<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999.
Registration Statement No. 333-72769
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CAIS INTERNET, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 4813 52-2066769
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
1255 22nd Street, N.W. Ulysses G. Auger, II
Fourth Floor Chairman and Chief Executive Officer
Washington, D.C. 20037 CAIS Internet, Inc.
(202) 715-1300 1255 22nd Street, N.W.
(Address, including zip code, and Fourth Floor
telephone number, including area code, Washington, D.C. 20037
of registrant's principal executive Telephone (202) 715-1300
offices) Facsimile (202) 463-7190
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
Copies to:
Morris F. DeFeo, Jr. Lorraine Massaro
Swidler Berlin Shereff Friedman, LLP Chadbourne & Parke, LLP
3000 K Street, N.W., Suite 300 30 Rockefeller Plaza
Washington, D.C. 20007 New York, NY 10112
Telephone (202) 424-7500 Telephone (212) 408-5100
Facsimile (202) 424-7647 Facsimile (212) 541-5369
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Title of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee(2)
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<S> <C> <C>
Common stock, $.01 par value........... $130,000,000 $36,140
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rules 457(c) and (o) under the Securities Act of 1933.
(2) $20,850 was paid in connection with the initial filing of this registration
statement on February 22, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission or any applicable state securities +
+commission becomes effective. This prospectus is not an offer to sell these +
+securities and is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
PROSPECTUS
6,000,000 Shares
[CAIS INTERNET LOGO]
Common Stock
-----------
This is the initial public offering of shares of CAIS Internet's common stock.
We expect that the initial public offering price will be between $14.00 and
$16.00 per share.
We have applied to list the common stock on The Nasdaq National Market under
the symbol "CAIS."
Investing in our shares involves a high degree of risk. See "Risk Factors"
beginning on page 7 for a discussion of certain factors that you should
consider before you invest in the common stock being sold with this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price.............................................. $ $
Underwriting discounts and commissions............................. $ $
Proceeds, before expenses, to us................................... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 900,000 shares of common
stock from us at the public offering price less underwriting discounts solely
to cover over-allotments.
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company
First Union Capital Markets Corp.
Friedman Billings Ramsey
Wit Capital Corporation
as e-Manager(TM)
This date of this prospectus is , 1999
<PAGE>
[OverVoice Phone Jack Graph appears here]
Our trademarks and pending trademark applications include "OVERVOICE,"
"CAIS," "LANJACK," "MEET JACK" and "DESKJACK." This prospectus also contains
our product names, trade names and trademarks and those of other entities.
ii
<PAGE>
PROSPECTUS SUMMARY
We have prepared this summary to assist you in your review of this document.
This summary highlights what we believe are the significant aspects of our
business and this offering. However, we have not included all of the
information that may be important to you. You should carefully read this entire
document, including the specific risks described in the "Risk Factors" section
beginning on page 7 and the other documents to which we refer. For more
information about CAIS Internet, see "Where You Can Find More Information."
Overview
We provide cost-effective high-speed Internet connections to both commercial
and residential customers, primarily using digital subscriber line technology
(DSL) and our patented OverVoice technology. We currently offer our digital
subscriber line service, "HyperDSL," in conjunction with Covad Communications
Group and Bell Atlantic. We use our OverVoice technology to simultaneously
transmit voice and data over a single traditional copper telephone line at
speeds of up to 175 times those of 56.6k dial-up modems. An OverVoice user is
therefore able to have both always-on, high-speed Internet access and complete
use of the telephone at the same time over one traditional telephone line.
Using our OverVoice technology and existing copper telephone wiring, we are
able to create an Ethernet network connecting multiple computers or web-enabled
devices within a hotel, multiple dwelling unit or single family home. We
believe we can offer always-on, high-speed Internet access simultaneously to
multiple users in hotels and residences more cost-effectively than other
technologies available today.
As of April 16, 1999, we have installed the OverVoice technology in over
1,900 apartment units in 15 multiple dwelling unit buildings and in over 2,100
guest rooms in eight hotels. We have contracts with 11 additional hotel
properties to install OverVoice in more than 2,500 guest rooms. In addition, we
have national contracts with Hilton Hotels Corporation and with OnePoint
Communications Corp.
On December 23, 1998, we entered into a master agreement with Hilton, under
which Hilton has licensed us the right to offer high-speed Internet access
service in 225 Hilton-owned, managed or franchised hotels throughout the United
States. In order to participate, each Hilton hotel must enter into an addendum
to the master agreement. As of April 16, 1999, 153 of these hotels have
notified Hilton that they intend to sign an addendum to participate under the
terms of the master agreement.
We have entered into a seven-year contract with OnePoint to install our
OverVoice technology in certain multiple dwelling unit buildings. Under a trial
agreement, we have installed OverVoice in 14 buildings within four properties.
With our new contract, we anticipate that we will install OverVoice in a
minimum of 30 multiple dwelling unit buildings with approximately 10,000 units.
Additionally, together with OnePoint, we will market high-speed Internet
services to approximately 300 additional multiple dwelling unit buildings where
OnePoint has a preferential right of entry to provide Internet and other
communications services.
We believe that the demand for high-speed Internet access in single family
homes and the trend toward using more than one personal computer at home, also
make OverVoice a cost-effective solution for providing dedicated high-speed
Internet access in single family homes and for "home networking." We currently
offer our HyperDSL services to the residential market. Furthermore, we are
developing a commercially deployable OverVoice solution for the single family
home market, to be offered in conjunction with a HyperDSL connection.
Industry Background
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. According to
industry estimates, the number of Internet users in the
1
<PAGE>
United States who access the world wide web reached approximately 70.1 million
in 1998 and has been forecast to grow to approximately 178.7 million by the
year 2003. Currently, individuals most commonly access the Internet from home
or while traveling by using a dial-up service.
Due to the inconveniences of dial-up Internet service, most businesses that
are large enough to justify the costs opt for an always-on, high-speed Internet
connection, such as a T-1. Smaller businesses are also moving rapidly toward
high-speed access solutions as newer technologies like digital subscriber line
become available. However, until recently, high-speed Internet access has not
been available to most business travelers and residents of multiple dwelling
units and single family homes due to the cost and difficulty of implementing
such service.
We believe that business users have grown accustomed to the high-speed
Internet access that they have at work and are increasingly seeking cost-
effective options for high-speed access at home and while traveling. As a
result, we believe demand is ever increasing for cost-effective, high-speed
Internet connectivity in the hotel, business and residential communities.
Our Business Strategy
Our objective is to become a leading national provider of high-speed
Internet access. The following are key elements of our business strategy to
achieve this objective:
. Offer the Most Cost-Effective, Always-On, High-Speed Internet Access
to Our Customers. We believe that hotel and multiple dwelling unit
property owners are seeking to use high-speed Internet access as a
tool to increase their occupancy and rental rates. We believe our
OverVoice technology is a cost-effective, always-on, high-speed
Internet solution for hotel guests and multiple dwelling unit
residents. In addition, we believe that many members of the single
family home market are seeking cost-effective high-speed Internet
access.
. Roll-Out Our OverVoice Technology Nationwide. Our goal is to make our
OverVoice technology the standard for high-speed Internet access in
hotels and multiple dwelling units. We intend to continue to
penetrate the hotel and multiple dwelling unit markets through both
direct sales and strategic relationships including our agreements
with Hilton and OnePoint.
. Attract End-Users in Hotels and Multiple Dwelling Units. We intend to
stimulate the demand for our OverVoice services through joint
marketing programs and sales calls. For hotel guests we believe that
it is important to make dedicated high-speed Internet access simple
and affordable. For multiple dwelling units, we believe that our
ability to offer multiple Internet connection speeds at different
price points, utilizing our rate shaper technology, enhances our
ability to attract end users.
. Accelerate the Roll-Out of Our HyperDSL Services. We have initiated
the roll-out of a new always-on, high-speed Internet access service
using digital subscriber line technology under the name HyperDSL. We
believe digital subscriber line technology currently represents the
most economical always-on, high-speed Internet solution for
commercial customers and, when used in conjunction with OverVoice,
for single-family residences requiring multiple points of access.
. Expand Our National Network. We operate a nationwide network and have
agreements with most of the major backbone providers, which enables
us to exchange Internet traffic over their respective networks. We
currently maintain six points of presence and intend to add at least
ten more in major metropolitan areas by the end of 1999. In addition,
we intend to add 15 points of presence by the end of 2000. In June
1998, we signed a ten-year fiber agreement with Qwest Communications
Corporation, under which we have access to all of Qwest's points of
presence nationwide, which totaled 200 as of April 16, 1999.
2
<PAGE>
. Leverage the OverVoice Platform to Deliver Future Services and
Products. We believe that our OverVoice technology provides a
platform to deliver a variety of broadband services and products to
our customers, including Internet protocol telephony, video
conferencing, traditional video services, high definition television
(HDTV) and digital audio radio. We intend to expand our service and
product offerings through internal research and development, and by
acquiring complementary businesses and technologies.
