares").
1.2 Sale and Issuance of Shares. Subject to the terms and conditions of
---------------------------
this Agreement, Purchaser agrees to purchase from the Company, and the Company
agrees to sell and issue to Purchaser, the Shares at a purchase price of One
Hundred and Twenty Dollars ($120.00) per Share.
Section 2
Closing Dates; Delivery
-----------------------
2.1 Closing. The purchase and sale of the Shares hereunder shall take
-------
place at a closing (the "Closing") on September __, 1999 (the "Closing
------- -------
Date"). The Closing shall be held at the offices of the
- ----
Company at 1255 22nd Street, N.W., Washington, D.C., at 10:00 a.m. local time,
on the Closing Date, or at such other time and place upon which the Company and
Purchaser shall agree.
2.2 Delivery. At the Closing, the Company will deliver to Purchaser a
--------
certificate registered in Purchaser's name representing the Shares to be
purchased against payment of the purchase price therefor. At the Closing,
Purchaser will pay to the Company by wire transfer of immediately available
federal funds per the Company's instructions cash in the amount of Fifteen
Million Dollars ($15,000,000.00).
Section 3
Representations and Warranties of the Company
---------------------------------------------
The Company (including for purposes of this Section 3 all subsidiaries of
the Company) represents and warrants to Purchaser as of the date of this
Agreement as follows:
3.1 Organization; Good Standing. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, is qualified to conduct business and is in good standing under the
laws of each jurisdiction in which the nature of its business or the ownership
or leasing of its properties requires such qualification. The Company has the
requisite corporate power and authority to own and operate its properties and
assets and to carry on its business as currently conducted. A true and correct
copy of the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") is attached hereto as Exhibit A, and a true and correct
- --------------------- ---------
copy of the Company's By-Laws (the "By-
__
<PAGE>
Execution Copy
--------------
Laws") is attached hereto as Exhibit B, which in each case shall be in full for
____ ---------
ce and effect as of the Closing Date (as the Restated Certificate shall be
amended pursuant to the Certificate of Designation (as defined below)).
3.2 Company Shares. The Shares to be issued to Purchaser hereunder will
--------------
be duly authorized, validly issued, fully paid and nonassessable, and will have
the rights, preferences and privileges described in the Restated Certificate and
the Certificate of Series and Determination of Rights and Preferences of Series
C Convertible Preferred Stocks (the "Certificate of Designation"), a true and
--------------------------
correct copy of which is attached hereto as Exhibit C, which shall be in full
---------
force and effect as the Closing Date. Such copy contains all amendments through
the Closing Date. The Company will not amend the Certificate of Designation or
otherwise take any action or fail to take any action that would cause or permit
the Certificate of Designation to be amended or adversely affect the rights,
preferences and privileges of the Shares without Purchaser's prior written
consent.
3.3 Authority; Binding Nature of Agreements.
---------------------------------------
(a) The execution, delivery and performance of this Agreement and all
other agreements and instruments contemplated to be executed and delivered by
the Company in connection herewith have been duly authorized by all necessary
corporate action on the part of the Company and its board of directors (the
"Board"). The Company has all requisite legal and corporate power and
-----
authority to sell and issue the Shares hereunder and to issue the shares of
common stock of the Company, par value $0.01 per share, issuable upon conversion
of the Shares (the "Conversion Stock") and to carry out and perform its
----------------
obligations under the terms of this Agreement.
(b) The Conversion Stock has been duly and validly reserved and, when
issued in compliance with the terms of this Agreement and the Restated
Certificate, will be validly issued, fully paid and nonassessable, and will have
the rights, preferences and privileges described in the Restated Certificate and
the Certificate of Designation. The Shares will be delivered to Purchaser free
of any liens or encumbrances, other than any liens or encumbrances created by or
imposed upon or by virtue of Purchaser; provided, however, that the Shares and
the Conversion Stock are subject to -------- -------
restrictions on transfer under state and/or federal securities laws as set
forth herein and in the Registration Rights and Lock-Up Agreement between the
Company and Purchaser dated the date hereof (the "Registration Rights
-------------------
Agreement"). Except as set forth in the Restated Certificate and the
- ---------
Certificate of Designation, the Shares and the Conversion Stock are not
subject to any preemptive rights or rights of first refusal.
(c) This Agreement and all other agreements and instruments contemplated
to be executed and delivered by the Company in connection herewith constitute
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except to the extent that enforceability
may be limited by applicable bankruptcy, merger, insolvency, moratorium,
fraudulent conveyance or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity regardless of whether such
enforceability is considered in a proceeding in law or equity, and by
limitations on indemnification due to public policy considerations.
2
<PAGE>
Execution Copy
--------------
3.4 No Violation or Default.
-----------------------
(a) The execution, delivery and performance of this Agreement and the
other agreements and instruments contemplated to be executed and delivered by
the Company in connection herewith will not, directly or indirectly (with or
without notice or lapse of time):
(i) contravene, conflict with or result in a material violation of
(i) the Company's Restated Certificate or Bylaws, or (ii) any resolution adopted
by the Company's Board or any committee thereof or the stockholders of the
Company;
(ii) contravene, conflict with or result in a violation of, or give
any governmental body the right to challenge the issuance of the Shares or to
exercise any remedy or obtain any relief under, any legal requirement or any
order to which the Company or any material assets owned or used by it are
subject;
(iii) to the knowledge of the Company, cause any material assets
owned or used by the Company to be reassessed or revalued by any taxing
authority or other governmental body;
(iv) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any governmental body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any governmental authorization
that is held by the Company;
(v) contravene, conflict with or result in a violation or breach of,
or default under, any material contract to which the Company is a party; or
(vi) result in the imposition or creation of any mortgage, pledge,
lien, charge or encumbrance upon or with respect to any material properties or
assets owned or used by the Company.
(b) The Company is not in violation of or in default under its Restated
Certificate or By-Laws or, to the best of the Company's knowledge, (i) any
judgment, order, writ, decree, statute, rule or regulation applicable to it, or
(ii) any mortgage or indenture, or any other material agreement, instrument or
contract to which it is a party or by which it is bound.
3.5 Finders and Brokers.
-------------------
The Company has not engaged any broker, finder or agent, and the Purchaser
has not, and will not, incur, directly or indirectly, as a result of any action
taken by the Company, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Transaction Documents.
In the event that the preceding sentence is in any way inaccurate, the Company
agrees to indemnify and hold harmless Purchaser from any liability for any
commission or compensation in the nature of a finder's fee (and the costs and
expenses of defending against such liability) for which Purchaser, or any of its
officers, directors, employees or representatives, is responsible.
3.6 Reports and Financial Statements; Absence of Certain Changes.
------------------------------------------------------------
(a) The Company has filed all reports required to be filed with the U.S.
Securities and Exchange Commission ("SEC") pursuant to the Securities Act of
---
1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934
--------------
as amended (the "Exchange Act"), since its initial public offering on May 20,
------------
1999 (all such reports, including those to be filed prior
3
<PAGE>
Execution Copy
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to the Closing Date and all registration statements and prospectuses filed by
the Company with the SEC in connection with the Company's initial public
offering, are collectively referred to as the "Company SEC Reports"), and has
------------------
previously furnished or made-available to Purchaser true and complete copies of
all the Company SEC Reports filed, if any, with respect to periods ending after
May 20, 1999 (including any exhibits thereto) and will promptly deliver to
Purchaser any Company SEC Reports filed between the date hereof and the Closing
Date. All of such Company SEC Reports complied at the time they were filed and
declared effective, if applicable, in all material respects with applicable
requirements of the Securities Act and the Exchange Act and the rules and
regulations thereunder. None of such Company SEC Reports, as of their respective
dates (as amended through the date hereof), 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 therein, in light of the circumstances under
which they were made, not misleading. The audited financial statements of the
Company included in the Company SEC Reports comply in all material respects with
the published rules and regulations of the SEC with respect thereto, and such
audited financial statements (i) were prepared from the books and records of the
Company, (ii) were prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis (except as may be
----
indicated therein or in the notes or schedules thereto) and (iii) present fairly
the financial position of the Company as of the dates thereof and the results of
operations and cash flows for the periods then ended. The unaudited financial
statements included in the Company SEC Reports comply in all material respects
with the published rules and regulations of the SEC with respect thereto; and
such unaudited financial statements (i) were prepared from the books and records
of the Company, (ii) were prepared in accordance with GAAP, except as otherwise
permitted under the Exchange Act and the rules and regulations thereunder, on a
consistent basis (except as may be indicated therein or in the notes or
schedules thereto) and (iii) present fairly the financial position of the
Company as of the dates thereof and the results of operations and cash flows (or
changes in financial condition) for the periods then ended, subject to normal
year-end adjustments and any other adjustments described therein or in the notes
or schedules thereto. The foregoing representations and warranties shall also be
deemed to be made with respect to all filings made with the SEC on or before the
Closing Date.
(b) Except as specifically contemplated by this Agreement or reflected in
the Company SEC Reports, since May 20, 1999, there has not been (i) any material
adverse change in the Company's business, assets, liabilities, or operations,
and, to the knowledge of the Company, no event has occurred that is likely to
have a material adverse effect on the Company's business, assets, liabilities or
operations; or (ii) any material change in the Company's accounting principles,
procedures or methods.
3.7 Compliance with Applicable Law. Except as disclosed in the Company
------------------------------
SEC Reports filed prior to the date of this Agreement or in the Company's
Registration State on Form S-1, SEC file number 333-72769, the Company holds all
governmental authorizations necessary for the lawful conduct of its business
under and pursuant to, and the business of the Company is not being conducted in
violation of, any governmental authorization applicable to the Company, except
to the extent that the failure or violation would not in the aggregate have a
material adverse effect on the business, results of operations or financial
condition of the Company.
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3.8 Consents. No consent, approval or authorization of or designation,
--------
declaration or filing with any governmental authority or other third party on
the part of the Company is required in connection with the valid execution and
delivery of this Agreement nor any other agreement or instrument contemplated to
be executed and delivered by the Company in connection with this Agreement, or
the offer, sale or issuance of the Shares and the Conversion Stock, or the
consummation of any other transaction contemplated hereby or thereby, except for
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Shares and the
Conversion Stock under applicable blue sky laws, which qualifications, if
required, will be accomplished in a timely manner.
3.9 Capitalization. The authorized capital stock of the Company consists
--------------
of 100,000,000 shares of Common Stock, of which 22,418,082 shares are issued and
outstanding as of the date of this Agreement, and 25,000,000 shares of preferred
stock, par value $.01 per share, of which 2,827,168 shares are designated as
Series A Preferred Stock (the "Series A Shares"), none of which are issued and
---------------
outstanding, 1,119,679 shares are designated as Series B Preferred Stock, none
of which are issued and outstanding, and 125,000 shares are designated as Series
C Preferred Stock, none of which are issued and outstanding as of the date of
this Agreement. The outstanding shares of Common Stock have been duly
authorized and validly issued in compliance with applicable laws, and are fully
paid and non assessable. The Company has reserved (a) 1,500,000 shares of
Common Stock for issuance upon conversion of the Shares to be issued hereunder,
(b) 5,000,000 shares of Common Stock for issuance pursuant to the Company's
Amended and Restated 1998 Equity Incentive Plan, (c) 3,778,423 shares of Common
Stock for issuance pursuant to other outstanding options and warrants, (d)
2,654,826 shares of Common Stock for issuance in connection with the Company's
acquisition of Atcom, Inc., and (e) 288,371 shares of Common Stock for issuance
in connection with the Company's acquisition of Business Anywhere USA, Inc.
3.10 Environmental Matters. The properties, assets and operations of the
---------------------
Company are in material compliance with all applicable federal, state, local or
foreign laws, rules, regulations, permits, licenses and decrees relating to
environmental matters or the discharge, release, storage, treatment or clean-up
of any materials or substances. No environmental or similar claim has been
asserted (or to the best knowledge of the Company threatened) against the
Company.
3.11 Litigation. There are no actions, suits, proceedings or
----------
investigations pending against the Company or its properties before any court or
governmental agency which could reasonably be expected to have a material
adverse effect on the business, results of operations or financial condition of
the Company (nor, to the best of the Company's knowledge, is there any threat
thereof). The Company is not a party or subject to the provision of any order,
writ, injunction or decree of any court or governmental agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
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3.12 Title to Properties and Assets; Liens. The Company has good
-------------------------------------
and marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (i) the lien of current taxes not yet due and
payable, (ii) possible minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the Company, and which have not arisen otherwise than
in the ordinary course of business and (iii) liens to secure vendor financing or
installation purchases.
3.13 Intellectual Property; Trademarks.
---------------------------------
(a) The Company has the right to use, free and clear of all liens, charges,
claims and restrictions, all patents, trademarks, service marks, trade names,
copyrights, licenses and other intellectual property rights necessary to the
business of the Company as presently conducted. To the best of the Company's
knowledge, the Company is not infringing upon or otherwise acting adversely to
the right or claimed right of any other person under or with respect to the
foregoing.