Company Information
We are located at 1255 22nd Street, N.W., Fourth Floor, Washington, D.C.
20037. Our telephone number is (202) 715-1300, and our Internet address is
www.cais.com. Information available on our web site is not part of this
prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by CAIS Internet... 6,000,000 shares
Common stock to be outstanding after the
offering.............................. 18,987,959 shares. This does not include
5,016,110 shares issuable pursuant to the
exercise of warrants and stock options
outstanding as of April 28, 1999. This figure
also assumes that the underwriters do not
exercise their over-allotment option.
Over-allotment option................... Up to 900,000 shares. If the over-allotment
option is exercised in full by the
underwriters, the total public offering price,
underwriters' discounts and net proceeds to
CAIS Internet after deducting estimated fees
and expenses will be $103.5 million, $7.3
million and $94.3 million, respectively.
Use of proceeds......................... To expand our business, including capital
expenditures, increased sales and marketing,
and for additional working capital associated
with the roll-out of our OverVoice technology
and digital subscriber line services. In
addition, to repay indebtedness, redeem shares
of Series B cumulative mandatory redeemable
convertible preferred stock, finance possible
strategic acquisitions of complementary
businesses, customer bases, products or
technologies, and for general corporate
purposes.
Proposed Nasdaq National Market symbol.. "CAIS"
</TABLE>
Risk Factors
Investing in our shares of common stock involves a high degree of risk. You
should read "Risk Factors" beginning on page 7 as well as the other cautionary
statements throughout the prospectus to ensure you understand the risks
associated with an investment in our common stock.
Additional Information
For additional information concerning the common stock, see "Description of
Capital Stock" and "Where You Can Find More Information."
4
<PAGE>
SUMMARY FINANCIAL DATA
The historical financial data set forth below in the Statement of Operations
Data for the periods ended, or as of dates, on or prior to May 10, 1996,
reflect the results of operations of Capital Area Internet Service, Inc. prior
to its acquisition by CAIS Internet. This data is shown under the caption
"Predecessor." The historical financial data subsequent to May 10, 1996 reflect
the results of operations of CAIS Internet's continuing operations. In February
1999, CAIS Internet completed the spin-off of Cleartel Communications, Inc.
(after the dissolution of Cleartel Communications Limited Partnership) and for
financial reporting purposes has accounted for Cleartel Communications, Inc.'s
results as discontinued operations. Accordingly, the results of operations for
Cleartel Communications, Inc. have been excluded from the summary financial
data below.
Certain summary financial data below is presented on a pro forma basis. The
column entitled "Pro Forma" gives effect to the following:
. the issuance of Series A convertible preferred stock in February 1999 for
gross proceeds of $11,500,000, less issuance costs of $135,000, the
repayment of $1,500,000 of borrowings from Cleartel Communications
Limited Partnership, and the payment of $210,000 to extend our credit
agreement with ING (U.S.) Capital LLC;
. the spin-off of Cleartel Communications, Inc. to our stockholders in
February 1999 and the related $700,000 of Owners' Deficit as of December
31, 1998;
. CAIS Internet's assumption of debt in a total principal amount of
$1,450,000 originally payable by Cleartel Communications Limited
Partnership to Ulysses G. Auger, Sr., a director of CAIS Internet, in
exchange for an equal reduction in the account payable by CAIS Internet
to Cleartel Communications Limited Partnership;
. CAIS Internet's issuance of Series B cumulative mandatory redeemable
convertible preferred stock to Ulysses G. Auger, Sr. in exchange for the
retirement of the $1,450,000 of assumed debt;
. CAIS Internet's issuance of additional Series B cumulative mandatory
redeemable convertible preferred stock in exchange for $3,107,000 of
related party debt; and
. the issuance of warrants in connection with the Series A convertible
preferred stock, which have been valued in the accompanying table
assuming an offering price of $15.00 per share (based on the midpoint of
the offering price range).
The column entitled "Pro Forma As Adjusted" gives effect to this offering
including:
. the issuance of 6,000,000 shares of common stock in the offering and
application of the net offering proceeds;
. the conversion of the Series A convertible preferred stock into 2,827,168
shares of common stock upon the closing of the offering;
. the redemption of $3,000,000 in aggregate face value of Series B
cumulative mandatory redeemable convertible preferred stock, the payment
of accrued dividends at a rate of 8% per annum thereon, and the
conversion of the remaining Series B shares into 103,806 shares of common
stock (based upon the midpoint of the offering price range);
. the repayment of remaining amounts due to Cleartel Communications, Inc.
and amounts outstanding under our credit agreement with ING (U.S.)
Capital LLC;
. the write-off of unamortized debt discount and deferred financing costs
(approximately $1,109,000 as of December 31, 1998) to be recorded upon
the repayment of borrowings outstanding under our credit agreement with
ING (U.S.) Capital LLC;
. the grant to an OverVoice customer of warrants to purchase 66,667 shares
of common stock which, upon the effective date of the offering, have a
put option that allows the OverVoice customer to sell all of its warrants
(or shares of common stock issued pursuant to the exercise of the
warrants) back to CAIS Internet at the initial public offering price per
share;
. the issuance of 66,500 shares of CAIS Internet common stock to the
OverVoice customer sub-account within a fund jointly controlled by CAIS
Internet and the OverVoice customer which will be expensed upon issuance;
and
5
<PAGE>
SUMMARY FINANCIAL DATA
(continued)
. the acceleration of deferred compensation expense (approximately
$1,909,000 as of December 31, 1998) upon the acceleration of the vesting
of options to purchase common stock held by our President and Executive
Vice President of Sales and Marketing on the date immediately prior to
the earliest to occur of: (i) the effective date of a registration
statement; or (ii) the pricing of the initial public offering; or (iii)
the execution and delivery of an underwriting agreement related to an
initial public offering.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Predecessor Successor
--------------------------------------- ------------------------------
Period from Period from
January 1, 1996 May 11, 1996 Year Ended
Year Ended December 31, to to December 31,
----------------------- May 10, December 31, ------------
1994 1995 1996 1996 1997 1998
----------- ----------- --------------- ------------ ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $481 $2,240 $1,287 $2,410 $4,556 $5,315
Cost of services........ 124 697 323 834 2,010 3,118
Operating expenses...... 267 596 381 2,478 6,844 12,664(1)
Interest and other
expense (income)....... 1 3 (2) 212 288 1,101
---- ------ ------ ------- ------- --------
Income (loss) from
continuing operations.. $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
==== ====== ====== ======= ======= ========
Basic and diluted loss
per common share from
continuing operations.. $ (0.11) $ (0.48) $ (1.17)
======= ======= ========
Weighted-average common
shares outstanding--
basic and diluted...... 9,648 9,648 9,869
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash............................................ $ 95 $ 9,750 $78,967
Working (deficit) capital ...................... (9,374) 3,266 74,875
Total assets.................................... 15,678 15,477 85,402
Long-term debt, net of current portion.......... 10,767 6,183 --
Stockholders' (deficit) equity.................. (13,604) (6,208) 80,768
</TABLE>
- --------
(1) Operating expenses increased significantly in 1998 primarily due to costs
relating to development and trials of OverVoice. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this document before you decide whether to purchase our common stock. The risks
set forth below are in addition to risks that apply to most businesses.
Our performance may be difficult to evaluate since we have had a limited
operating history during which we have incurred significant net losses,
experienced negative cash flows and accumulated a significant deficit.
Our limited historical operating data may make it more difficult for you to
evaluate our performance. We incurred a net loss for the fiscal year ended
December 31, 1997 of approximately $2.7 million, and we incurred net losses and
negative cash flows from operations for the fiscal year ended December 31, 1998
in the amounts of approximately $12.2 million and $3.2 million, respectively.
On December 31, 1998, we had a stockholders' deficit of approximately $13.6
million.
Following the completion of this offering, we believe that we will incur
further losses, in part due to expenses incurred in connection with the roll-
out of OverVoice. However, we cannot assure you that after incurring these
additional losses and expenses:
. there will be an increase in revenues;
. we will gain profits in future operating periods; or
. we will have sufficient cash available to meet continuing losses and/or
necessary capital expenditures.
Our failure to manage our growth and expansion effectively could adversely
affect our business.
Our failure to manage our future growth and expansion effectively could have
a material adverse effect on our business. Our business strategy depends in
large part on our ability to rapidly deploy OverVoice which will require
significant capital expenditures. We expect to fund our near-term capital
requirements through the funds raised in this offering. However, further
expansion of our business over the long term will require substantial
additional capital and will likely require additional outside financing. This
growth will also increase our operating complexity as well as the level of
responsibility for both existing and new management personnel. As a result, in
order to manage our growth, we must, among other things:
. continue to implement and improve our operational, financial and
management information systems, including our billing, accounts
receivable and payables tracking, fixed assets and other financial
management systems;
. hire and train additional qualified personnel; and
. continue to expand and upgrade our network infrastructure.
We also expect that demands on our network infrastructure and technical
support resources will increase rapidly as our customer base continues to grow.
We may therefore experience difficulties meeting a high demand for services in
the future. We cannot assure you that our infrastructure, technical support or
other resources will be sufficient to facilitate this growth. As we strive to
increase network utilization, there will be additional demands on our customer
support, sales and marketing resources. Competition for qualified employees is
intense and salaries are escalating very quickly. In addition, the process of
locating such personnel with the combination of skills and attributes required
to carry out our strategy is often lengthy.
We may need additional capital, which we may not be able to obtain.
We intend to rapidly enhance and develop our network and effect a broad-
based roll-out of OverVoice in order to attain our business goals. We intend to
add at least ten additional points of presence from third-party providers in
1999 and make substantial capital investments in our own points of presence or
otherwise as
7
<PAGE>
dictated by customer demand or strategic considerations. If we do not have
enough cash from this offering, cash on hand and cash generated from our
operations to meet these cash requirements, we will need to seek alternative
sources of financing to carry out our growth and operating plans. We may not be
able to raise cash on terms acceptable to us or at all. Financings may be on
terms that are dilutive or potentially dilutive to our stockholders. If
alternative sources of financing are required, but are insufficient or
unavailable, we will have to modify our growth and operating plans, which may
negatively affect our operations, financial condition and stock performance.
The Inline agreement requires us to pay ongoing royalties.
We are required to pay Inline Connection Corporation royalties ranging
between 3.0% and 5.5% of net sales of the OverVoice technology. In the rare
cases where we do not provide the Internet access or own the OverVoice
equipment installed, this percentage may be as high as 70.0%. If we sublicense
the patents and pending patent applications relating to the OverVoice
technology to a third party, we are required to pay Inline a percentage of the
income received from the sublicense. Additionally, we have minimum annual
royalty payments starting at $100,000 in 1998 and increasing to $250,000. If we
fail to pay the minimum payments, or otherwise breach our agreement with
Inline, we will lose our exclusive right to use the OverVoice technology in
hotels and multiple dwelling units, which would have a material adverse effect
on our business.
Our business is subject to risks of technological change and evolving industry
standards.
Our future success will depend, in part, on our ability to: (1) offer
services that address the increasingly sophisticated and varied needs of our
current and prospective customers, and (2) respond to technological advances
and emerging industry standards and practices on a timely and cost-effective
basis. Internet access operations are characterized by:
. rapidly changing and unproven technology;
. evolving industry standards;
. changing customer needs; and
. numerous competitive services and product offerings.
We cannot assure you that:
. future advances in technology will be beneficial to, or compatible with,
our business;
. we will be able to incorporate such advances on a cost-effective or
timely basis; or
. our services will be necessary and cost-effective as a result of such
advances.
Although we intend to support emerging standards, we cannot assure you that
industry standards will be established, or that, if established, we will be
able to conform to the new standards in a timely fashion or maintain a
competitive position in the market. In addition, future products, services or
technologies developed by others may render our services noncompetitive,
unnecessary or obsolete.
The market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
greater marketplace presence and financial resources.
We operate in a highly competitive environment for each of our lines of
business and we believe that competition is increasing. We may not be able to
compete effectively, especially against established industry competitors with
greater marketplace presence and financial resources than those we possess. In
addition, due to the high level of competition, competing technologies may
surface which may lead to the decline in the demand for our services. The
competitive environments for our different lines of business are as follows:
8
<PAGE>
OverVoice. The major groups of competitors in the business of providing
high-speed Internet access to hotels and multiple dwelling units include:
. local exchange carriers;
. other digital subscriber line providers;
. cable TV companies and other providers using cable modems; and
. installation firms that upgrade existing wiring.
Many of these competitors have extensive marketplace presence and greater
technological and financial resources than we do.
The OverVoice technology also competes with technologies using other
transmission media, such as coaxial cable, wireless facilities and fiber optic
cable. If telecommunications service providers, hotels, multiple dwelling units
or single family residences install any of these alternative transmission
media, demand for OverVoice may decline.
CAIS Internet. Our principal competitors include other tier one national
backbone providers such as UUNET Technologies, Inc., PSINet Inc., BBN (a GTE
subsidiary), and other providers of always-on high-speed Internet access
including digital subscriber line services, T-1 and wireless access. To a
lesser extent, we also compete for always-on and dial-up access and web
services business with regional, tier two Internet service providers and cable
companies that operate in the same geographic markets that we serve. Because
the Internet services market has no substantial barriers to entry, we expect
that competition will continue to intensify. Eventually, we expect some form of
a market consolidation to occur, with those Internet service providers that
furnish the most value-added solutions ultimately surviving.
As a result of increased competition and vertical and horizontal integration
in the industry, we could encounter significant pricing pressure which could
cause us to significantly reduce the average selling price of some of our
products and services. We might not be able to offset the effects of any such
price reductions with an increase in the number of our customers, higher
revenue from enhanced services, cost reductions or otherwise. Market
consolidation could result in increased price and other competition in these
industries. Increased price or other competition could result in erosion of our
market share and could have a material adverse effect on our financial
condition. We cannot assure you that we will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully.
We may not be able to recover our installation costs and some of our contracts
are nonexclusive.
We have incurred, and will continue to incur, significant up-front costs
installing OverVoice in hotels and multiple dwelling units. There is no
guarantee that we will be able to recover such costs. In addition, because our
trial and long-term agreements for both hotels and multiple dwelling units
generally do not contain any minimum use requirements, there is no minimum
payout that we can expect to receive. Furthermore, some of our agreements do
not require hotel owners and operators to offer our services exclusively.
Our competitive advantage depends on our intellectual property rights and our
inability to protect those rights could adversely affect our business.
Our competitive advantage depends on certain domestic and foreign patents
and patent applications relating to the OverVoice technology that we license
from and jointly own with Inline Connection Corporation. Our success relies
substantially on our ability to protect the OverVoice technology, both
domestically and abroad. We face two major risks in connection with our
intellectual property rights:
(1) Others may infringe on our intellectual property rights, resulting in:
. lack of competitiveness in the market;
. expense of time and resources to protect our patents; and
9
<PAGE>
. dilution of the brand value of our service.
(2) Although we do not believe this to be the case, we may infringe others'
patents, resulting in:
. significant expense in defending our technology, even in the case of a
frivolous suit;
. requirement to pay damages; and
. costly and potentially impracticable redesign of our technology.
Any of the above could have a materially adverse effect on our business.
We depend upon our suppliers and have sole and limited sources of supply for
certain products and services.
We depend substantially on telecommunications services providers and we are
unable to control the pricing structure for these services. For example, in
order to provide Internet access and other on-line services to our customers,
we lease long distance fiber optic telecommunications lines from national
telecommunications services providers.
Certain of our suppliers, including regional Bell operating companies and
competitive local exchange carriers, are currently subject to various price
constraints, including tariff controls, which may change in the future. In
addition, pending regulatory proposals may affect the prices they charge us.
These regulatory changes could result in increased prices for products and
services, which could have a material adverse effect on our results of
operations.
We do not manufacture our proprietary OverVoice equipment, such as wall
jacks and the OverVoice DeskJack; rather, we depend on third parties to
manufacture and supply it. Any interruption in these manufacturers' operations
could adversely affect our ability to meet our customers' requirements.
We rely on other companies to supply our network infrastructure.
We rely on other companies to supply our network infrastructure (including
telecommunications services and networking equipment) which, in the quantities
and quality we require, is available only from sole or limited sources. We are,
therefore, vulnerable to the possibility that our suppliers may:
. compete directly with us;
. enter into exclusive arrangements with our competitors; or
. stop selling their products or components to us at commercially
reasonable prices, or at all.
The Internet relies on the exchange of traffic over a network of networks
that is owned and operated by many parties. We currently exchange traffic with
other Internet service providers with whom we maintain relationships. These
exchange agreements are not regulated and may be changed. If they become
regulated, modified or are altogether terminated, we may have to find
alternate, more expensive means to exchange traffic, or we may not be able to
do so, which would have a material adverse affect on our business.
A system failure could cause interuptions in the services we provide to our
customers.
Our operations depend upon our ability to protect our network against damage
from acts of nature, power failures, telecommunications failures and similar
events. Because we lease our lines from long-distance telecommunications
companies, Internet backbone providers, the regional Bell operating companies
and competitive local exchange carriers, we depend upon those companies for
physical repair and maintenance of those lines. Despite the precautions we and
our telecommunications providers take, the occurrence of a natural disaster,
fire, electrical outage or other unanticipated problems at one of our
facilities may cause interruptions in the services we provide. Such
interruptions in operations could have a material adverse effect on our
business.
10
<PAGE>
Viruses, break-ins and other security breaches could cause interruptions,
delays or a cessation of the services we provide to our customers.
Despite the implementation of network security measures, the core of our
Internet network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems. We may experience future interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Unauthorized use could also potentially
jeopardize the security of confidential information stored in our computer
systems and the computer systems of our customers. Although we intend to
continue to implement security measures to prevent this, these measures have
occasionally been circumvented in the past, and the possibility exists that the
measures we implement will be circumvented in the future. In addition,
eliminating such viruses and remedying such security problems may cause
interruptions, delays or cessation of service to our customers. If our security
measures fail, we may lose subscribers or be sued, resulting in additional
expenses and reduced profitability. We do not carry any insurance against these
risks because it is unavailable at a reasonable cost.