(b) The Company is at least a 50 percent owner of the entire right, title
and interest in and to the subject U.S. and foreign (excluding Israel) patents
and patent applications included in Schedule 3.13 (the "Properties"), and, in
------------- ----------
particular, is a 100 percent owner of the entire right, title and interest in
and to U.S. Application No. 08/893,403 and corresponding PCT Application No.
PCT/US971/12045.
(c) To the best knowledge of the Company, the Properties encompass all
patents and patent applications relating to communication systems that are
wholly or partially owned by Inline Connection Corporation.
(d) The Company has undertaken a reasonable investigation and has
determined that there are no claims, actions or proceedings, pending or to the
best knowledge of the Company threatened, or other information that challenges
the validity and/or the enforceability of any of the claims in the patents or of
any of the claims of the patent applications that may issue with respect to the
Properties.
(e) The Company will use commercially reasonable efforts to prosecute (to
the extent that the Company has a legal right to do so) all of the pending
patent applications listed in Schedule 3.13, with a view to obtaining broad
patent protection covering technology (known as "Overvoice") relating to
---------
the simultaneous transmission of voice and data over a single traditional
copper telephone line at speeds of up to 300 times those of conventional
28.8k dial-up modems and to enable a user to have both designated high-
speed Internet access and complete use of his telephone simultaneously over
one traditional telephone line.
(f) There are no encumbrances, third party or otherwise, against any
of the Properties.
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3.14 Tax Matters. The Company, any predecessor of the Company and
-----------
all current and former members for income tax purposes of any affiliated group
of corporations of which the Company or any such predecessor is or has been a
member, Cleartel, Inc. and Cleartel, L.P. (collectively, the "Taxpayers") have
---------
duly filed all tax reports and returns required to be filed by them or have
requested and obtained appropriate extensions, including all federal, state,
local and foreign tax returns and reports. The Taxpayers have paid in full all
taxes required to be paid by such Taxpayers before such payment became
delinquent or have otherwise paid any required interest and penalties relating
thereto or have made adequate provision, in conformity with U.S. GAAP
consistently applied, for the payment of such taxes as well as taxes which may
subsequently become due. There are no audits known by the Company to be pending
of the tax returns of the Company or any other Taxpayer, and there are no claims
known by the Company or any Taxpayer which have been or maybe asserted relating
to any tax returns filed for any year which if determined adversely would result
in the assertion by any governmental agency of any material deficiency.
3.15 Investment Company. Immediately following the Closing, after
------------------
giving effect to the transactions contemplated hereby, neither the Company nor
any person, firm or entity controlling, controlled by or under common control
with the Company will be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
3.16 Employer Matters. Except as disclosed in the Registration
----------------
Statement, or as set forth in Schedule 3.16, the Company does not have any
-------------
employment contracts with any of its employees that are not terminable at will
and does not have any collective bargaining agreement covering any of its
employees. The Company is not aware of any labor organization activity
involving its employees. The Company is in compliance in all material respects
with the requirements of (i) the Employee Retirement Income Security Act of
1974,as amended, and (ii) the Internal Revenue Code of 1986, as amended, in each
case relating to employee benefit plans, programs and agreements.
3.17 Condition of System. All material properties, equipment and
-------------------
systems of the Company are in good repair, working order and condition and are
in material compliance with all standards and rules imposed (i) by any
governmental agency or authority in which such properties, equipment and/or
systems are located or operated and (ii) under any agreements with customers.
3.18 Fees; License Compliance. The Company has paid all material
------------------------
franchise, license or other fees and charges which have become due in respect of
its business and has made appropriate provisions as is required by GAAP for any
such fees and charges which have accrued. The Company has duly secured all
necessary and material permits, licenses, consents and authorizations from and
have filed all required and material registrations, applications, reports and
other documents with, the appropriate governmental agencies, authorities and
commissions and other entities exercising jurisdiction over the business of the
Company. All of the Company's licenses, including licenses held through or by
affiliated entities, are valid and in full force and effect without conditions
except such conditions as are generally applicable to holders of licenses. To
the best of the Company's knowledge, no event has occurred and is continuing
which could result in the termination, revocation or adverse modification of any
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license. The Company does not have any reason to believe that its licenses,
including licenses held through or by its affiliated entities, will not be
renewed in the ordinary course.
3.19 No Conflict of Interest. Except as disclosed in the
-----------------------
Registration Statement or as set forth in the Schedule 3.19, the Company is not
-------------
indebted, directly or indirectly, to any of its officers, directors or
stockholders or to their respective spouses or children, in any amount
whatsoever, other than for normal travel advances or reimbursement for normal
business expenses; and none of such officers, directors or stockholders, or any
members of their immediate families is indebted to the Company. Schedule 3.19
-------------
sets forth a description of all transactions since January 1, 1996, between the
Company and any of its officers, directors and stockholders, and their
respective spouses and children in which such persons had a direct or indirect
material interest which are not disclosed in the Registration Statement.
3.20 Agreements; Action.
------------------
(a) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that may involve (i) obligations (contingent
or otherwise) of, or payments to, the Company in exercise of $50,000, (ii) the
license of any patent, copyright, trade secret or other proprietary rights to or
from the Company, (iii) provisions restricting or affecting the development,
manufacture or distribution of the Company's products or services or (iv)
indemnification by the Company with respect to infringements of proprietary
rights.
(b) The Company is not a party to and is not bound by any contract,
agreement or instrument, and is not subject to any restriction under its
Restated Certificate or its By-Laws, that materially adversely affects its
business as now conducted or as proposed to be conducted, or its properties or
financial condition.
(c) The Company has not engaged in the past three months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation or corporations,
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets of
the Company or a transaction or series of related transactions in which more
than 50 percent of the voting power of the Company is disposed of, or (iii)
regarding any other form of sale, liquidation, dissolution or winding up of the
Company.
(d) Except as disclosed in the Registration Statement or as provided
in Schedule 3.20, the Company has not granted or agreed to grant any
-------------
registration rights, including piggy back rights, to any person or entity.
3.21 Complete Copies of Requested Documents. The Company has delivered or
--------------------------------------
made available true and complete copies of each document that has been
reasonably requested by Purchaser.
3.22 Full Disclosure. Neither this Agreement (including all Exhibits
---------------
hereto) nor any of the other agreements or instruments contemplated to be
executed and delivered by the
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Company in connection with this Agreement contain any untrue statement of
material fact; and none of such documents omits to state any material fact
necessary to make any of the representations, warranties or other statements or
information contained therein not misleading.
Section 4
Representations and Warranties of Purchaser
-------------------------------------------
Purchaser hereby represents and warrants to the Company with respect to the
purchase of the Shares by Purchaser, as follows:
4.1 Experience; Speculative Nature of Investment. 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 acknowledges that its
investment in the Company is highly speculative and entails a substantial degree
of risk and Purchaser is in a position to lose the entire amount of such
investment.
4.2 Investment. Purchaser is acquiring the Shares and the underlying
----------
Conversion Stock for investment for its own account, not as a nominee or agent,
and not with the view to, or for resale in connection with, any distribution
thereof. Purchaser is an "accredited investor" within the meaning of Regulation
D, Rule 501(a), promulgated by the SEC.
4.3 Restricted Securities. Purchaser acknowledges that the Shares and the
---------------------
underlying Conversion Stock must be held indefinitely unless subsequently
registered under the Securities Act or unless an exemption from the registration
requirements of the Securities Act is available.
4.4 Access to Data. Purchaser has had an opportunity to discuss the
--------------
Company's business, management and financial affairs with the Company's
management. Purchaser has had an opportunity to ask questions of officers of the
Company, which questions were answered to its satisfaction. Purchaser
understands that such discussions, as well as any other written information
issued by the Company, were intended to describe certain aspects of the
Company's business and operations, but were not an exhaustive description.
4.5 Authority; Binding Nature of Agreements.
---------------------------------------
(a) The execution, delivery and performance of this Agreement and all
other agreements and instruments contemplated to be executed and delivered by
Purchaser in connection herewith have been duly authorized by all necessary
corporate action on the part of Purchaser and its board of directors. Purchaser
has all requisite legal and corporate power and authority to purchase the Shares
hereunder.
(b) This Agreement and all other agreements and instruments contemplated
to be executed and delivered by Purchaser in connection herewith constitute the
legal, valid and binding obligations of Purchaser, enforceable against Purchaser
in accordance with their terms, except to the extent that enforceability may be
limited by applicable bankruptcy, merger, insolvency, moratorium, fraudulent
conveyance or other laws affecting the enforcement of creditors' rights
generally and by general principles of equity regardless of whether such
enforceability is considered in a proceeding in law or equity, and by
limitations on indemnification due to public policy considerations.
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(c) There is no pending proceeding, and, to Purchaser's knowledge, no
person has threatened to commence any proceeding that challenges, or that may
have the effect of preventing, delaying, making illegal or otherwise interfering
with Purchaser's ability to comply with or perform its obligations and covenants
under this Agreement and under all other agreements and instruments contemplated
to be executed and delivered by Purchaser in connection herewith, and, to the
knowledge of Purchaser, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that might directly or indirectly give rise to
or serve as a basis for the commencement of any such proceeding.
4.6 Brokers or Finders. Purchaser has not engaged any broker, finder or
------------------
agent, and the Company has not, and will not, incur, directly or indirectly, as
a result of any action taken by Purchaser, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in connection with
the purchase of the Shares. In the event that the preceding sentence is in any
way inaccurate, the Purchaser agrees to indemnify and hold harmless the Company
from any liability for any commission or compensation in the nature of any such
fee (and the costs and expenses of defending against such liability) for which
the Company or any of its officers, directors, employees or representatives, is
held responsible.
4.7 Tax Liability. Purchaser has reviewed with its own tax
-------------
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. With respect to
such matters, Purchaser has relied solely on such advisors and not on any
statements or representations of the Company or any of its representatives other
than the representations and warranties set forth herein. Purchaser understands
that it (and not the Company) shall be responsible for its own tax liability
that may arise as a result of this investment or the transactions contemplated
by this Agreement.
Section 5
Conditions to Purchaser's Obligations to Close
----------------------------------------------
Purchaser's obligations to purchase the Shares at the Closing are, unless
waived by Purchaser, subject to the fulfillment of the following conditions:
5.1 Representations and Warranties Correct. 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.
5.2 Covenants. All covenants and agreements contained in this Agreement
---------
and the other agreements and instruments contemplated herewith to be performed
by the Company on or prior to the Closing shall have been performed or complied
with in all materials respects.
5.3 Blue Sky. The Company shall have obtained all necessary Blue Sky law
--------
permits and qualifications, or have the availability of exemptions therefrom,
required by any state for the offer and sale of the Shares.
5.4 Registration Rights Agreement. The Company shall have executed and
-----------------------------
delivered the Registration Rights Agreement as of the Closing Date.
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5.5 Opinion of Company's Counsel. The Purchaser shall have received
----------------------------
from Swidler Berlin Shereff Friedman, LLP, counsel to the Company, an opinion
addressed to it, dated the Closing Date, is substantially the form of Exhibit D.
---------
Section 6
Conditions to Company's Obligations to Close
--------------------------------------------
The Company's obligation to sell and issue the Shares at the Closing is,
unless waived by the Company, subject to the fulfillment of the following
conditions:
6.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by Purchaser in Section 4 hereof shall be true and correct in
all material respects as of the Closing Date.
6.2 Covenants. All covenants and agreements contained in this Agreement
---------
and all other agreements and instruments contemplated herewith to be performed
by Purchaser on or prior to the Closing shall have been performed or complied
with in all material respects.
6.3 Blue Sky. The Company shall have obtained all necessary blue sky law
--------
permits and qualifications, or have the availability of exemptions therefrom,
required by any state for the offer and sale of the Shares.
6.4 Registration Rights Agreement. Purchaser shall have executed and
-----------------------------
deliveredthe Registration Rights Agreement as of th e Closing Date.
Section 7
Confidential Information
------------------------
7.1 Confidential Company Information. Purchaser covenants and agrees that
--------------------------------
it shall maintain the confidentiality of all nonpublic information related to
the Company made available to it and/or any of its representatives by or on
behalf of the Company ("Confidential Company Information"). Purchaser further
--------------------------------
covenants and agrees that it shall not disclose any Confidential Company
Information to any person or entity, other than its officers, directors,
employees, attorneys, accountants and other agents with a legitimate need for
such information (which individuals and entities Purchaser shall cause to comply
with this Section 7.1), except as required by law, without the prior written
consent of the Company. Purchaser agrees that violation of this Section 7.1
would cause immediate and irreparable damage to the business of the Company, and
consents to the entry of immediate and permanent injunctive relief for any
violation hereof.