Our success depends on our retention of and the performance of management and
other key personnel.
Our success depends in significant part upon the continued service and
performance of our senior management personnel and other employees who possess
longstanding industry relationships and technical knowledge of our operations.
While we do not maintain any "key person" insurance, we have entered into
employment agreements with certain key employees. Our future success also
depends on our ability to attract, train, retain and motivate highly skilled
personnel. To date, we have successfully attracted and retained qualified,
high-level personnel; we have not had to devote significant time and resources
recruiting such personnel; and personnel turnover has not affected our
development efforts. However, competition for qualified, high-level
telecommunications personnel is intense and we cannot assure you that we will
be able to continue to attract and retain such talent. The loss of the services
of one or more of our key individuals, or the failure to attract and retain
additional key personnel, could have a material adverse effect on our business.
We could face government regulation and changes in current or future laws or
regulations could restrict our operations; We may be subject to potential
taxes.
As an Internet service provider, we are not currently subject to direct
regulation by the Federal Communications Commission or any other agency, other
than regulations applicable to businesses generally. Nevertheless, Internet-
related regulatory policies are continuing to develop, and it is possible that
we could be exposed to regulation in the future. For example, the FCC has
stated its intention to consider whether to regulate voice and fax telephony
services provided over the Internet as "telecommunications" even though
Internet access itself would not be regulated. The FCC is also considering
whether such Internet-based telephone service should be subject to universal
service support obligations, or pay carrier access charges on the same basis as
traditional telecommunications companies.
Local telephone companies assess access charges to long distance companies
for the use of the local telephone network to originate and terminate long
distance calls, generally on a per-minute basis. Access charges have been a
matter of continuing dispute, with long distance companies complaining that the
rates are substantially in excess of cost, and local telephone companies
arguing that access rates are justified to subsidize lower local rates for end
users and other purposes. Both local and long distance companies, however,
contend that Internet-based telephony should be subject to these charges. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments. However,
we cannot predict whether these debates will cause the FCC to reconsider its
current policy of not regulating Internet service providers.
In addition, a number of 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 access taxes. We cannot
accurately predict whether the imposition of any such taxes would have a
material adverse effect on
11
<PAGE>
our business, financial condition or results of operations. For more
information about our regulatory situation, please see "Business--Government
Regulation; Potential Taxes."
We may be liable for information sent through our network.
The law relating to the liability of Internet service providers and on-line
services companies for information carried on, stored on or disseminated
through their network is unsettled, even with the recent enactment of the
Digital Millennium Copyright Act. We believe that it is currently also
unsettled as to whether the Telecommunications Act of 1996 prohibits and
imposes liability for any of the services we provide should the content of
information transmitted be subject to the statute. While no one has ever filed
a claim against us relating to this issue, someone may file a claim of that
type in the future and may be successful in imposing liability on us. If that
happens, we may have to spend significant amounts of money to defend ourselves
against these claims and, if we are not successful in our defense, the amount
of damages that we will have to pay may be significant. Any costs that we incur
as a result of defending these claims or the amount of liability that we may
suffer if our defense is not successful could materially adversely affect our
profitability.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take steps to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering certain of our products or services.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to certain content
by minors, pricing, bulk e-mail (spam), encryption standards, consumer
protection, electronic commerce, taxation, copyright infringement and other
intellectual property issues. We cannot predict the impact, if any, that future
regulatory changes or developments may have on our business, financial
condition, or results of operation. Changes in the regulatory environment
relating to the Internet access industry, including regulatory changes that
directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition from regional telephone companies or others,
could have a material adverse effect on our business.
We may not be able to protect our trademarks which could hamper our ability to
market our products and services.
Our success is dependent in part on recognition of our name and trademarks,
such as "CAIS" and "OverVoice", and pending trademarks, such as "DeskJack." We
intend to protect and defend our name, servicemarks and trademarks in the
United States and internationally. We achieved federal registration for several
of our trademarks, including the mark CAIS, and filed for federal trademark
protection for a number of other marks which we use or intend to use, for
example "DeskJack." However, we cannot assure you that:
. our efforts to protect our proprietary rights in the United States or
abroad will be successful;
. our use of our trademarks and servicemarks will be free from legal
challenges; or
. we will have sufficient funds to withstand such challenges or claims,
regardless of their merit.
If we are unable to protect our proprietary rights, it could seriously
affect our ability to market our products and services. In addition, legal
challenges to our proprietary rights could lead to a substantial diversion of
our limited resources. For more information about our intellectual property,
please see "Business--Patents and Other Proprietary Information."
Management will have broad discretion in applying the proceeds of the offering.
Our management will have broad discretion as to the application of the
proceeds of this offering without prior stockholder approval and our
management's failure to apply the funds effectively could cause our
12
<PAGE>
business to suffer. Accordingly, you will have to rely on our management to
properly apply the proceeds. Please see "Use of Proceeds" for more information
on how we intend to apply the proceeds.
Our executive officers and directors, as a group, control CAIS Internet.
After giving effect to this offering, our executive officers and directors,
as a group, beneficially owned or controlled approximately 70% of the
outstanding shares of common stock on a fully diluted basis. Consequently, as a
practical matter, even after this offering, our executive officers and
directors, as a group, will be able to control all matters requiring approval
by our stockholders, including the election of our Board of Directors,
management policy and all fundamental corporate actions, including mergers,
substantial acquisitions and dispositions of assets. Please see "Principal
Stockholders" for information about the ownership of common stock by our
executive officers, directors and principal stockholders.
Future sales of our common stock could have a negative impact on the market
price of our common stock.
Sales of a substantial number of shares of common stock in the public market
following this offering, or the appearance that such shares are available for
sale, could adversely affect the market price of our common stock and could
impair our ability to raise funds in future stock offerings. Upon completion of
the offering, we will have outstanding 18,987,959 shares of common stock. In
addition to these shares, upon completion of the offering, 5,016,110 shares
will be issuable upon the exercise of options and warrants.
All of our stockholders, directors and officers have agreed not to dispose
of any common stock, or any options, warrants or other securities convertible
into or exercisable for common stock for 180 days after the date of this
prospectus, subject to limited exceptions. See "Underwriting" and "Shares
Eligible for Future Sale" for a detailed discussion of these arrangements and
stockholders' rights under the Securities Act.
In addition, following the consummation of the offering, we intend to
register 3,860,295 shares of common stock issuable upon the exercise of options
granted to executives and options granted under our Amended and Restated 1998
Equity Incentive Plan and under other compensatory arrangements which could
also adversely affect the market price of our common stock.
There is currently no public market for our common stock and our stock price
may fluctuate significantly in the future.
Before this offering, there was no public market for our common stock. We
have applied to the Nasdaq National Market to list our common stock, but we do
not know whether an active trading market will develop or continue after this
offering. The initial public offering price will be determined by negotiation
between us and the representatives of the underwriters and may not be
indicative of the price that will prevail in the open market. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The stock market has from time to time experienced significant price and
volume fluctuations, which have particularly affected the market prices of the
stocks of Internet-related companies and which may be unrelated to the
operating performance of such companies. Furthermore, our operating results and
prospects may be below the expectations of public market analysts and investors
which could lead to a material decline in the price of our common stock.
In addition, in the past, following periods of volatility in the market
price of a company's securities, class action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources.
13
<PAGE>
You will experience immediate and substantial dilution in the book value of our
common stock.
The price you pay for our common stock will be substantially higher than the
book value of the common stock. As a result, you will experience immediate and
substantial dilution in the pro forma combined net tangible book value of your
shares of $10.83 per share, while our founders and executive officers will
receive a material increase in the pro forma combined net tangible book value
of their shares of common stock. In addition, your common stock will be diluted
because upon completion of this offering:
. 5,016,110 shares will be issuable upon the exercise of options and
warrants;
. 2,827,168 shares of common stock will be issuable upon the conversion of
Series A convertible preferred stock; and
. 103,806 shares of common stock will be issuable upon the conversion of
remaining Series B cumulative mandatory redeemable convertible preferred
stock (based on the midpoint of the offering price range).
We may also grant options for up to 194,200 additional shares of common
stock under our Amended and Restated 1998 Equity Incentive Plan.
The ability of stockholders to effect changes in control of CAIS Internet is
limited.
There are provisions in our certificate of incorporation and by-laws that
make it more difficult for a third party to acquire, or attempt to acquire,
control of CAIS Internet.
These provisions include:
. a classified Board of Directors with staggered, three-year terms;
. the authority to issue "blank check" preferred stock;
. eliminating the ability of stockholders to act by written consent;
. eliminating the ability of stockholders to call a special meeting of the
stockholders;
. an advance notice procedure for stockholder proposals to be brought
before meetings of our stockholders; and
. requiring a super-majority stockholder vote to effect certain
amendments.
In addition, the Delaware General Corporation Law may also discourage
takeover attempts that have not been approved by our Board of Directors.
We do not anticipate that we will pay cash dividends.
We plan to retain future net income, if any, to fund internal growth.
Therefore, we do not anticipate paying any cash dividends on the common stock
in the foreseeable future.
Failure to obtain Year 2000 compliance may have adverse effects on the company.
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. Our failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain of our normal
business activities or operations. During 1998, we established a Year 2000
compliance program to coordinate appropriate activity and report to our Board
of Directors with regard to Year 2000 issues. We continue to assess the impact
of Year 2000 issues on our internal computer, operational and financial
systems, and to review with our key vendors and suppliers, the compliance of
their systems with Year 2000 processing requirements. We currently believe that
our most likely worst case scenario related to the Year 2000 is associated with
potential concerns with our customers' and
14
<PAGE>
suppliers' Internet operations. The failure of such parties to ensure Year 2000
compliance would lead to decreased Internet usage and the delay or inability to
obtain necessary data communication and telecommunication capacity. These
factors could in turn have a material adverse effect on our business. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000 Issue" for a more detailed discussion of
the impact of the Year 2000 issue.
15
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Our fiscal year ends on December 31. We will furnish our stockholders annual
reports containing audited financial statements and other appropriate reports.
In addition, we will become a reporting company under the Securities Exchange
Act of 1934 and file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information we file at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further
information on the operation of the Public Reference Rooms. Our SEC filings are
also available to the public on the SEC's Internet site at http://www.sec.gov.,
which contains reports, proxy and information statements, and other information
regarding issuers.
We have applied to list our common stock on The Nasdaq National Market under
the symbol "CAIS." Reports, proxy statements and other information concerning
CAIS Internet will also be available to be inspected at the offices of Nasdaq
Operations, 9801 Washingtonian Boulevard, Fifth Floor, Gaithersburg, MD 20879.
If you want more information, write or call us at:
CAIS Internet, Inc.
1255 22nd Street, N.W.
Fourth Floor
Washington, D.C. 20037
Telephone: (202) 715-1300
Facsimile: (202) 463-7190
Internet address: www.cais.com
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933, covering the common stock being offered by this
prospectus. As permitted by SEC rules, this prospectus omits certain
information that is included in the registration statement. For further
information about us and our common stock, you should refer to the registration
statement and its exhibits. Since the prospectus may not contain all the
information that you may find important, you should review the full text of
these documents. If we have filed a contract, agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the document or matter involved. Information
available on our web site is not part of this prospectus.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future
expectations and business strategies or state other "forward-looking"
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. We undertake no obligation to publicly update or revise any
forward-looking statements.
Important factors that may cause actual results to differ from projections
include, for example:
. changes in business conditions;
. changes in the Internet services industry and the general economy;
. our limited operating history;
. our ability to manage rapid growth;
. our ability to enter into joint ventures and other strategic
relationships with companies on terms acceptable to us; and
. the impact of computer and related problems that may arise from the Year
2000 problem on our business.
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<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $81.7 million (approximately $94.3 million if the underwriters'
over-allotment option is exercised in full) after deducting estimated
underwriting discounts and commissions and other fees and expenses. We intend
to use the net proceeds from this offering to expand our business, including
capital expenditures, increased sales and marketing and working capital
associated with the roll-out of our OverVoice technology and digital subscriber
line (DSL) services and to further build-out our network infrastructure
nationwide. Of the total net proceeds, we estimate that we will use
approximately $16 million for capital expenditures, $20 million for sales and
marketing, $18 million for network infrastructure build out, $9 million for
research and development, and $7 million for general corporate purposes. In
addition, we intend to use proceeds from the offering to:
. repay approximately $7 million of outstanding indebtedness under our
credit agreement with ING (U.S.) Capital LLC, which bears interest at
the one-month LIBOR rate plus 5%;
. repay a non-interest bearing account payable in the amount of
approximately $2 million owed to Cleartel Communications, Inc.; and
. redeem shares of Series B cumulative mandatory redeemable convertible
preferred stock with a total face value of $3 million and pay accrued
dividends thereon at a rate of 8% per annum.
We also intend to use proceeds from the offering to finance research and
development of future products and services, as well as for general corporate
purposes. We also from time to time consider the acquisition of, or investments
in, complementary businesses, customer bases, products or technologies, and may
use proceeds of the offering to make such acquisitions or investments. Pending
such uses, we intend to invest the net proceeds of this offering in short-term,
investment grade interest-bearing securities.
We currently intend to allocate substantial proceeds to each of the
foregoing categories. However, the precise allocation of funds among these uses
will depend on future technological, regulatory and other developments in or
affecting our business, the competitive climate in which we operate and the
emergence of future opportunities. Accordingly, our management will retain
broad discretion in the allocation of the net proceeds.
For a further discussion of our capitalization structure and liquidity,
please see "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." For further information concerning the amounts payable to Cleartel
Communications, Inc. and the redemption of Series B cumulative mandatory
redeemable convertible preferred stock, please see "Certain Relationships and
Related Transactions."
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion of
our business and for general corporate purposes and do not anticipate paying
any cash dividends on the common stock for the foreseeable future. Our future
dividend policy will be determined by the Board of Directors on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
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<PAGE>
CAPITALIZATION
The following table sets forth our cash, short-term debt and capitalization
as of December 31, 1998, (1) on an actual basis, (2) on a pro forma basis and
(3) on a pro forma as adjusted basis to give effect to the pro forma
adjustments and to give effect to this offering and the application of the
estimated net proceeds of the offering. You should read this table together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and CAIS Internet's historical financial statements, including
the related notes thereto, included elsewhere in this prospectus.
The column entitled "Pro Forma" gives effect to the following:
. the issuance of Series A convertible preferred stock in February 1999 for
gross proceeds of $11,500,000, less issuance costs of $135,000, the
repayment of $1,500,000 of borrowings from Cleartel Communications
Limited Partnership, and the payment of $210,000 to extend our credit
agreement with ING (U.S.) Capital LLC;
. the spin-off of Cleartel Communications, Inc. to our stockholders in
February 1999 and the related $700,000 of Owners' Deficit as of
December 31, 1998;
. CAIS Internet's assumption of debt in the total principal amount of
$1,450,000 originally payable by Cleartel Communications Limited
Partnership to Ulysses G. Auger, Sr., a director of CAIS Internet, in
exchange for an equal reduction in the account payable by CAIS Internet
to Cleartel Communications Limited Partnership;
. CAIS Internet's issuance of Series B cumulative mandatory redeemable
convertible preferred stock to Ulysses G. Auger, Sr. in exchange for the
retirement of the $1,450,000 of assumed debt;
. CAIS Internet's issuance of additional Series B cumulative mandatory
redeemable convertible preferred stock in exchange for $3,107,000 of
related party debt; and
. the issuance of the warrants in connection with the Series A convertible
preferred stock, which have been valued in the accompanying table
assuming an offering price of $15.00 per share (based on the midpoint of
the offering price range).
The column entitled "Pro Forma As Adjusted" gives effect to the following:
. the issuance of 6,000,000 shares of common stock in this offering and
application of the net offering proceeds;
. the conversion of the Series A convertible preferred stock into 2,827,168
shares of common stock upon the closing of the offering;
. the redemption of $3,000,000 in total face value of Series B cumulative
mandatory redeemable convertible preferred stock, the payment of accrued
dividends at a rate of 8% per annum thereon, and the conversion of the
remaining shares into 103,806 shares of common stock (based upon the
midpoint of the offering price range);
. the repayment of remaining amounts due to Cleartel Communications, Inc.
and amounts outstanding under our credit agreement with ING (U.S.)
Capital LLC;
. the write-off of unamortized debt discount and deferred financing costs
(approximately $1,109,000 as of December 31, 1998) to be recorded upon
the repayment of borrowings outstanding under our credit agreement;
. the grant to an OverVoice customer of warrants to purchase 66,667 shares
of common stock which, upon the effective date of the offering, have a
put option that allows the OverVoice customer to sell all of its warrants
(or shares of common stock issued pursuant to the exercise of the
warrants) back to CAIS Internet at the initial public offering price per
share;
. the issuance of 66,500 shares of CAIS Internet common stock to the
OverVoice customer sub-account within a fund jointly controlled by CAIS
Internet and the OverVoice customer, which will be expensed upon
issuance; and
. the acceleration of deferred compensation expense (approximately
$1,909,000 as of December 31, 1998) upon the acceleration of the vesting
of options to purchase common stock held by our President and Executive
Vice President of Sales and Marketing on the date immediately prior to
the earliest to occur of: (i) the effective date of a registration
statement; or (ii) the pricing of the initial public offering; or (iii)
the execution and delivery of an underwriting agreement related to an
initial public offering.