7.2 Confidential Purchaser Information. The Company covenants and agrees
----------------------------------
that it shall maintain the confidentiality of all nonpublic information related
to Purchaser made available to it and/or any of its representatives by or on
behalf of Purchaser ("Confidential Purchaser Information"). The Company further
covenants and agrees that it shall not disclose any Confidential Purchaser
Information to any person or entity, other than its officers, directors,
employees, attorneys, accountants and other agents with a legitimate need for
such information (which individuals and entities the Company shall cause to
comply with this Section 7.2), except as required by law, without the prior
written consent of Purchaser. The Company agrees that violation of this Section
7.2 would cause immediate and irreparable damage to the business of
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Purchaser, and consents to the entry of immediate and permanent injunctive
relief for any violation hereof.
Section 8
Miscellaneous
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8.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the internal laws of the State of New York, without regard to the conflicts of
laws provisions thereof.
8.2 Jurisdiction; Jury Trial Waiver. The parties hereto hereby
------------------------------
irrevocably submit to the exclusive jurisdiction of the state and federal courts
located in the State of New York with respect to any action or proceeding
arising out of this Agreement or in any way arising here from or relating
hereto. THE PARTIES HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING INSTITUTED BY ANY PARTY AGAINST ANY OTHER PARTY ARISING ON, OUT OF OR
BY REASON OF THIS AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT BY ANY PARTY OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISING OUT OF OR RELATED TO THE RELATIONSHIP
BETWEEN THE PARTIES.
8.3 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by Purchaser and the closing of
the transactions contemplated hereby.
8.4 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, permitted assigns, heirs, executors and administrators of the
parties hereto; provided, however, that the rights of Purchaser to purchase the
-------- -------
Shares shall not be assignable without the prior written consent of the Company.
8.5 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto at the Closing constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that Purchaser may, with the Company's prior written consent,
- -------- -------
waive, modify or amend any provision hereof governing the rights and obligations
of Purchaser.
8.6 Notice, etc. All notices and other communications required or
------------
permited hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to Purchaser, at Purchaser's address, 700 Qwest Tower, 555
Seventeenth Street, Denver, Colorado 80202, or at such other address as
Purchaser shall have furnished to the Company in writing, or (b) if to the
Company, at the Company's address: 1255 22nd Street, N.W., Washington, D.C.
20037, or at such other address as the Company shall have furnished to
Purchaser, and addressed to the attention of the Chief Executive Officer. Each
such notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered
personally, or, if sent by mail, at the earlier of its receipt or seventy-two
(72) hours after the same has been
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deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and mailed as aforesaid.
8.7 Delays or Omissions. Except as expressly provided herein, no delay or
-------------------
omission to exercise any right, power or remedy accruing to either party to this
Agreement upon any breach or default of the other party under this Agreement,
shall impair any such right, power or remedy of such nondefaulting party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of
either party of any breach or default under this Agreement, or any waiver on the
part of either party of any provisions or conditions of this Agreement, must be
in writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or otherwise
afforded to either party to this Agreement, shall be cumulative and not
alternative.
8.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the party actually
executing such counterparts, and all of which together shall constitute one
instrument.
8.9 Severability. In the event that any provision of this Agreement becomes
------------
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision; provided, however, that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to either party.
8.10 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
8.11 Expenses. The Company and Purchaser shall bear their own expenses
--------
with respect to this Agreement and the transactions contemplated hereby.
[Signatures appear on the following page]
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The foregoing Series C Preferred Stock Purchase Agreement is hereby
executed as of the date first above written.
"COMPANY"
CAIS INTERNET, INC.
By: /s/ Ulysses G. Auger, II
__________________________
Chief Executive Officer
"PURCHASER"
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
__________________________
Senior Vice President of
Corporate Development
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EXHIBIT A
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Amended and Restated Certificate of Incorporation
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EXHIBIT B
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By-Laws
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EXHIBIT C
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Certificate of Designation
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EXHIBIT D
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Opinion of Company's Counsel
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SCHEDULES
TO
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
The following schedules refer to the Series C Preferred Stock Purchase
Agreement (the "Agreement"), dated as of September __, 1999, among CAIS
Internet, Inc. (the "Company") and U.S. Telesource, Inc. (the "Purchaser").
Nothing in the following schedules is intended to broaden the scope of
any representation or warranty contained in the Agreement or to create any
covenant on the part of the Company.
To the extent more than one representation and warranty contained in
the Agreement requires the same disclosure, the appearance of such disclosure on
any single item herein shall serve as disclosure for all other representations
and warranties to which such disclosure applies. The failure by the Company to
cross-reference any disclosure on any particular schedule shall not constitute a
breach by the Company of the applicable representation or warranty as long as
the matter is disclosed elsewhere in these schedules.
Inclusion of any item in the schedules (1) does not represent a
determination by the Company that such item is material nor shall it be deemed
to establish a standard of materiality (it being the intent that the Company
shall not be penalized for having disclosed more than it may be required by the
terms of the Agreement), (2) does not represent a determination by the Company
that such item did not arise in the ordinary course of business, and (3) shall
not constitute, or be deemed to be, an admission concerning such item by the
Company. The items in the schedules are descriptions or brief summaries of
certain aspects of the Company and the Company's business and are necessarily
not complete. Accordingly, the schedules are qualified in their entirety by
reference to the more detailed information in documents attached hereto or
previously delivered or made available to the Purchaser and its representatives.
Capitalized terms used but not defined herein shall have the same
meanings ascribed to them in the Agreement. The headings in the following
schedules are for reference only and shall not affect the disclosures contained
therein.
19
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Execution Copy
--------------
SCHEDULE 3.13
TO
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
As of the date hereof, the Company owns at least a fifty percent (50%)
of the entire right, title and interest in and to the following subject U.S. and
foreign (excluding Israel) patents and patent applications:
The Company is a licensee and joint-owner of patents and patent
applications of Inline Connection Corporation ("Inline") relating to the Over
Voice technology. The Company, together with Inline, has three U.S. patents and
ten U.S. patent applications. One of these ten patent applications has recently
been allowed and, therefore, is expected to become patents in the next several
months.
Together with Inline, who also owns 50%, the Company owns 50% of all U.S.
and foreign (with the exception of Israel) patents and patent applications
relating to the OverVoice technology, except for the patent applications
relating to the OverVoice technology filed in Canada, Europe, Mexico, Australia
and New Zealand, in which the Company owns 100%.
The first U.S. patent granted relates to transmission of video over active
voice telephone wires. Related patents have also been obtained in Canada and
from the European Patent Office, covering Germany, France and the United
Kingdom. In addition, a patent was issued in South Korea and a division
application was filed in Europe.
The second U.S. patent granted relates to some or all aspects of the
following systems, among others:
. provision of high-speed Internet service through the communication of
Ethernet signals over the active telephone wiring in residences, hotels,
apartment buildings and similar structures;
. provision of video services over the telephone writing in the same
structures;
. provision of webTV-type services over the telephone wiring in these
structures;
. creation of a standard Ethernet network, using existing telephone
wiring, among all personal computers in a structure; and
. communication of Ethernet signals over 1,000 feet over a single active
telephone line.
Novel ideas are embodied in many of the different parts that make up these
systems. Among these parts are:
. different electronic processes for converting the video and data
signals;
20
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Execution Copy
--------------
. special connectors that are easy to install, convenient to use and
promote smooth signal flow across the wiring;
. different arrangements of the components to facilitate the operation of
the systems; and
. special "command and control" procedures that help implement the
different applications.
The third U.S. patent granted relates new features related to communication
of video and data over active telephone wires. These additional features are
also embodied in applications filed by the Inline in Israel and under the Patent
Cooperation Treaty, and in applications the Company has filed in Canada, Europe,
Mexico, Australia and New Zealand.
Pursuant to the Company's license agreement with Inline, the Company has
the exclusive right to make, use and sell the OverVoice technology for all
structures in the United States, except for single family residential units and
certain food establishments, for which the Company has non-exclusive rights.
The Company further has the exclusive right to make, use and sell under all
foreign patents and patent applications relating to the OverVoice technology for
all structures except for single family residential units and certain food
establishments, for which the Company has non-exclusive rights, with the
exception of Israel, which Inline reserved for itself.
Business Anywhere USA, Inc. ("BAC"), a subsidiary of the Company, is the
assignee to US Patent 5,901,067 and US Patent Application 09/088,213. This
intellectual property was assigned to BAC by Kim Kao.
Please see the attached documents for a list of patents and patent
applications held by Atcom, Inc., a subsidiary of the Company.
21
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Execution Copy
--------------
SCHEDULE 3.16
TO
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
Except as set forth in the Company's Registration Statement or as set forth
below, as of the date hereof, the Company does not have any (i) employment
contracts with any of its employees that are not terminable at will, or (ii)
collective bargaining agreement covering any of its employees.
I. Employment Contracts
--------------------
1. On March 10, 1999, CAIS, Inc., a subsidiary of the Company, entered into an
Employment Agreement with Stephen Price. Under the terms of the agreement,
CAIS, Inc. may not terminate the agreement and discharge Mr. Price without good
cause for one year from the date of the agreement.
2. On March 10, 1999, CAIS, Inc., a subsidiary of the Company, entered into an
Employment Agreement with Durand Achee. Under the terms of the agreement, CAIS,
Inc. may not terminate the agreement and discharge Mr. Achee without good cause
for eighteen months from the date of the agreement.
II. Collective Bargaining Agreements
--------------------------------
None.
22
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Execution Copy
--------------
SCHEDULE 3.19
TO
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
Except as set forth in the Company's Registration Statement or as set forth
below, as of the date hereof, the Company is not indebted, directly or
indirectly, to any of its officers, directors or stockholders or to their
respective spouses or children, in any amount whatsoever, other than for normal
travel advances or reimbursement for normal business expenses; and none of such
officers, directors or stockholders, or any member of their immediate families
is indebted to the Company.
None.
Additionally, set forth below, is a description of all transactions since
January 1, 1996, between the Company and any of its officers, directors and
stockholders and their respective spouses and children in which such persons had
a direct or indirect material interest which are not disclosed in the Company's
Registration Statement.
None.
23
<PAGE>
Exhibit 4.2
CERTIFICATE OF DESIGNATION OF SERIES
AND DETERMINATION OF RIGHTS AND PREFERENCES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
CAIS INTERNET, INC.
CAIS Internet, Inc., a Delaware corporation (the "Company"), acting
pursuant to Section 151 of the General Corporation Law of Delaware, does hereby
submit the following Certificate of Designation of Series and Determination of
Rights and Preferences of its Series C Convertible Preferred Stock.
FIRST: The name of the Company is CAIS Internet, Inc.
SECOND: By unanimous consent of the Board of Directors of the Company (the
"Board"), dated as of September __, 1999, the following resolutions were duly
adopted:
WHEREAS, the Amended and Restated Certificate of Incorporation of the
Company (the "Certificate of Incorporation") authorizes 25,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), issuable from
time to time in one or more series;
WHEREAS, the Board is authorized, subject to certain limitations prescribed
by law and certain provisions of the Certificate of Incorporation, to establish
and fix the number of shares to be included in any series of Preferred Stock and
the designation, rights, preferences, powers, restrictions and limitations of
the shares of such series; and
WHEREAS, the Board deems it advisable to establish a series of Preferred
Stock, designated as Series C Convertible Preferred Stock, par value $.01 per
share.
NOW, THEREFORE, BE IT RESOLVED, that the series of Preferred Stock
designated as Series C Convertible Preferred Stock is hereby authorized and
established; and
FURTHER, RESOLVED, that the Board does hereby fix and determine the
designation, rights, preferences, powers, restrictions and limitations of the
Series C Convertible Preferred Stock as follows:
Section 1. Designation; Rank.
This series of cumulative convertible Preferred Stock shall be designated
and known as the "Series C Preferred Stock." The number of shares constituting
the Series C Preferred Stock shall be 125,000 shares. The Series C Preferred
Stock shall, with respect
<PAGE>
to dividends and rights upon liquidation, dissolution or winding up, whether
voluntary or involuntary, rank prior to the common stock of the Company, par
value $.01 per share (the "Common Stock"), and any other series of Preferred
Stock ("Other Preferred Stock").
Section 2. Dividends.
The holders of outstanding shares of Series C Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
the assets of the Company which are, by law, available for such payment,
cumulative dividends of $10.20 per annum per share, and no more, payable
quarterly on the fifteenth day of December, March, June and September in each
year commencing with a payment on December 15, 1999 of dividends accrued from
the date of issuance, and in preference and priority to any payment of any
dividend on Common Stock or Other Preferred Stock. Accruals of dividends shall
not bear interest.
Section 3. Liquidation Preference.
(a) Upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, before any distribution or payment shall be
made to the holders of any Common Stock or Other Preferred Stock, the holders of
Series C Preferred Stock shall be entitled to be paid out of the remaining
assets of the Company legally available for distribution with respect to each
share of Series C Preferred Stock an amount equal to the sum of (i) $120.00 per
share, as adjusted for any stock dividends, combinations or splits with respect
to such shares (the "Original Series C Issue Price") plus (ii) any accrued but
unpaid dividends thereon (whether or not declared) (such sum, the "Series C
Liquidation Value"). If upon any such liquidation, dissolution or winding up of
the Company the remaining assets of the Company available for distribution to
its stockholders shall be insufficient to pay the holders of shares of Series C
Preferred Stock the full Series C Liquidation Value, the holders of shares of
Series C Preferred Stock shall share ratably in any distribution of the
remaining assets of the Company in proportion to the respective amounts which
would otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(b) After payment in full of the Series C Liquidation Value, the
remaining assets of the Company legally available for distribution, if any,
shall be distributed to the holders of any Other Preferred Stock entitled to a
preference over the Common Stock and, thereafter, to the holders of Common
Stock.
(c) The value of any property not consisting of cash which is
distributed by the Company to the holders of the Series C Preferred Stock
pursuant to Section 3(a) or otherwise will equal the Fair Market Value (as
defined below) thereof. For purposes hereof, the "Fair Market Value" of any
property shall mean the fair market value thereof as determined in good faith by
the Board; provided, however, that the value of any securitieswill be determined
-------- -------
as follows:
2
<PAGE>
(i) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (ii) below:
(A) If traded on a securities exchange or through the Nasdaq National
Market, the value shall be deemed to be the average of the closing
prices of the securities on such quotation system over the thirty
(30) day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be deemed to be
the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days
prior to the closing ; and
(C) If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by the Board and the
holders of at least a majority of the voting power of all then
outstanding shares of Series C Preferred Stock.
(ii) The method of valuation of securities subject to investment letter
or other restrictions on free marketability (other than restrictions
arising solely by virtue of a stockholder's status as an affiliate or
former affiliate) shall be to make an appropriate discount from the
market value determined as above in (i)(A), (B) or (C) to reflect the
approximate fair market value thereof, as mutually determined by the
Board and the holders of at least a majority of the voting power of all
then outstanding shares of Series C Preferred Stock.
Section 4. Voting Rights.
Each holder of outstanding shares of Series C Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Common
Stock into which all of the shares of Series C Preferred Stock held by such
holder are convertible (as adjusted from time to time pursuant to Section 5
hereof), at each meeting of stockholders of the Company (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Company for their action or consideration. Except as
provided by law or by the express provisions hereof, holders of Series C
Preferred Stock shall vote together with the holders of Common Stock as a single
class.
Section 5. Conversion Rights.
The holders of the Series C Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series C Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time and from time to
time (but subject to the
3
<PAGE>
limitation set forth in Section 6(i)), into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Original
Series C Issue Price by the Conversion Price (as defined below) in effect at the
time of conversion. The Conversion Price at which shares of Common Stock shall
be deliverable upon conversion of Series C Preferred Stock without the payment
of additional consideration by the holder thereof (the "Conversion Price") shall
initially be $12.00. Such initial Conversion Price and the rate at which shares
of Series C Preferred Stock may be converted into shares of Common Stock, shall
be subject to adjustment as provided below.
In the event of a liquidation of the Company as set forth in Section 3
above, the Conversion Rights shall terminate at the close of business on the
first full day preceding the date fixed for the payment of any amounts
distributable on liquidation to the holders of Series C Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Series C Preferred Stock. In lieu of fractional
shares, the Company shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(c) Mechanics of Conversion.
-----------------------
(i) In order to convert shares of Series C Preferred Stock into
shares of Common Stock, the holder shall surrender the
certificate or certificates for such shares of Series C Preferred
Stock at the office of the transfer agent (or at the principal
office of the Company if the Company serves as its own transfer
agent), together with written notice that such holder elects to
convert all or any number of the shares represented by such
certificate or certificates. Such notice shall state the number
of shares of Series C Preferred Stock which the holder seeks to
convert. If required by the Company, certificates surrendered for
conversion shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to
the Company, duly executed by the registered holder or his or its
attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent or the Company
shall be the conversion date ("Conversion Date"). As soon as
practicable after the Conversion Date, the Company 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 certificate representing the shares of Series C 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.
4
<PAGE>
(ii) The Company shall at all times during which the Series C
Preferred Stock shall be outstanding, reserve and keep available
out of its authorized but unissued stock, for the purpose of
effecting the conversion of the Series C Preferred Stock, such
number of its duly authorized shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all
outstanding Series C Preferred Stock. Before taking any action
which would cause an adjustment reducing the Conversion Price
below the then par value of the shares of Common Stock issuable
upon conversion of the Series C Preferred Stock, the Company will
take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock
at such adjusted Conversion Price.
(iii) Upon any conversion, the Company shall promptly pay in cash
or, to the extent sufficient funds are not then legally available
therefor, in Common Stock (at the Common Stock's Fair Market
Value as of the date of such conversion) or a combination of cash
and Common Stock, any accrued but unpaid dividends (whether or
not declared) on the shares of Series C Preferred Stock being
converted.
(iv) All shares of Series C Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such
shares, including the rights, if any, to receive dividends,
notices and to vote, shall immediately cease and terminate on the
Conversion Date, except only the right of the holders thereof to
receive shares of Common Stock in exchange therefor, and if
applicable, cash for any fractional shares of Common Stock. Any
shares of Series C Preferred Stock so converted shall be retired
and cancelled and shall not be reissued, and the Company may from
time to time take such appropriate action as may be necessary to
reduce the number of shares of authorized Series C Preferred
Stock accordingly.
(v) If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities Act
of 1933, as amended (the "1933 Act"), the conversion may, at the
option of any holder tendering Series C Preferred Stock for
conversion, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable
upon such conversion of the Series C Preferred Stock shall not be
deemed to have converted such Series C Preferred Stock until
immediately prior to the closing of the sale of securities.
5
<PAGE>
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Subsection 5(d), the
-------------------
following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities, excluding rights or options granted
to employees, vendors, officers, directors and executives
of, and consultants or shareholders to, the Company in an
amount not exceeding the number of Reserved Employee Shares.
(B) "Original Issue Date" shall mean the date on which the
first share of Series C Preferred Stock is first issued.
(C) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities directly or
indirectly convertible into or exchangeable for Common
Stock.
(D) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued (or, pursuant to Subsection 5(d)(iii)
below, deemed to be issued) by the Company after the
Original Issue Date, other than Reserved Employee Shares and
other than shares of Common Stock issued or issuable:
(1) as a dividend or distribution on Series C
Preferred Stock;
(2) by reason of a dividend, stock split, split-up or
other distribution on shares of Common Stock
excluded from the definition by the foregoing
clause (1);
(3) upon the exercise of Options;
(4) upon conversion of shares of Series C Preferred
Stock;
(5) pursuant to warrants issued by the Company
pursuant to (a) the Warrant Agreement dated as of
September 4, 1998 among the Company, Cleartel
Communications, Inc., CAIS, Inc. and ING (U.S.)
Capital Corporation, Inc. (the "ING Warrant
Agreement"), (b) the Series A Preferred Stock and
Warrant Purchase Agreement dated as of February
19, 1999 among the Company and the several
purchasers set forth therein; and (c) the Warrant
to Purchase Common Stock granted to Hilton Hotels
Corporation;
6
<PAGE>
(6) to a corporation, partnership or other entity with
which the Company is seeking to establish a
partnership, joint venture or other business
relationship when the total number of shares of
Common Stock so issuable or issued does not exceed
1,000,000 shares (as appropriately adjusted for
any stock dividends, combinations, splits or the
like with respect to shares of Common Stock),
provided the Company receives at least 95% of Fair
Market Value for such shares;
(7) in connection with any high-yield debt financing
undertaken by the Company, not to exceed 1,500,000
shares of Common Stock in t he aggregate;
(8) pursuant to the Agreement and Plan of Merger among
the Company, Business Anywhere USA, Inc., CIBA
Merger Corp., Kim Kao, and Amy Hsiao dated
September 7, 1999, including without limitation,
the conversion of Business Anywhere options into
options to acquire Common Stock and the issuance
of shares of Common Stock upon the exercise
thereof, not to exceed 288,371 shares of Common
Stock in the aggregate;
(9) in connection with the acquisition by the Company
of the securities or assets of another
corporation, partnership or other entity, provided
the Company receives at least 95% of Fair Market
Value for such shares; and
(10) pursuant to the Agreement and Plan of Merger among
the Company, CIAM Corp. and Atcom, Inc. dated
August 4, 1999, including without limitation, the
conversion of Atcom options into options to
acquire Common Stock as described therein, the
issuance of shares of Common Stock upon the
exercise thereof and the issuance of Common Stock
constituting "Contingent Consideration" as defined
therein, not to exceed 2,654,826 shares of Common
Stock in the aggregate.
(E) "Reserved Employee Shares" shall mean shares of Common
Stock issued to employees, officers, directors,
shareholders and executives of, and consultants or
vendors to, the Company of up to: (i) 5,000,000 shares
(as appropriately adjusted for any stock dividends,
combinations, splits or the like with respect to shares
of Common Stock), plus such additional number of shares
of Common Stock issued or deemed issued for like
7
<PAGE>
purposes as shall be approved by holders of at least a
majority of the voting power of all then outstanding
shares of Series C Preferred Stock, voting together as
a single class; plus (ii) shares reserved, as of the
date hereof, for issuance upon the exercise of
outstanding Options to purchase up to 2,604,495 shares
of Common Stock presently held by five management
employees of the Company. Such Reserved Employee Shares
shall be issued, at any time, and from time to time,
under such arrangements, contracts or plans as are
recommended by the Company's management and approved by
the Board.
(F) "Rights to Acquire Common Stock" (or "Rights") shall
mean all rights issued by the Company to acquire Common
Stock whether by exercise of a warrant, option or
similar call, or conversion of any existing instruments,
in either case for consideration fixed, in amount or by
formula, as of the date of issuance.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
number of shares of Common Stock into which the Series C
Preferred Stock is convertible shall be made, by adjustment in
the applicable Conversion Price thereof, unless the Fair
Market Value of the consideration per share (determined
pursuant to Subsection 5(d)(v) below) received by the Company
for an Additional Share of Common Stock issued or deemed to be
issued by the Company is less than the greater of 95% of the
Fair Market Value per share of the Common Stock or the
applicable Conversion Price in effect on the date of, and
immediately prior to, the issue of such additional shares, or
if prior to such issuance, the Company receives written notice
from the holders of at least a majority of the voting power of
all then outstanding shares of Series C Preferred Stock,
voting together as a single class, agreeing that no such
adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock. If the Company at any time or from time to time
------------
after the Original Issue Date issue any Options or Convertible
Securities or Rights to Acquire Common Stock, then the maximum
number of shares of Common Stock (as set forth in the
instrument relating thereto without regard to any provision
contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options, Rights to Acquire
Common Stock or, in the case of Convertible Securities, the
conversion or exchange of such Convertible Securities, shall
be deemed to be Additional Shares of Common Stock issued as of
the time of such issue; provided, however, that Additional
Shares of Common Stock shall not be deemed to have been issued
unless the Fair Market Value of the consideration per
8
<PAGE>
share (determined pursuant to Subsection 5(d)(v) hereof)
received by the Company for such Additional Shares of Common
Stock would be less than the greater of 95% of the Fair Market
Value per share of Common Stock or the applicable Conversion
Price in effect on the date of and immediately prior to such
issue, or such record date, as the case may be, and provided,
further, that in any such case:
(A) No further adjustment in the Conversion Price shall be
made upon the subsequent issue of shares of Common Stock
upon the exercise of such Options, Rights or conversion
or exchange of such Converti ble Securities;
(B) Upon the expiration or termination of any unexercised
Option, Right or Convertible Security, the Conversion
Price shall be adjusted immediately to reflect the
applicable Conversion Price which would have been in
effect had such Option, Right or Convertible Security (to
the extent outstanding immediately prior to such
expiration or termination) never been issued; and
(C) In the event of any change in the number of shares of
Common Stock issuable upon the exercise, conversion or
exchange of any Option, Right or Convertible Security,
including, but not limited to, a change resulting from
the anti-dilution provisions thereof, the Conversion
Price then in effect shall forthwith be readjusted to
such Conversion Price as would have obtained had the
Conversion Price adjustment that was originally made upon
the issuance of such Option, Right or Convertible
Security which were not exercised or converted prior to
such change been made upon the basis of such change, but
no further adjustment shall be made for the actual
issuance of Common Stock upon the exercise or conversion
of any such Option, Right or Convertible Security.
(iv) Adjustment of Conversion Price upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. If the Company shall at any time after
----------------------
the Orginial Isssue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued
pursuant to Subsection 5(d)(iii), but excluding shares issued as
a dividend or distribution as provided in Subsection 5(f) or
upon a stock split or combination as provided in Subsection
5(e)), without consideration, or for a consideration per share
less than the greater of 95% of the Fair Market Value per share
of Common Stock or the applicable Conversion Price in effect on
the date of and immediately prior to such issue, or without the
requisite number of notices contemplated by Subsection 5(d)(ii)
hereof, then and in such event, such Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying
9
<PAGE>
such Conversion Price by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of
Common Stock which the aggregate consideration received by the
Company for the total number of Additional Shares of Common
Stock so issued would purchase at the greater of 95% of the Fair
Market Value per share of Common Stock or such Conversion Price;
and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus
the number of such Additional Shares of Common Stock so issued.