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CAPITALIZATION
(continued)
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share data)
<S> <C> <C> <C>
Cash........................................... $ 95 $ 9,750 $ 78,967
======== ======= ========
Short-term debt:
Payable to discontinued operations............. $ 5,342 $ 2,392 $ --
======== ======= ========
Long-term debt:
Loan, net of unamortized debt discount of
$817......................................... $ 6,183 $ 6,183 $ --
Notes payable to related parties, net of
current portion.............................. 1,983 -- --
Long-term liabilities of discontinued
operations................................... 2,601 -- --
-------- ------- --------
10,767 6,183 --
-------- ------- --------
Series A convertible preferred stock, net of
discount of $6,446, 2,827,168 shares
authorized, issued and outstanding on a pro
forma basis, no shares outstanding as
adjusted...................................... -- 4,919 --
-------- ------- --------
Series B cumulative mandatory redeemable
convertible preferred stock, 1,119,679 shares
authorized, issued and outstanding on a pro
forma basis, no shares outstanding as
adjusted...................................... -- 4,557 --
-------- ------- --------
Put warrants................................... -- -- 1,000
-------- ------- --------
Stockholders' (deficit) equity:
Common stock, $0.01 par value, 100,000,000
shares authorized, 9,965,485 shares issued
and outstanding on an actual basis,
9,990,485 shares on a pro forma basis, and
18,987,959 shares as adjusted(1)............. 100 100 190
Additional paid-in capital(1)................. 7,544 7,794 103,458
Warrants outstanding.......................... 1,226 7,672 7,672
Deferred compensation......................... (2,888) (2,888) (979)
Accumulated deficit........................... (19,586) (18,886) (29,573)
-------- ------- --------
Total stockholders' (deficit) equity........ (13,604) (6,208) 80,768
-------- ------- --------
Total capitalization........................ $ (2,837) $ 9,451 $ 81,768
======== ======= ========
</TABLE>
- --------
(1) Excludes (i) approximately 2,034,000 and 520,000 shares of common stock
issuable upon the exercise of executive stock options granted in 1997 and
1999, respectively; (ii) 1,500,000 shares of common stock reserved for
issuance under CAIS Internet's Amended and Restated 1998 Equity Incentive
Plan (960,000 of which were granted in 1998, 280,000 of which were granted
in January and February 1999, and 45,000 of which were granted in April
1999); (iii) 390,000 shares of common stock issuable pursuant to the
exercise of certain warrants issued to ING (U.S.) Capital LLC; (iv)
approximately 699,000 shares of common stock issuable pursuant to the
exercise of certain warrants issued to the holders of Series A convertible
preferred stock; (v) 66,667 shares of common stock issuable pursuant to the
exercise of certain warrants issued to an OverVoice customer; and (vi)
153,500 shares of common stock issuable upon the exercise of employee
options to be granted concurrently with this offering at an exercise price
equal to the initial public offering price.
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DILUTION
CAIS Internet's pro forma net tangible book value as of December 31, 1998
was $1.6 million, or $0.12 per share of common stock. Pro forma net tangible
book value per share is equal to CAIS Internet's total pro forma tangible
assets less its total pro forma liabilities divided by the number of shares of
common stock outstanding after giving effect to the conversion of the Series A
and Series B preferred stock. After giving effect to the sale by CAIS Internet
of the 6,000,000 shares of common stock upon completion of this offering,
assuming an initial public offering price of $15.00 per share, and the
application of the estimated net proceeds of the offering as described under
"Use of Proceeds," CAIS Internet's pro forma net tangible book value at
December 31, 1998, would have been approximately $79.1 million, or
approximately $4.17 per share. This represents an immediate increase of $4.05
per share in the pro forma net tangible book value to existing stockholders and
an immediate dilution of $10.83 per share in pro forma net tangible book value
to new investors purchasing common stock in this offering.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $15.00
Pro forma net tangible book value per share before the
offering.................................................... $0.12
Increase per share attributable to new investors............. $4.05
Pro forma net tangible book value per share after the
offering...................................................... $ 4.17
------
Dilution per share to new investors............................ $10.83
======
</TABLE>
The following table summarizes as of March 31, 1999, after giving effect to
the conversion of the Series A and Series B preferred stock and this offering
(assuming an initial public offering price of $15.00 per share) the number of
shares of common stock purchased from CAIS Internet, the total cash
consideration paid for CAIS Internet's capital stock and the average price per
share paid by existing stockholders and the new investors purchasing shares of
common stock in the offering (before deducting underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
Shares
Purchased Total Cash
-------------- Consideration Average Price
Number Percent Paid Per Share
------ ------- ------------- -------------
<S> <C> <C> <C> <C>
Existing stockholders................ 12,988 68% $ 10,688 $ 0.82
New investors........................ 6,000 32 90,000 15.00
------ --- --------
Total................................ 18,988 100% $100,688
====== === ========
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option and no exercise of options or warrants to purchase additional shares of
common stock. As of the date of this prospectus, the foregoing table excludes
(i) approximately 2,034,000 and 520,000 shares of common stock issuable upon
the exercise of executive stock options granted in 1997 and 1999, respectively;
(ii) 1,500,000 shares of common stock reserved for issuance under CAIS
Internet's Amended and Restated 1998 Equity Incentive Plan (960,000 of which
were granted in 1998, 280,000 of which were granted in January and February
1999, and 45,000 of which were granted in April 1999); (iii) 390,000 shares of
common stock issuable pursuant to the exercise of certain warrants issued to
ING (U.S.) Capital LLC; (iv) approximately 699,000 shares of common stock
issuable pursuant to the exercise of certain warrants issued to the holders of
Series A convertible preferred stock; (v) 66,667 shares of common stock
issuable pursuant to the exercise of certain warrants issued to an OverVoice
customer; and (vi) 153,500 shares of common stock issuable upon the exercise of
employee options to be granted concurrently with this offering at an exercise
price equal to the initial public offering price. To the extent outstanding
options and warrants are exercised, there will be further dilution to new
investors.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The selected
financial data for the fiscal years ended December 31, 1996, 1997 and 1998 are
derived from CAIS Internet's financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants and included elsewhere in
this prospectus. The selected financial data for the period from January 1,
1996 through May 10, 1996 are derived from Capital Area Internet Service Inc.'s
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants and are presented separately in this prospectus.
The selected financial data for the fiscal years ended December 31, 1994 and
1995 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which CAIS Internet considers necessary for a fair presentation of the
financial position and results of operations for these periods. The financial
data set forth for the periods ended, or as of dates, on or prior to May 10,
1996 reflect the results of operations of Capital Area prior to its acquisition
by CAIS, Inc. and are captioned as "predecessor." The historical financial data
subsequent to May 10, 1996 reflect the results of operations of CAIS Internet's
continuing operations. In February 1999, CAIS Internet completed the spin-off
of Cleartel Communications, Inc. and for financial reporting purposes has
accounted for Cleartel Communications, Inc.'s results as discontinued
operations. Accordingly, the results of operations for Cleartel Communications,
Inc. have been excluded from the selected financial data below. See "Certain
Relationships and Related Transactions--Organization of CAIS Internet." The
operating results for the period ended December 31, 1998 are not necessarily
indicative of the results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Predecessor Successor
----------------------------- ------------------------------
Period from Period from
Year Ended January 1, 1996 May 11, 1996 Year Ended
December 31, to to December 31,
------------- May 10, December 31, -----------------
1994 1995 1996 1996 1997 1998
------------- --------------- ------------ ------- --------
(unaudited) (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,315
Cost of services........ 124 697 323 834 2,010 3,118
Operating expenses:
Selling, general and
administrative....... 228 514 339 2,126 5,550 10,407
Depreciation and
amortization......... 39 82 42 352 678 831
Non-cash
compensation......... -- -- -- -- 616 1,426
----- ------- ------ ------- ------- --------
Total operating
expenses........... 267 596 381 2,478 6,844 12,664
----- ------- ------ ------- ------- --------
Income (loss) from
operations 90 947 583 (902) (4,298) (10,467)
Interest and other
expense (income)....... 1 3 (2) 212 288 1,101
----- ------- ------ ------- ------- --------
Income (loss) from
continuing operations.. $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
===== ======= ====== ======= ======= ========
Basic and diluted loss
per common share from
continuing operations.. $ (0.11) $ (0.48) $ (1.17)
======= ======= ========
Weighted-average common
shares outstanding -
basic and diluted...... 9,648 9,648 9,869
======= ======= ========
</TABLE>
21
<PAGE>
SELECTED FINANCIAL DATA
(continued)
<TABLE>
<CAPTION>
Predecessor Successor
----------------------------- ------------------------------
Period from Period from
Year Ended January 1, 1996 May 11, 1996 Year Ended
December 31, to to December 31,
------------- May 10, December 31, -----------------
1994 1995 1996 1996 1997 1998
------------- --------------- ------------ ------- --------
(unaudited) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Business Segments:
Net revenues:
Internet services..... $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,278
OverVoice............. -- -- -- -- -- 37
----- ------- ------ ------- ------- --------
Total............... $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,315
----- ------- ------ ------- ------- --------
Income (loss) from
continuing operations:
Internet services..... $ 89 $ 944 $ 585 $(1,114) $(3,807) $ (8,228)
OverVoice............. -- -- -- -- (779) (3,340)
----- ------- ------ ------- ------- --------
Total............... $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
----- ------- ------ ------- ------- --------
Other Financial Data:
EBITDA, as
adjusted(1)(2): $ 129 $1,029 $ 625 $ (550) $(3,004) $ (8,210)
</TABLE>
<TABLE>
<CAPTION>
Predecessor Successor
------------- --------------------------
December 31, December 31,
------------- --------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- --------
(unaudited) (in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 50 $ 113 $ 73 $ 149 $ 95
Working capital
(deficit).............. 48 454 (3,755) (6,440) (9,374)
Total assets............ 139 997 13,120 15,038 15,678
Long-term debt, net of
current portion........ 23 -- 4,863 4,110 10,767
Stockholders' equity
(deficit).............. 111 748 (3,133) (5,278) (13,604)
</TABLE>
- --------
(1) EBITDA, as adjusted, represents operating income (loss) before
depreciation, amortization and non-cash compensation. EBITDA, as adjusted,
is presented to enhance understanding of CAIS Internet's operating results
and should not be construed (1) as an alternative to operating income (as
determined in accordance with generally accepted accounting principles
("GAAP"), as an indicator of CAIS Internet's operating performance; or (2)
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. EBITDA, as adjusted, as
calculated by CAIS Internet may be calculated differently than EBITDA, as
adjusted, for other companies. See CAIS Internet's Consolidated Financial
Statements and the notes to the financial statements contained elsewhere in
this prospectus.