Notwithstanding the foregoing, the applicable Conversion Price
shall not be reduced if the amount of such reduction would be an
amount less than $.03, but any such amount shall be carried
forward and reduction with respect thereto made at the time of
and together with any subsequent reduction which, together with
such amount and any other amount or amounts so carried forward,
shall aggregate $.03 or more .
(v) Determination of Consideration. For purposes of this
------------------------------
Subsection 5(d) Fair Market Value of the consideration received
by the Company for the issue of any Additional Shares of Common
Stock shall be computed as follows:
(A) Cash and Property. Such consideration shall:
-----------------
(1) insofar as it consists of cash, be computed at the
aggregate of cash received by the Company, excluding
amounts paid or payable for accrued interest or
accrued dividends;
(2) insofar as it consists of property other than cash, be
computed at the Fair Market Value thereof at the time
of such issue, as determined in good faith by the
Board; and
(3) in the event Additional Shares of Common Stock are
issued together with other shares or securities or
other assets of the Company for consideration which
covers both, be the proportion of such consideration
so received, computed as provided in clauses (1) and
(2) above, as determined in good faith by the Board.
(B) Options, Rights and Convertible Securities. The
------------------------------------------
consideration per share received by the Company for
Additional Shares of Common Stock deemed to have been
issued pursuant to Subsection 5(d)(iii), relating to
Options, Rights and Convertible Securities, shall be
determined by dividing
10
<PAGE>
(1) the total amount, if any, received or receivable by
the Company as consideration for the issue of such
Options, Rights or Convertible Securities, plus the
minimum aggregate amount of additional consideration
(as set forth in the instruments relating thereto,
without regard to any provision contained therein for
a subsequent adjustment of such consideration) payable
to the Company upon the exercise of such Options,
Rights or the conversion or exchange of such
Convertible Securities, by
(2) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without
regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon
the exercise of such Options, Rights or the conversion
or exchange of such Convertible Securities.
(e) Adjustment for Stock Splits and Combinations. If the Company
--------------------------------------------
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Stock, the Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased. If the
Company shall at any time or from time to time after the Original Issue Date
combine the outstanding shares of Common Stock, the Conversion Price then in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this paragraph shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Company at any time or from time to time after the Original Issue Date shall
make or issue a dividend or other distribution payable in Additional Shares of
Common Stock, then and in each such event the Conversion Price shall be
decreased as of the time of such issuance, by multiplying the Conversion Price
by a fraction, the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance, and the denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance plus the number of shares of Common Stock issuable in payment of such
dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Company at any time, or from time to time after the Original Issue Date
shall make or issue, a dividend or other distribution payable in securities of
the Company other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of shares of the Series C Preferred
Stock shall receive upon conversion thereof in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the Company
that they would have received had their Series C Preferred Stock been converted
into Common Stock on the date of such event and had thereafter, during the
period from the date of such event to and including the Conversion Date,
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retained such securities receivable by them as aforesaid during such period
given application to all adjustments called for during such period, under this
paragraph with respect to the rights of the holders of the Series C Preferred
Stock.
(h) Adjustment for Reclassification, Exchange or Substitution. If the
---------------------------------------------------------
Common Stock issuable upon the conversion of the Series C Preferred Stock shall
be changed into the same or a different number of shares of any class or classes
of stock, whether by capital reorganization, reclassification, or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for above), then and in each such event the holder of each share of Series C
Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification, or other change, by holders of the
number of shares of Common Stock into which such shares of Series C Preferred
Stock might have been converted immediately prior to such reorganization,
reclassification, or change, all subject to further adjustment as provided
herein.
(i) No Impairment. The Company will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series C Preferred Stock against impairment to the extent required hereunder.
(j) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder, if
any, of Series C Preferred Stock outstanding a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based and shall file a copy of such certificate
with its corporate records. The Company shall, upon the reasonable written
request of any holder of Series C Preferred Stock, furnish or cause to be
furnished to such holder a similar certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price then in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of Series C Preferred
Stock. Despite such adjustment or readjustment, the form of each or all Series C
Preferred Stock certificates, if the same shall reflect the initial or any
subsequent Conversion Price, need not be changed in order for the adjustments or
readjustments to be valid in accordance with the provisions of this Certificate,
which shall control.
(k) Notice of Record Date. In the event
---------------------
(i) that the Company declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or
other securities of th e Company;
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(ii) that the Company subdivides or combines its outstanding
shares of Common Stock;
(iii) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock or a stock dividend or stock distribution thereon); or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be filed at its principal office or at the
office of the transfer agent of the Series C Preferred Stock, and shall cause to
be mailed to the holders of the Series C Preferred Stock at their last addresses
as shown on the records of the Company, or such transfer agent, at least 10 days
prior to the record date specified in (A) below or 20 days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution, subdivision
or combination, or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to
be entitled to such dividend, distribution, subdivision or
combination are to be determined, or
(B) the date on which such reclassification, dissolution,
liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property
deliverable upon such reclassification, dissolution or
winding up.
(l) Limitation on Conversion Rights. Notwithstanding any other
-------------------------------
provision herein to the contrary, at no time will (i) the number of shares of
Common Stock issuable to such holder upon any conversion of Series C Preferred
Stock, plus (ii) the number of shares of Common stock beneficially owned by such
holder (as determined pursuant to Rule 13d-3 of the Exchange Act) that were
previously issued upon conversion of Series C Preferred Stock in accordance with
the provisions hereof, exceed 4.99% of the total issued and outstanding shares
of Common Stock.
Section 6. Mandatory Redemption.
(a) Upon the second anniversary of the closing of the Original Issue
Date, the Company shall redeem, out of assets of the Company which are, by law,
available for such payment, the lesser of 41,667 shares (then outstanding and
not previously converted pursuant to Section 5) of the Series C Preferred Stock,
at a price per share equal to the Original Series C Issue Price, plus any
accrued but unpaid dividends thereon (whether or not declared). Upon the third
anniversary of the Original Issue Date, the Company shall redeem, out of the
assets of the Company which are, by law, available for such payment, the
remaining shares (then outstanding and not previously converted pursuant to
Section
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5) of the Series C Preferred Stock at a price per share equal to the
Original Series C Issue Price, plus any accrued but unpaid dividends thereon
(whether or not declared).
(b) The following events shall constitute "Mandatory Redemption Events"
for purposes hereof unless the holders of at least a majority of the voting
together as a single class, vote otherwise:
(i) any merger, consolidation, reorganization or other
business combination of the Company in which the stockholders
of the Company immediately prior to such transaction will,
immediately after such transaction (by virtue of securities
issued in the transaction or otherwise), beneficially own (as
determined pursuant to rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") capital stock
representing less than 50% of the voting power of the surviving
entity's voting stock immediately after such transaction;
(ii) a sale of all or substantially all of the assets of the
Company to any other entity, where the Company's stockholders
immediately prior to such sale will, immediately after such sale
(by virtue of securities issued as consideration for the
Company's sale or otherwise), beneficially own (as determined
pursuant to Rule 13d-3 under the Exchange Act) capital stock
representing less than 50% of the voting power of the acquiring
entity's voting stock;
(iii) any acquisition of voting stock of the Company by a person
or "group" (as such term is defined in Section 13(d)(3) of the
Exchange Act) in a purchase or transaction or series of
purchases or transactions if immediately thereafter such person
or group has, or would have, beneficial ownership of more than
50% of the combined voting power of the Company's then
outstanding voting stock;
(iv) a change or changes in the membership of the Company's
Board of Directors which represent a change of a majority or
more of such membership during any three-year period;
(v) A change or changes in the membership of the Company's
Board of Directors
(vi) (A) an assignment by the Company for the benefit of
creditors, (B) the filing by the Company of a petition to have
the Company adjudged insolvent, bankrupt or seeking a
reorganization or liquidation under any law relating to
bankruptcy, insolvency or receivership, (C) an appointment of a
receiver or trustee for all or substantially all of the assets
of the Company, unless appointed without the Company's consent,
in which case if after sixty (60) days such appointment has
14
<PAGE>
not been vacated or stayed, (D) a public admission in writing of
the Company's inability to pay its debts as they come due, or
(E) the adoption of a plan of liquidation or dissolution by the
Board of Directors of the Company; or
(vii) the execution of, or entering into by the Company, an
agreement to do any of the above.
(c) Upon the occurrence of any Mandatory Redemption Event, the Company
shall redeem, out of the assets of the Company which are, by law, available for
such payment, all of the Series Preferred Stock then issued and outstanding, at
a price per share equal to the Original Series C Issue Price, plus any accrued
but unpaid dividends thereon (whether or not declared).
(d) At least twenty (20) but not more than sixty (60) days prior to any
date on which the Company must redeem shares of the Series C Preferred Stock
pursuant to Section 6(a) (each a "Redemption Date," together the "Redemption
Dates"), the Company shall send a notice (the "Redemption Notice") to all
holders of the outstanding Series C Preferred Stock of such redemption to be
effected, specifying the number of shares to be redeemed from such holder, the
Redemption Date, the price per share to be paid (the "Redemption Price") and the
place at which payment may be obtained.
(e) On or prior to the Redemption Date, the Company shall deposit the
Redemption Price of all shares to be redeemed as of such date with a bank or
trust company having aggregate capital and surplus in excess of $50,000,000, as
a trust fund, with irrevocable instructions and authority to the bank or trust
company to pay, upon receipt of notice from the Company that such holder has
surrendered the Series C Preferred Stock share certificates in accordance with
Section 6(f), the Redemption Price of the shares to their respective holders.
Any moneys deposited by the Company pursuant to this Section 6(e) for the
redemption of shares thereafter converted into shares of Common Stock pursuant
to Section 5 hereof no later than the fifth (5th) day preceding the Redemption
Date shall be returned to the Company forthwith upon such conversion. The
balance of any funds deposited by the Company pursuant to this Section 6(e)
remaining unclaimed at the expiration of one (1) year following such Redemption
Date shall be returned to the Company promptly upon its written request.
(f) On such Redemption Date, each holder of shares of Series C Preferred
Stock to be redeemed shall surrender such holder's certificates representing
such shares to the Company in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price of such shares 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 such certificates
are redeemed, a new certificate shall be issued representing the unredeemed
shares. From and after such Redemption Date, unless there shall have been a
default in payment of the Redemption Price or the Company is unable to pay the
Redemption Price due to not having sufficient legally available funds, all
rights of the
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<PAGE>
holder of such shares as a holder of Series C Preferred Stock (except the right
to receive the Redemption Price without interest upon surrender of their
certificates), shall cease and terminate with respect to such shares; provided
that in the event that shares of Series C Preferred Stock are not redeemed due
to a default in payment by the Company or because the Company does not have
sufficient legally available funds, such shares of Series C Preferred Stock
shall remain outstanding and shall be entitled to all of the rights and
preferences provided herein.
(g) Shares subject to redemption pursuant to this Section 6 shall be
redeemed from each holder of Series C Preferred Stock on a pro rata basis.
(h) If upon any Redemption Date the assets of the Company available for
redemption are insufficient to pay the redeeming holders of outstanding shares
of Series C Preferred Stock the full amounts to which they are entitled, all
shares of the Series C Preferred Stock will be redeemable for cash upon demand.
The shares of Series C Preferred Stock not redeemed shall remain outstanding and
entitled to all the powers, preferences and rights provided herein. At any
time thereafter when additional funds of the Company are legally available for
the redemption of shares of Series C Preferred Stock, such funds will
immediately be used to redeem the balance of the shares which the Company has
become obligated to redeem on any Redemption Date but which it has not redeemed.
(i) In the event of a call for redemption of any shares of Series C
Preferred Stock, the Conversion Rights (as defined in Section 5) for such Series
C Preferred Stock shall terminate as to the shares designated for redemption at
the close of business on the fifth (5th) day preceding the Redemption Date,
unless default is made in payment of the Redemption Price.
(j) The Company will not enter into any contract or agreement (whether
verbal or written) restricting or impairing its ability to redeem shares of the
Series C Preferred Stock in accordance with this Section 6.
[Signatures appear on the following page]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be executed this ___ day of September 1999.
CAIS INTERNET, INC.
By /s/ Ulysses G. Auger, II
-----------------------------------
Name: Ulysses G. Auger, II
Title: Chairman of the Board and
Chief Executive Officer
ATTEST:
/s/ Michael G. Plantamura
- ------------------------------
Michael G. Plantamura
Secretary
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Exhibit 4.3
Execution Copy
--------------
NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR
THE HOLDER OF SAID SECURITIES THAT IS REASONABLY ACCEPTABLE TO THE COMPANY,
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE SAID ACT OR THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION
IS EXEMPT FROM REGISTRATION.
COMMON STOCK WARRANT
OF
CAIS INTERNET, INC.
THIS CERTIFIES THAT, subject to the terms and conditions of this Warrant,
for the consideration of $1.00, the receipt of which is hereby acknowledged,
U.S. Telesource, Inc., a Delaware corporation, or its successors and assigns
(the "holder"), is entitled to purchase, at any time and from time to time on or
after the date hereof, shares of Common Stock, par value $.01 per share (the
"Common Stock"), of CAIS Internet, Inc., a Delaware corporation (the "Company"),
from the Company in such number and at such price as determined in accordance
with this Warrant.
Upon delivery of this Warrant (with the notice of exercise in the form
attached hereto as Exhibit A), together with payment of the Warrant price (as
defined below) for the shares of Common Stock to be issued, which payment may be
made by converting this warrant, or any portion thereof, pursuant to section 5
below ("Warrant Conversion"), at the principal office of the Company or at such
other office or agency as the Company may designate by notice in writing to the
Holder hereof, the Holder shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. All shares of Common
Stock that may be issued upon the exercise of this Warrant will, upon issuance,
be fully paid and nonassessable and free from all taxes, liens and charges with
respect thereto.
This Warrant is subject to the following terms and conditions:
1. Term of Warrant. This Warrant may be exercised in whole or in part, at
any time and from time to time on or after the date hereof; provided, however,
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that this Warrant shall expire to the extent then unexercised as of 5:00 p.m.,
eastern time on October 28, 2002.
2. Number of Warrant Shares. Subject to adjustment from time to time
pursuant to Section 4 hereof, the Holder may exercise this Warrant with respect
to 500,000 shares of Common Stock (or other securities issuable in the event of
a reclassification, change, merger or consolidation as set forth in Section 4(a)
hereof) (the "Shares").
3. Warrant Price. The exercise price of this Warrant (the "Warrant Price")
shall equal $12.00 per share, subject to adjustment from time to time pursuant
to Section 4 hereof.
<PAGE>
Execution Copy
--------------
4. Adjustment of Number of Shares and Warrant Price. The number and kind
of Shares purchasable upon the exercise of the Warrant and the Warrant Price
shall be subject to adjustment from time to time in accordance with the
following provisions:
(a) Special Definitions. For purposes of this Section 4, the following
definitions shall apply:
(i) "Option" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire Common Stock or Convertible Securities,
excluding rights or options granted to employees, vendors, officers,
directors and executives of, and consultants or shareholders to, the
Company in an amount not exceeding the number of Reserved Employee Shares.
(ii) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities directly or indirectly convertible
into or exchangeable for Common Stock.
(iii) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to Section 4(c) below, deemed to be
issued) by the Company at any time while this Warrant remains outstanding
and unexpired, other than Reserved Employee Shares and other than shares of
Common Stock issued or issuable:
(i) upon the exercise of Options;
(ii) as a dividend or distribution on Series C Preferred
Stock, par value $.01 per share ("Series C Preferred Stock") or
upon conversion of shares of Series C Preferred Stock;
(iii) pursuant to this Warrant and warrants issued by the
Company pursuant to or in connection with (a) the Warrant
Agreement dated as of September 4, 1998 among the Company,
Cleartel Communications, Inc., CAIS, Inc. and ING (U.S.) Capital
Corporation, Inc. (the "ING Warrant Agreement"), (b) the Series A
Preferred Stock and Warrant Purchase Agreement dated as of
February 19, 1999 among the Company and the several purchasers set
forth therein; and (c) the Warrant to Purchase Common Stock
granted to Hilton Hotels Corporation;
(iv) to a corporation, partnership or other entity with
which the Company is seeking to establish a partnership, joint
venture or other business relationship when the total number of
shares of Common Stock so issuable or issued does not exceed
1,000,000 shares (as appropriately adjusted for any stock
dividends, combinations, splits or the like with respect to shares
of Common Stock), provided the Company receives at least 95% of
Fair Market Value for such shares;
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Execution Copy
--------------
(v) in connection with any high-yield debt financing
undertaken by the Company, not to exceed 2,000,000 shares of
Common Stock in the aggregate;
(vi) pursuant to the Agreement and Plan of Merger among the
Company, Business Anywhere USA, Inc., CIBA Merger Corp., Kim Kao,
and Amy Hsiao dated September 7, 1999, including without
limitation, the conversion of Business Anywhere options into
options to acquire Common Stock and the issuance of shares of
Common Stock upon the exercise thereof, not to exceed 288,371
shares of Common Stock in the aggregate;
(vii) in connection with the acquisition by the Company of
the securities or assets of another corporation, partnership or
other entity, provided the Company receives at least 95% of Fair
Market Value for such shares; and
(viii) pursuant to the Agreement and Plan of Merger among
the Company, CIAM Corp. and Atcom, Inc. dated August 4, 1999,
including without limitation, the conversion of Atcom options into
options to acquire Common Stock as described therein, the issuance
of shares of Common Stock upon the exercise thereof and the
issuance of Common Stock constituting "Contingent Consideration"
as defined therein, not to exceed 2,654,826 shares of Common Stock
in the aggregate.
(iv) "Reserved Employee Shares" shall mean shares of Common Stock
issued to employees, officers, directors, shareholders and executives of,
and consultants or vendors to, the Company of up to: (i) 5,000,000 shares
(as appropriately adjusted for any stock dividends, combinations, splits or
the like with respect to shares of Common Stock), plus such additional
number of shares of Common Stock issued or deemed issued for like purposes
as shall be approved by the Holder; plus (ii) shares reserved, as of the
date hereof, for issuance upon the exercise of outstanding Options to
purchase up to 2,604,495 shares of Common Stock presently held by five
management employees of the Company. Such Reserved Employee Shares shall be
issued, at any time, and from time to time, under such arrangements,
contracts or plans as are recommended by the Company's management and
approved by the Board.
(v) "Rights to Acquire Common Stock" (or "Rights") shall mean all
rights issued by the Company to acquire Common Stock whether by exercise of
a warrant, option or similar call, or conversion of any existing
instruments, in either case for consideration fixed, in amount or by
formula, as of the date of issuance.
(vi) "Fair Market Value" of any property shall mean the fair
market value thereof as determined in good faith by the Board of Directors
of the Company (the "Board"); provided, however, that the value of any
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securities will be determined as follows:
3
<PAGE>
Execution Copy
--------------
(i) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (ii) below:
(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such quotation system over the thirty
(30) day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3)
days prior to the closing; and
(C) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the Board
and the Holder.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount
from the market value determined as above in (i)(A), (B) or (C) to reflect
the approximate fair market value thereof, as mutually determined by the
Board and the Holder.
(b) No Adjustment of Warrant Price. The number of Shares purchasable
upon the exercise of the Warrant shall not be adjusted, by adjustment in the
Warrant Price thereof, unless the Fair Market Value of the consideration per
share (determined pursuant to Section 4(e) below) received by the Company for an
Additional Share of Common Stock issued or deemed to be issued by the Company is
less than the greater of 95% of the Fair Market Value per share of the Common
Stock or the applicable Warrant Price in effect on the date of, and immediately
prior to, the issue of such additional shares, or if prior to such issuance, the
Company receives written notice from the Holder, agreeing that no such
adjustment shall be made as the result of the issuance of Additional Shares of
Common Stock.
(c) Issue of Securities Deemed Issue of Additional Shares of Common
Stock. If the Company at any time or from time to time while this Warrant
remains outstanding and unexpired shall issue any Options or Convertible
Securities or Rights to Acquire Common Stock, then the maximum number of shares
of Common Stock (as set forth in the instrument relating thereto without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options, Rights to Acquire Common Stock or,
in the case of Convertible Securities, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue; provided, however, that Additional Shares
of Common Stock shall not be deemed to have been issued unless the Fair Market
Value of the consideration per share (determined pursuant to Section 4(e)
hereof) received by the Company for such Additional Shares of Common Stock
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<PAGE>
Execution Copy
--------------
would be less than the greater of 95% of the Fair Market Value per share of
Common Stock or the applicable Warrant Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided, further, that in any such case:
(i) No further adjustment in the Warrant Price shall be made upon
the subsequent issue of shares of Common Stock upon the exercise of such
Options, Rights or conversion or exchange of such Convertible Securities;
(ii) Upon the expiration or termination of any unexercised Option,
Right or Convertible Security, the Warrant Price shall be adjusted
immediately to reflect the applicable Warrant Price which would have been
in effect had such Option, Right or Convertible Security (to the extent
outstanding immediately prior to such expiration or termination) never been
issued; and
(iii) In the event of any change in the number of shares of Common
Stock issuable upon the exercise, conversion or exchange of any Option,
Right or Convertible Security, including, but not limited to, a change
resulting from the anti-dilution provisions thereof, the Warrant Price then
in effect shall forthwith be readjusted to such Warrant Price as would have
been obtained had the Warrant Price adjustment that was originally made
upon the issuance of such Option, Right or Convertible Security, which were
not exercised or converted prior to such change, been made upon the basis
of such change, but no further adjustment shall be made for the actual
issuance of Common Stock upon the exercise or conversion of any such
Option, Right or Convertible Security.
(d) Adjustment of Warrant Price upon Issuance of Additional Shares of
Common Stock. If the Company shall at any time while this Warrant is outstanding
and unexpired issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to Section 4(c), but
excluding shares issued as a dividend or distribution as provided in Section
4(g) or upon a stock split or combination as provided in Section 4(f)), without
consideration, or for a consideration per share less than the greater of 95% of
the Fair Market Value per share of Common Stock or the applicable Warrant Price
in effect on the date of and immediately prior to such issue, or without the
requisite notice contemplated by Section 4(b) hereof, then and in such event,
such Warrant Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Warrant Price by
a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Company for the total
number of Additional Shares of Common Stock so issued would purchase at the
greater of 95% of the Fair Market Value per share of Common Stock or such
Warrant Price; and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued.
Notwithstanding the foregoing, the applicable Warrant Price shall not be reduced
if the amount of such reduction would be an amount less than $.03, but any such
amount shall be carried forward and reduction with respect thereto made at the
time of and together with any subsequent
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Execution Copy
--------------
reduction which, together with such amount and any other amount or amounts so
carried forward, shall aggregate $.03 or more.
(e) Determination of Consideration. For purposes of this Section 4, the
Fair Market Value of the consideration received by the Company for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
-----------------
(i) insofar as it consists of cash, be computed at the
aggregate of cash received by the Company, excluding amounts paid
or payable for accrued interest or accrued dividends;
(ii) insofar as it consists of property other than cash, be
computed at the Fair Market Value thereof at the time of such
issue, as determined in good faith by the Board; and
(iii) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of
the Company for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses
(i) and (ii) above, as determined in good faith by the Board.
(ii) Options, Rights and Convertible Securities. The consideration
------------------------------------------
per share received by the Company for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 4(c), relating to Options,
Rights and Convertible Securities, shall be determined by dividing
(i) the total amount, if any, received or receivable by the
Company as consideration for the issue of such Options, Rights or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the Company
upon the exercise of such Options, Rights or the conversion or
exchange of such Convertible Securities, by
(ii) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options, Rights or the
conversion or exchange of such Convertible Securities.
(f) Adjustment for Stock Splits and Combinations. If at any time or
from time to time while this Warrant remains outstanding and unexpired, the
Company shall effect a subdivision of the outstanding Common Stock, the Warrant
Price then in effect immediately
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Execution Copy
--------------
before that subdivision shall be proportionately decreased. If at any time or
from time to time while this Warrant remains outstanding and unexpired, the
Company shall combine the outstanding shares of Common Stock, the Warrant Price
then in effect immediately before the combination shall be proportionately
increased. Any adjustment under this paragraph shall become effective at the
close of business on the date that the subdivision or combination becomes
effective.
(g) Adjustment for Certain Dividends and Distributions. In the event
that, while this Warrant remains outstanding and unexpired, the Company at any
time or from time to time shall make or issue a dividend or other distribution
payable in Additional Shares of Common Stock, then and in each such event the
Warrant Price shall be decreased as of the time of such issuance, by multiplying
the Warrant Price by a fraction, the numerator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance, and the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance plus the number of shares of Common Stock issuable in payment of
such dividend or distribution.
(h) Adjustments for Other Dividends and Distributions. In the event
that, while this Warrant remains outstanding and unexpired, the Company at any
time, or from time to time shall make or issue, a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then and
in each such event provision shall be made so that the Holder shall receive upon
the exercise of the Warrant in addition to the number of Shares receivable
thereupon, the amount of securities of the Company that the Holder would have
received had the Warrant been exercised with respect to the Shares on the date
of such event and had thereafter, during the period from the date of such event
to and including the date on which the Warrant was exercised, retained such
securities receivable by the Holder as aforesaid during such period given
application to all adjustments called for during such period.
(i) Reclassification, Consolidation or Merger. In case of any capital
reorganization, reclassification or change of outstanding securities of the
class issuable upon exercise of the Warrant (other than as a result of a
subdivision, split, combination or stock dividend), or in case of any
consolidation or merger of the Company with or into another entity, the Company,
or such successor entity, as the case may be, shall execute a new Warrant, with
substantially the same terms as this Warrant, or amend this Warrant, to provide
that the Holder shall have the right to exercise such new Warrant or amended
Warrant and procure upon such exercise in lieu of the Common Stock theretofore
issuable upon exercise of this Warrant the kind and amount of shares of stock,
other securities, money and/or property receivable upon such reorganization,
reclassification, change, consolidation or merger by the Holder as if this
Warrant had been fully exercised immediately prior to such event. Any such new
Warrant shall provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Section 4. The provisions
of this subsection (a) shall similarly apply to successive reorganizations,
reclassifications, changes, consolidations and mergers.