(2) Net cash provided by (used in) operating activities for continuing
operations for the years ended December 31, 1996, 1997 and 1998 was
approximately $804,000, $(97,000), and $(4,939,000), respectively.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes to the financial
statements appearing elsewhere in this prospectus.
Overview
During the years presented, CAIS Internet has 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 this period CAIS Internet has incurred
significant costs and devoted substantial resources associated with the
research, development and trial deployment of its OverVoice technology, all of
which has been expensed as incurred. The costs of these trials include
OverVoice equipment, contract labor for surveys and the actual property
installation, and Internet bandwidth and local loop connection charges. In
addition, CAIS Internet intends to make significant investments in its
nationwide network infrastructure in conjunction with OverVoice and its other
always-on, high-speed Internet services. CAIS Internet also plans to devote
considerable sales and marketing resources to the sale of always-on, high-speed
Internet access using its OverVoice technology in hotels and multiple dwelling
units and digital subscriber line services in the commercial and residential
markets. CAIS Internet plans to continue to expand its research and development
activities to develop new products and services to be offered using the
OverVoice technology.
CAIS Internet's nationwide deployment of OverVoice and other services, and
the expansion of its network, will result in increased cost of services,
selling, general and administrative expenses and capital expenditures. CAIS
Internet's ability to generate positive cash flow from operations and achieve
profitability is dependent upon its ability to successfully expand its customer
base for OverVoice and other services and achieve further operating
efficiencies. CAIS Internet might not be able to achieve or sustain revenue
growth, positive cash flow or profitability in the future.
Statements of Operations
CAIS Internet records revenues for all services, including installation
fees, when the services are provided to customers. 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. Although net revenues from
OverVoice services, including amounts generated under CAIS Internet's
agreements with OnePoint Communications Corp. and Hilton Hotels, have not been
significant to date, revenue will be recognized when earned. Internet access
services typically require the customer to purchase equipment and 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 on a monthly or annual basis.
CAIS Internet's costs include:
. cost of services;
. selling, general and administrative expenses;
. research and development;
. depreciation and amortization, which includes the amortization of
goodwill recorded as a result of the acquisition of Capital Area in May
1996;
. non-cash compensation attributable to the grant of options to certain
executives; and
. interest and other expense.
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.
23
<PAGE>
Selling, general and administrative costs are incurred in the areas of sales
and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Selling, general and administrative
costs will increase over time as CAIS Internet's operations, including the
nationwide deployment of OverVoice services and the expansion of its HyperDSL
services, increase. In addition, significant levels of marketing activity may
be necessary for CAIS Internet to build or increase its customer base among
multiple dwelling unit residents and hotel guests to a significant enough size
in a particular building or market. Any such increased marketing efforts may
have a negative effect on earnings.
During 1997, CAIS Internet granted options to purchase common stock to
William M. Caldwell, IV, CAIS Internet's President, and Evans K. Anderson, CAIS
Internet's Executive Vice President of Sales and Marketing. As a result of
these grants, CAIS Internet recorded paid-in capital of $4,930,000 and unearned
compensation of $4,930,000. Of this unearned compensation, $616,000 and
$1,426,000 were charged to expense during the fiscal years ended December 31,
1997 and 1998, respectively. In March and April 1999, CAIS Internet granted
options to purchase a total of 380,000 shares of common stock, at an exercise
price of $4.31 per share, to two additional officers. As a result of such
option grants, CAIS Internet expects to record additional paid-in capital and
unearned compensation of approximately $2.2 million, which will be expensed
over the expected vesting periods of three to four years.
On April 23, 1999, in connection with an amendment to CAIS Internet's master
agreement with an OverVoice customer, CAIS Internet issued warrants to the
customer to purchase 66,667 shares of common stock based on an initial public
offering price of $15 per share at an exercise price of $0.01 per share, as an
additional contribution by CAIS Internet in support of the customer's marketing
of OverVoice. If the initial public offering price is less than $15, the number
of warrants to purchase common stock shall be increased such that the total
number of warrants multiplied by the initial public offering price will equal
at least $1 million. In connection with the warrants, the customer received
certain demand and incidental registration rights. Commencing upon the
effective date of the initial public offering, the customer has a put option to
sell all of the warrants (or shares of CAIS Internet issued pursuant to the
exercise of the warrants) back to CAIS Internet at the initial public offering
price 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 Securities Act
Rule 144. As a result of this transaction with the customer, CAIS Internet
expects to record additional paid-in capital and an intangible asset of
approximately $1 million, which will be expensed over the expected benefit
periods.
Also, in connection with the development of future technologies at the
customer's properties, CAIS Internet will contribute 133,000 shares of common
stock to a fund, at a date no later than 10 days following of the initial
public offering. The shares will be jointly owned by CAIS Internet and the
customer, with 50% of the contributed shares allocated to a customer sub-
account within the fund and 50% of the contributed shares allocated to CAIS
Internet's sub-account. The customer's shares will be entitled to the same
registration rights as the shares underlying the customer warrants as discussed
above. Upon issuance of the customer's 66,500 shares of CAIS Internet common
stock, CAIS Internet expects to record approximately $1 million of expense.
For the years ended December 31, 1996, 1997 and 1998, CAIS Internet's
operations generated net losses. As of December 31, 1997 and 1998, CAIS
Internet had negative working capital of approximately $6,440,000 and
$9,374,000, respectively, and a stockholders' deficit of approximately
$5,278,000 and $13,604,000, respectively.
History
CAIS Internet was incorporated in Delaware in December 1997, under the name
CGX Communications, Inc., to serve as a holding company for CAIS, Inc. and
Cleartel Communications Limited Partnership. CAIS, Inc. was formed as a
Virginia corporation by certain current stockholders of CAIS Internet in May
1996, to acquire Capital Area, a tier one Internet service provider that was
owned by persons unaffiliated with CAIS
24
<PAGE>
Internet. CAIS, Inc. acquired all of the outstanding capital stock of Capital
Area for approximately $3.07 million. Capital Area merged with and into CAIS,
Inc. in May 1996.
In October 1998, in anticipation of a possible high yield debt offering or
other debt financing, CAIS Internet completed a reorganization in which CAIS,
Inc., Cleartel Communications, Inc. and Cleartel Communications Limited
Partnership became wholly owned subsidiaries of CAIS Internet. CAIS Internet
issued common stock in exchange for the ownership of these entities. The
October 1998 reorganization was accounted for on a basis similar to a pooling-
of-interests, since CAIS Internet, Cleartel Communications, Inc., Cleartel
Communications Limited Partnership and CAIS, Inc. were under common ownership.
In February 1999, CAIS Internet transferred all of its limited partnership
interests in Cleartel Communications Limited Partnership to Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership was
dissolved. CAIS Internet then completed the spin-off of Cleartel
Communications, Inc. by distributing all of its shares in Cleartel
Communications, Inc. to CAIS Internet's stockholders pro rata based on their
percentage ownership of the outstanding shares of CAIS Internet. As a result of
the spin-off of Cleartel Communications, Inc., Cleartel Communications, Inc.
ceased to be a subsidiary of CAIS Internet. CAIS Internet effected the spin-off
to concentrate on its Internet businesses and to position itself for an initial
public offering. In addition, CGX Communications, Inc. changed its name to CAIS
Internet, Inc.