(j) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Warrant Price pursuant to this Section 4, the
Company at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and
7
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Execution Copy
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furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based and shall file a copy of such certificate with its
corporate records. The Company shall, upon the reasonable written request of the
Holder, furnish or cause to be furnished to the Holder a similar certificate
setting forth (i) such adjustments and readjustments, (ii) the Warrant Price
then in effect, and (iii) the number of Shares and the amount, if any, of other
property which then would be received upon the exercise of the Warrant.
5. Payment by Warrant Conversion. The Holder may exercise the purchase
right represented by this Warrant with respect to a particular number of Shares
subject to this Warrant ("Converted Warrant Shares") and elect to pay for a
number of such Converted Warrant Shares through Warrant Conversion by specifying
such election in the Notice of Exercise attached hereto as Exhibit A. In such
event, the Company shall deliver to the Holder (without payment by the Holder of
any Warrant Price or any cash or other consideration) that number of Shares
equal to the quotient obtained by dividing (x) the value of this Warrant (or the
specified portion hereof) on the date of exercise, which value shall be
determined by subtracting (A) the aggregate Warrant Price of the Converted
Warrant Shares immediately prior to the exercise of the Warrant from (B) the
aggregate fair market value of the Converted Warrant Shares issuable upon
exercise of this Warrant (or the specified portion hereof) on the date of
exercise, by (y) the fair market value of one Share on the date of exercise. For
purposes of this Section 5, fair market value of a Share as of a particular date
shall be the closing price on the business day immediately prior to the exercise
of the applicable Warrant.
6. Notices. Upon any adjustment of the Warrant Price and any increase
or decrease in the number of Shares purchasable upon the exercise of this
Warrant, then, and in each such case, the Company, within 30 days thereafter,
shall give written notice thereof to the registered holder of this Warrant (the
"Notice"). The Notice shall be mailed to the address of such holder as shown on
the books of the Company; and shall state the Warrant Price as adjusted and the
increased or decreased number of shares purchasable upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation of each.
7. Transfer and Exchange of the Warrant and Shares. When this Warrant
or Shares are presented to the Company with a request:
(a) to register their transfer; or
(b) to exchange such Warrant for an equal number of warrants of
other authorized denominations, the Company shall register the transfer or make
the exchange as requested if the following requirements are met:
(x) the Warrant shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Company, duly executed by
the Holder thereof or by his attorney-in-fact, duly authorized in writing; and
8
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Execution Copy
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(y) in the case of Shares, such request shall be accompanied by the
following additional information and documents (all of which may be submitted by
facsimile), as applicable:
(i) if such Shares are being transferred (1) to a "qualified
institutional buyer" (as defined in Rule 144A) in accordance with Rule 144A
or (2) pursuant to an exemption from registration in accordance with Rule
144 (and based on an opinion of counsel if the Company so requests) or (3)
pursuant to an effective registration statement under the Securities Act, a
certification to that effect;
(ii) if such Shares are being transferred pursuant to an exemption
from registration in accordance with Rule 904 under the Securities Act (and
based on an opinion of counsel if the Company so requests), a certification
to that effect; or
(iii) if such Shares are being transferred in reliance on another
exemption from the registration requirements of the Securities Act (and based on
an opinion of counsel if the Company so requests), a certification to that
effect.
8. Representations and Warranties. The Company represents and warrants to
the Holder as follows:
(a) Organization and Powers. The Company (i) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation; and (ii) has all the requisite power and
authority to carry on its business and to execute, deliver and perform its
obligations under this Warrant.
(b) Authorization; No Conflict. The offer and sale of the Warrant
and the Common Stock underlying the Warrant, and the execution, delivery and
performance by the Company of the Warrant have been duly authorized by all
necessary corporate action of the Company and do not and will not (i) contravene
the Company's articles of incorporation or bylaws; (ii) result in a breach or
default under any material instrument, contract or other agreement to which the
Company is a party; or (iii) violate any provision of any law, rule, regulation,
order, judgment, decree or the like binding on or affecting the Company.
(c) Binding Obligations. The Warrant constitutes, or will
constitute, a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and general principles of
equity, including, without limitation, concepts of materiality, reasonableness,
good faith and fair dealing and the possible unavailability of specific
performance or injunctive relief, regardless of whether considered in a
proceeding of equity or at law.
(d) Shares Duly Issued, Fully Paid and Non-Assessable. The Shares,
when issued upon the exercise of this Warrant pursuant to the terms hereof,
shall be duly issued, fully paid and non-assessable.
9
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(e) No Registration. The offer and sale of the Warrant and the
underlying Shares of Common Stock are exempt from the registration and
prospectus delivery requirements of the Securities Act.
9. Registration Rights. The Holder shall have such registration rights
with respect to the Shares as specified in that certain Registration Rights and
Lock-Up Agreement dated as of September 29, 1999, as amended by the First
Amendment to Registration Rights and Lock-Up Agreement dated as of even date
herewith.
10. Press Releases. The Holder shall consent to the form and content of
all press releases or public announcements that shall be made concerning this
Warrant and the transactions contemplated hereby, and the Company shall not make
any press release or public announcement without the Holder's prior written
consent, which consent shall not be unreasonably withheld.
11. Miscellaneous.
(a) The terms of this Warrant shall be binding upon and shall
inure to the benefit of any successors or assigns of the Company and of the
holder or holders hereof and of the Common Stock issued or issuable upon the
exercise hereof.
(b) No Holder, as such, shall be entitled to vote or receive
dividends or be deemed to be a stockholder of the Company for any purpose, nor
shall anything contained in this Warrant be construed (i) to confer upon the
Holder, as such, any rights of a stockholder of the Company, or any right to
vote, give or withhold consent to any corporate action, receive notice of
meetings, receive dividends or subscription rights, or otherwise, or (ii) as
imposing any obligation on the Holder to purchase any securities or any
liability as a stockholder of the Company, whether such obligation or
liabilities are asserted by the Company or its creditors.
(c) Receipt of this Warrant by the Holder hereof shall constitute
acceptance of and agreement to the foregoing terms and conditions.
(d) The Company will not, by amendment of its certificate of
incorporation or bylaws or through any other action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all actions as may be necessary or appropriate in order to protect the
rights of the Holder against impairment.
(e) Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and, in
the case of any such loss, theft or distribution, upon delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, upon surrender and cancellation of such Warrants,
the Company at its expense will execute and deliver, in lieu thereof, a new
Warrant of like date and tenor.
10
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(f) Any provision of this Warrant may be amended, waived or
modified upon the written consent of the Company and the Holder.
(g) The Company hereby agrees that at all times there shall be
reserved for issuance and/or deliver upon exercise of this Warrant, free from
preemptive rights, such number of authorized but unissued shares of Common Stock
as from time to time shall be required for issuance or delivery upon exercise of
this Warrant. The Company further agrees that it will promptly to take all
action as may from time to time be required in order to permit the holder hereof
to exercise this Warrant and the Company duly and effectively to issue shares of
Common Stock hereunder.
(h) This Warrant shall be governed by and construed in accordance
with the laws of the State of New York without regard to the conflicts of laws
provisions thereof.
[Remainder of this page intentionally left blank.]
11
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Execution Copy
--------------
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Dated: October 27, 1999
CAIS INTERNET, INC.:
/s/ William M. Caldwell, IV
------------------------------
William M. Caldwell, IV
President
S-1
<PAGE>
Execution Copy
--------------
EXHIBIT A
---------
NOTICE OF EXERCISE
TO: CAIS Internet, Inc.
1. The undersigned hereby elects to purchase _______________ shares of the
Common Stock of CAIS Internet, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. The undersigned hereby elects to exercise the purchase right with
respect to ___________ shares of such Common Stock through Warrant Conversion,
as set forth in Section 5 of the attached Warrant.
3. Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other names as is
specified below:
__________________________________________
(Name)
__________________________________________
__________________________________________
(Address)
Signature of Holder:
By: _________________________________
Title: ______________________________
Date: _______________________________
<PAGE>
Exhibit 4.4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION OF SERIES AND
DETERMINATION OF RIGHTS AND PREFERENCES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
CAIS INTERNET, INC.
CAIS Internet, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: The Certificate of Designation of Series and Determination of
Rights and Preferences of Series C Convertible Preferred Stock of the
Corporation is hereby amended by striking Section 5(d)(i)(D)(5) thereof and by
substituting in lieu of said paragraph the following:
"(5) pursuant to warrants issued by the Company pursuant to (a) the
Warrant Agreement, dated as of September 4,
1998, among the Company, Cleartel
Communications, Inc., CAIS, Inc., and ING
(U.S.) Capital Corporation, Inc. (the "ING
Warrant Agreement"); (b) the Series A
Preferred Stock and Warrant Purchase
Agreement, dated as of February 19, 1999,
among the Company and the several purchasers
set forth therein; (c) the Warrant to
Purchase Common Stock granted to Hilton
Hotels Corporation; and (d) the Common Stock
Warrant, dated as of October 27, 1999, among
the Company and U.S. Telesource, Inc."
SECOND: The amendment to the Certificate of Designation of Series and
Determination of Rights and Preferences of Series C Convertible Preferred Stock
of the Corporation herein
<PAGE>
certified has been duly adopted by the Board of Directors of the Corporation in
accordance with the provisions of Section 141 of the General Corporation Law of
the State of Delaware.
THIRD: The amendment to the Certificate of Designation of Series and
Determination of Rights and Preferences of Series C Convertible Preferred Stock
of the Corporation herein certified has been duly adopted by the written consent
of the Series C Preferred Stockholders of the Corporation in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
2
<PAGE>
IN WITNESS WHEREOF, CAIS INTERNET, INC. has caused this Certificate of
Amendment of Certificate of Designation of Series and Determination of Rights
and Preferences of Series C Convertible Preferred Stock to be signed by its
President this 27th day of October, 1999.
CAIS INTERNET, INC.
By: /s/ William M. Caldwell, IV
---------------------------
William M. Caldwell, IV
President
3
<PAGE>
Exhibit 10.1
Execution Copy
--------------
FIRST AMENDMENT TO
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
This FIRST AMENDMENT TO REGISTRATION RIGHTS AND LOCK-UP AGREEMENT (this
"Amendment"), is dated as of October 27, 1999, by and between CAIS Internet,
- ----------
Inc., a Delaware corporation (the "Company"), and U.S. Telesource, Inc., a
-------
Delaware corporation (the "Holder"). Except as otherwise provided below, all
------
undefined, capitalized terms used herein will have the meanings ascribed to such
terms in that certain Registration Rights and Lock-Up Agreement dated as of
September 29, 1999, by and between the Company and the Holder (the "Agreement").
---------
W I T N E S S E T H:
- - - - - - - - - --
WHEREAS, the Company and the Holder have entered into the Agreement,
pursuant to which the Company granted to the Holder certain registration rights
with respect to shares of Common Stock issued or issuable upon the conversion of
the Holder's Shares in accordance with the Company's Amended and Restated
Certificate of Incorporation, as amended, and the Certificate of Designation
related to the Shares, and the Holder agreed to certain transfer restrictions
with respect to the Shares; and
WHEREAS, the Company has issued to the Holder a certain Common Stock
Warrant of even date herewith (the "Warrant") that entitles the Holder to
-------
purchase from the Company up to 500,000 shares of Common Stock of the Company
(the "Warrant Shares"), and the Company and the Holder desire that the same
--------------
registration rights and transfer restrictions applicable to the Shares apply to
the Warrant Shares;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Amendment to Agreement.
----------------------
Upon execution of this Amendment, the Agreement will be amended by
deleting the definition of the term "Registrable Securities" in its entirety
from Section 1 thereof and replacing such definition as follows:
"Registrable Securities" shall mean any shares of Common Stock
----------------------
issued or issuable upon (i) the conversion of the Holder's Shares in accordance
with the Company's Amended and Restated Certificate of Incorporation, as
amended, and the Certificate of Designation related to the Shares, and (ii) the
exercise of the Warrant, but excluding, in each case, (x) Registrable Securities
for which a Registration Statement relating to the sale thereof shall have
become effective under the Securities Act or (y) Registrable Securities which
the holder thereof may sell in any one three month period pursuant to Rule 144
under the Securities Act (or such successor rule as may be adopted).
<PAGE>
Execution Copy
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2. Other Terms.
-----------
Except as otherwise provided herein, all other terms and conditions
of the Agreement will remain in full force and effect.
[Signatures appear on the following page]
-2-
<PAGE>
Execution Copy
--------------
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Registration Rights and Lock-Up Agreement as of the date first written above.
CAIS INTERNET, INC.
By: /s/ William M. Caldwell, IV
-----------------------------------
Name: President
---------------------------------
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weinberg
------------------------------------
Name: Senior Vice President of
----------------------------------
Corporate Development
----------------------------------
S-1
<PAGE>
Exhibit 10.2
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and
---------
entered into effective as of September 7, 1999, by and among CAIS, INC. (the
"Borrower"), a Virginia corporation, each of the lending entities which is a
- ---------
party hereto (as evidenced by the signature pages of this Agreement) or which
may from time to time become a party hereto as a lender or any successor or
assignee thereof (individually, a "Lender" and, collectively, the "Lenders"),
------ -------
and NORTEL NETWORKS INC., a Delaware corporation, as administrative agent for
itself and the other Lenders (in such capacity, together with its successors in
such capacity, the "Administrative Agent").
--------------------
RECITALS:
--------
A. Pursuant to that certain Credit Agreement dated as of June 4, 1999, by
and among the Borrower, the Lenders, and the Administrative Agent ("Credit
------
Agreement"), the Lenders agreed to provide to the Borrower a senior secured
- ---------
credit facility in the maximum aggregate principal amount of $30,000,000. All
capitalized terms used in this Amendment and not otherwise defined herein shall
have the meanings assigned to such terms in the Credit Agreement.
B. Pursuant to the request of the Borrower, the Administrative Agent and
the Lenders have agreed, subject to the terms and conditions of this Amendment,
to amend the Credit Agreement.
AGREEMENTS:
----------
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Terms Defined. Unless otherwise defined or stated in this Amendment,
-------------
each capitalized term used in this Amendment has the meaning given to such term
in the Credit Agreement (as amended by this Amendment).
Page 1
<PAGE>
2. Amendment to Section 8.15. The first sentence of Section 8.15 of the
------------------------- ------------
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"The Borrower shall, commencing on or before the earlier of (i)
December 31, 1999 or (ii) the date in which the Obligations initially
exceed Five Million Dollars ($5,000,000), maintain in full force and effect
through the Maturity Date one or more Interest Rate Protection Agreements
reasonably satisfactory to the Administrative Agent with one or more
counterparties reasonably acceptable to the Administrative Agent rated in
one of the three of the highest rating categories of Standard & Poors
Corporation or Moody's Investors Services, Inc. and otherwise reasonably
acceptable to the Administrative Agent that enable the Borrower to fix or
place a limit upon a rate of interest with respect to not less than an
aggregate notional amount (not less than zero) equal to fifty percent (50%)
of Total Debt minus the amount of such Total Debt with a fixed interest
-----
rate.
3. Amendment to Section 8.17. The first sentence of Section 8.17 of the
------------------------- ------------
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"The Borrower will, commencing on or before the earlier of (i)
December 31, 1999 or (ii) the date in which the Obligations initially
exceed Five Million Dollars ($5,000,000), ensure that all cash proceeds of
Service Agreement Revenues are (a) deposited directly, as received, into a
lockbox or collection account of the Borrower as the Administrative Agent
may require from time to time and (b) on a daily basis after such deposit,
transferred into a lockbox or concentration account of the Borrower as the
Administrative Agent may require from time to time. "
4. Amendment to Section 9.5. Section 9.5 of the Credit Agreement is
------------------------- -----------
hereby amended to include a new subsection 9.5(k), which subsection 9.5(k) shall
----------------- -----------------
read in its entirety as follows:
"Investments in money market mutual funds selected by the Borrower and
reasonably acceptable to the Administrative Agent;"
Page 2
<PAGE>
5. Conditions Precedent. The effectiveness of this Amendment is subject
--------------------
to the satisfaction of each of the following conditions precedent, all of which
conditions precedent must be satisfied on or before September 24, 1999:
(a) The Administrative Agent shall have received all of the following,
each dated (where applicable and unless otherwise indicated) the date of this
Amendment, in form and substance satisfactory to the Administrative Agent:
(i) Amendment Documents. This Amendment as executed by the
-------------------
parties hereto and any other agreement, document, instrument or certificate
reasonably required by the Administrative Agent or the Lenders to be
executed or delivered by the Borrower or any other Loan Party in connection
with this Amendment;
(ii) Resolutions. Resolutions of the Board of Directors of the
-----------
Borrower and the other Loan Parties certified by its Secretary or an
Assistant Secretary which authorize the execution, delivery and performance
by the Borrower and the other Loan Parties of this Amendment and the other
Amendment Documents to which the Borrower or such Loan Party is or is to be
a party;
(iii) Fees, Costs and Expenses. All fees, costs and expenses
------------------------
(including, without limitation, attorneys' fees and expenses) incurred by
the Administrative Agent incident to this Amendment or required to be paid
in accordance with Section 13.1 of the Credit Agreement, to the extent
------------
incurred and submitted to the Borrower, shall have been paid in full by the
Borrower; and
(iv) Additional Information. The Agent shall have received such
----------------------
additional agreements, documents, instruments and information as the Agent
or its legal counsel, Jenkens & Gilchrist, a Professional Corporation, may
reasonably request to effect the transactions contemplated hereby;
(b) The representations and warranties contained herein and in all
other Loan Documents, as amended hereby, shall be true and correct as of the
date hereof as if made again on and as of the date hereof (except if and to the
extent that such representations and warranties are or were expressly made only
as of another specific date);
Page 3
<PAGE>
(c) All corporate proceedings taken in connection with this Amendment
and the other Amendment Documents, and all legal matters incident thereto, shall
be reasonably satisfactory to the Agent and its legal counsel, Jenkens &
Gilchrist, a Professional Corporation; and
(d) No Default or Event of Default shall have occurred and be
continuing.
6. Representations and Warranties. Each of the Borrower and the other
------------------------------
Loan Parties hereby jointly and severally represent and warrant to, and agrees
with, the Agent and the Lenders that, as of the date of and after giving effect
to this Amendment (a) the execution, delivery and performance of this Amendment
and any and all other Amendment Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate action on
the part of the Borrower and the other Loan Parties and will not violate the
Borrower's or any Loan Party's corporate charter or bylaws; (b) the term Loan
Documents as defined in the Credit Agreement and as used in any of the Loan
Documents includes, without limitation, the Amendment Documents; (c) all
representations and warranties set forth in the Credit Agreement and in the
Security Documents are true and correct as if made again on and as of such date
(except if and to the extent that such representations and warranties were
expressly made only as of another specific date); (d) no Default or Event of
Default has occurred and is continuing; and (e) the Credit Agreement, the Notes,
the Guaranties, the Security Documents and the other Loan Documents (as amended
by this Amendment) are and remain legal, valid, binding and enforceable
obligations of the Borrower and the other Loan Parties (as applicable) which are
parties thereto in accordance with their terms.
7. Governing Law. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
-------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND APPLICABLE LAWS OF THE U.S.
8. Counterparts. This Amendment may be executed in any number of
------------
counterparts, all of which when taken together shall constitute one agreement,
and any of the parties hereto may execute this Amendment by signing any such
counterpart.
Page 4
<PAGE>
9. No Oral Agreements. THIS AMENDMENT, TOGETHER WITH THE CREDIT AGREEMENT
------------------
AND THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN
AND AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN (A) THE BORROWER OR ANY OTHER LOAN PARTY AND
(B) THE ADMINISTRATIVE AGENT OR ANY LENDER.
10. Agreement Remains in Effect; No Waiver. Except as expressly provided
--------------------------------------
herein, all terms and provisions of the Credit Agreement and the other the Loan
Documents shall remain unchanged and in full force and effect and are hereby
ratified and confirmed. No waiver by the Administrative Agent or any Lender of
any Default or Event of Default shall be deemed to be a waiver of any other
Default or Event of Default. No delay or omission by the Administrative Agent
or any Lender in exercising any power, right or remedy shall impair such power,
right or remedy or be construed as a waiver thereof or an acquiescence therein,
and no single or partial exercise of any such power, right or remedy shall
preclude other or further exercise thereof or the exercise of any other power,
right or remedy under the Agreement, the Loan Documents or otherwise.
11. Survival of Representations and Warranties. All representations and
------------------------------------------
warranties made in this Amendment or any other Loan Document shall survive the
execution and delivery of this Amendment and the other Loan Documents, and no
investigation by the Administrative Agent or any Lender or any closing shall
affect the representations and warranties or the right of the Administrative
Agent and the Lenders to rely upon such representations and warranties.
12. Reference to Credit Agreement. This Amendment shall constitute a Loan
-----------------------------
Document. Each of the Loan Documents, including the Credit Agreement, the
Amendment Documents and any and all other agreements, documents or instruments
now or hereafter executed and/or delivered pursuant to the terms hereof or
pursuant to the terms of the Credit Agreement as amended hereby, are (if and to
the extent necessary) hereby amended so that any reference in such Loan
Documents to the Credit Agreement shall mean a reference to the Credit Agreement
as amended hereby.
Page 5
<PAGE>
13. Severability. Any provision of this Amendment held by a court of
------------
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
14. Successors and Assigns. This Amendment is binding upon and shall
----------------------
inure to the benefit of the Agent, the Lenders, the Borrower and the other Loan
Parties and their respective successors and assigns; provided, however, that
-------- -------
neither the Borrower nor any of the other Loan Parties may assign or transfer
any of its rights or obligations hereunder without the prior written consent of
the Lenders.
15. Headings. The headings, captions and arrangements used in this
--------
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
[Remainder of this page intentionally left blank]
Page 6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their duly authorized officers effective as of the day
and year first above written.
BORROWER:
--------
CAIS, INC.
By: /s/ Barton Groh
-------------------
Name: Barton Groh
--------------
Title: CFO
-------------
Address for Notices:
-------------------
CAIS, Inc.
1255 22nd Street, N.W.
Washington, D.C. 20037
Attention: Michael G. Plantamura
Telecopy No.: (202) 463-7190
Telephone No.: (202) 715-1300
Page 7
<PAGE>
ADMINISTRATIVE AGENT:
--------------------
NORTEL NETWORKS INC.,
as Administrative Agent
/s/ Paul D. Day
By: ---------------------------------
VP, Customer Finance
Address for Notices:
-------------------
Nortel Networks Inc.
8 Federal Street
Billerica, Massachusetts 01821
Attention: Vice President, Finance
Carrier Packet Solutions
Telecopy No.: (978) 916-4755
Telephone No.: (978) 916-1751
and
Nortel Networks Inc.
GMS 991 04 B30
2221 Lakeside Blvd.
Richardson, Texas 75082-4399
Attention: Vice President,
Customer Finance
North America
Telecopy No.: (972) 684-3679
Telephone No.: (972) 684-2271
and
Nortel Networks Inc.
PO Box 833858
Richardson, Texas 75083-3858
Mail Stop 04D/02/A40
Attention: Kimberly Poe, Loan Administration
Telecopy No.: (972) 684-3808
Telephone No.: (972) 684-7687
Page 8
<PAGE>
LENDERS:
-------
Commitment: $ 30,000,000 NORTEL NETWORKS INC.
- ----------
/s/ Paul D. Day
By: -------------------------------------
VP, Customer Finance
Address for Notices:
-------------------
Nortel Networks Inc.
8 Federal Street
Billerica, Massachusetts 01821
Attention: Vice President, Finance
Carrier Packet Solutions
Telecopy No.: (978) 916-4755
Telephone No.: (978) 916-1751
and
Nortel Networks Inc.
GMS 991 04 B30
2221 Lakeside Blvd.
Richardson, Texas 75082-4399
Attention: Vice President,
Customer Finance
North America
Telecopy No.: (972) 684-3679
Telephone No.:(972) 684-2271
and
Nortel Networks Inc.
PO Box 833858
Richardson, Texas 75083-3858
Mail Stop 04D/02/A40
Attention: Kimberly Poe, Loan Administration
Telecopy No.: (972) 684-3808
Telephone No.: (972) 684-7687
Page 9
<PAGE>
Lending Office for Base Rate Loans:
----------------------------------
Nortel Networks Inc.
2221 Lakeside Blvd.
Richardson, Texas 75082
Lending Office for Eurodollar Loans:
-----------------------------------
Nortel Networks Inc.
2221 Lakeside Blvd.
Richardson, Texas 75082
Page 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANYS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<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> 52,981
<SECURITIES> 16,501
<RECEIVABLES> 1,936
<ALLOWANCES> 231
<INVENTORY> 0
<CURRENT-ASSETS> 73,496
<PP&E> 63,765
<DEPRECIATION> 1,957
<TOTAL-ASSETS> 192,976
<CURRENT-LIABILITIES> 41,119
<BONDS> 0
14,960
0
<COMMON> 224
<OTHER-SE> 118,461
<TOTAL-LIABILITY-AND-EQUITY> 192,976
<SALES> 0
<TOTAL-REVENUES> 6,102
<CGS> 5,126
<TOTAL-COSTS> 5,126
<OTHER-EXPENSES> 30,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (400)
<INCOME-PRETAX> 14,964
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,964
<DISCONTINUED> (340)
<EXTRAORDINARY> (551)
<CHANGES> 0
<NET-INCOME> (33,867)
<EPS-BASIC> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