Prior to the October 1998 reorganization, CAIS, Inc. and Cleartel
Communications Limited Partnership were not subject to federal income taxes
since any federal tax effects were passed through to each entity's S
corporation shareholders (as to CAIS, Inc.) or its partners (as to Cleartel
Communications Limited Partnership). Cleartel Communications Limited
Partnership was subject to state unincorporated business franchise taxes on any
profits in the District of Columbia. In addition, Cleartel Communications
Limited Partnership has reimbursed its limited partners for any state tax
liabilities related to allocated taxable income. Since CAIS Internet is a C
corporation, all earnings and losses generated after the October 1998
reorganization are no longer passed through to CAIS Internet's stockholders.
The spin-off of Cleartel Communications, Inc. in February 1999 was a taxable
transaction. Accordingly, CAIS Internet will be subject to income taxes on the
excess of the fair value of the spun-off assets (stock) over CAIS Internet's
basis in the assets distributed. Management believes that the net operating
losses available for carryforward into 1999 together with the losses expected
to be generated in 1999 will offset any potential gain for income tax purposes.
To the extent that net operating losses are used to offset the taxable gain
upon the spin-off of Cleartel Communications, Inc., the related operating
losses will not be available to offset any future operating income. If
carryforward losses are used to offset the gain from the spin-off of Cleartel
Communications, Inc., CAIS Internet may be subject to the Alternative Minimum
Tax. Any Alternative Minimum Tax imposed would be allowed as a credit to offset
future regular tax liability.
The Consolidated Financial Statements include the results of operations of
CAIS Internet, its wholly owned subsidiary, CAIS, Inc., Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership, for the
years ended December 31, 1996, 1997 and 1998 and the balance sheets as of
December 31, 1997 and 1998. CAIS Internet's results of continuing operations
for 1996 only include operating results from May 11, 1996 (the date of CAIS,
Inc.'s acquisition of Capital Area) through December 31, 1996. The results of
Cleartel Communications, Inc. and Cleartel Communications Limited Partnership
for these years and the applicable balance sheets at those dates have been
presented as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from CAIS Internet's Consolidated Statements of Operations and their percentage
of net revenues. Operating results for any period are not necessarily
indicative of results for any future period.
25
<PAGE>
<TABLE>
<CAPTION>
Period from Years Ended December 31,
May 11, 1996 to --------------------------------
December 31, 1996 % 1997 % 1998 %
----------------- --- -------- ---- --------- ----
(in thousands, except for percentages)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Internet services...... $ 2,410 100% $ 4,556 100% $ 5,278 99%
OverVoice.............. -- -- -- -- 37 1
------- --- -------- ---- --------- ----
Total.................. 2,410 100 4,556 100 5,315 100
------- --- -------- ---- --------- ----
Cost of services:
Internet services...... 834 35 2,010 44 3,016 57
OverVoice.............. -- -- -- -- 102 2
------- --- -------- ---- --------- ----
Total.................. 834 35 2,010 44 3,118 59
------- --- -------- ---- --------- ----
Operating expenses:
Internet services...... 2,381 98 6,110 134 9,677 182
OverVoice.............. 97 4 734 16 2,987 56
------- --- -------- ---- --------- ----
Total.................. 2,478 102 6,844 150 12,664 238
------- --- -------- ---- --------- ----
Loss from operations.... (902) (37) (4,298) (94) (10,467) (197)
Interest and other
expense................ 212 9 288 6 1,101 21
------- --- -------- ---- --------- ----
Loss from continuing
operations............. (1,114) (46) (4,586) (100) (11,568) (218)
Income (loss) from
discontinued
operations............. 799 33 1,923 42 (671) (13)
------- --- -------- ---- --------- ----
Net loss................ $ (315) (13)% $ (2,663) (58)% $ (12,239) (231)%
======= === ======== ==== ========= ====
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net revenues. Net revenues for the year ended December 31, 1998 totaled
approximately $5,315,000, compared to approximately $4,556,000 for the year
ended December 31, 1997. Net revenues increased primarily due to an increase of
$747,000 resulting from the sale of Internet access services and an increase of
$237,000 from the sale of web hosting services. Both of these increases were
due to an increase in the number of customers for these services. This increase
in net revenues was offset by a decrease in consulting revenues from $159,000
in 1997 to zero in 1998.
Cost of services. Cost of services for the year ended December 31, 1998
totaled approximately $3,118,000, compared to approximately $2,010,000 for the
year ended December 31, 1997. This increase resulted primarily from an increase
of $944,000 due to the purchase of additional nationwide bandwidth and the
expansion to new geographic locations. CAIS Internet also incurred bandwidth
and local connection charges of $102,000 in 1998 for the deployment of
OverVoice in trial properties. There was no OverVoice related cost of services
for 1997.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1998 totaled approximately
$10,407,000, compared to approximately $5,550,000 for the year ended December
31, 1997. This increase resulted primarily from increases of $910,000
attributable to Internet services payroll, $1,671,000 related to Internet
services administrative costs, $1,927,000 related to OverVoice costs (e.g.,
payroll, market trials and marketing and professional fees and expenses) and
$347,000 for professional fees relating to the October 1998 reorganization.
Depreciation and amortization. Depreciation and amortization totaled
approximately $831,000 for the year ended December 31, 1998, compared to
approximately $678,000 for the year ended December 31, 1997. This increase was
attributable primarily to the purchase of capital equipment necessary to
support the expansion of CAIS Internet's network.
Non-cash compensation. Non-cash compensation totaled approximately
$1,426,000 for the year ended December 31, 1998, compared to approximately
$616,000 for the year ended December 31, 1997. This increase reflects
amortization of deferred compensation for an entire year in 1998 compared to a
partial year in 1997.
26
<PAGE>
Interest and other expense. Interest and other expense totaled approximately
$1,101,000 for the year ended December 31, 1998, compared to approximately
$288,000 for the year ended December 31, 1997. This increase was attributable
primarily to interest on indebtedness incurred, including amortization of
financing costs relating to our credit agreement with ING (U.S.) Capital LLC.
Loss from continuing operations. Loss from continuing operations totaled
approximately $11,568,000 for the year ended December 31, 1998, compared to
approximately $4,586,000 for the year ended December 31, 1997, due to the
foregoing factors.
Income (loss) from discontinued operations. Loss from discontinued
operations totaled $671,000 for the year ended December 31, 1998, compared to
income of approximately $1,923,000 for the year ended December 31, 1997. This
decrease in earnings resulted primarily from a reduction in net revenues
generated from operator assisted telephone calls.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. Net revenues for the year ended December 31, 1997 totaled
approximately $4,556,000. Net revenues for the year ended December 31, 1996
consisted of approximately $2,410,000 for the period from May 11, 1996 to
December 31, 1996 and approximately $1,287,000 with respect to Capital Area for
the period from January 1, 1996 to May 10, 1996, for a total of approximately
$3,697,000. Net revenues increased primarily due to a $859,000 increase in
sales of always-on Internet access services and a $60,000 increase resulting
from the sale of web hosting services. Both of these increases were primarily
due to an increase in the number of customers for these services.
Cost of services. Cost of services for the year ended December 31, 1997
totaled approximately $2,010,000. Cost of services for the year ended December
31, 1996 consisted of approximately $834,000 for the period from May 11, 1996
to December 31, 1996 and $323,000 with respect to Capital Area for the period
from January 1, 1996 to May 1996, for a total of $1,157,000. This increase
resulted primarily from building network redundancy and the purchase of
additional nationwide bandwidth for dedicated access customers.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1997 totaled approximately $5,550,000.
Selling, general and administrative expenses for the year ended December 31,
1996 consisted of approximately $2,126,000 for the period from May 11, 1996 to
December 31, 1996 and $339,000 with respect to Capital Area for the period from
January 1, 1996 to May 10, 1996, for a total of $2,465,000. A major portion of
this increase consisted of an additional $1,227,000 in payroll costs related to
new employees in the areas of sales, operations, and engineering and, to a
lesser extent, various expenditures related to the initial payroll, marketing
and development of, and the purchase of $957,000 of market trial equipment for
OverVoice.
Depreciation and amortization. Depreciation and amortization totaled
approximately $678,000 for the year ended December 31, 1997. Depreciation and
amortization for the year ended December 31, 1996 consisted of $352,000 for the
period from May 11, 1996 to December 31, 1996 and $42,000 with respect to
Capital Area for the period from January 1, 1996 to May 10, 1996, for a total
of $394,000. This increase was attributable primarily to the purchase of
capital equipment necessary to support the expansion of CAIS Internet's network
and a full year's amortization of goodwill and interest costs relating to the
acquisition of Capital Area in May 1996.
Non-cash compensation. Non-cash compensation totaled approximately $616,000
for the year ended December 31, 1997, reflecting the amortization of deferred
compensation incurred upon the grant of options to purchase shares of CAIS
Internet's common stock in 1997 to two executive officers. There was no non-
cash compensation for 1996.
Interest and other expense. Interest and other expense totaled approximately
$288,000 for the year ended December 31, 1997, compared to approximately
$212,000 for the period from May 11, 1996 to December 31, 1996. This increase
was attributable primarily to debt incurred by CAIS, Inc. in May 1996 to
finance the acquisition of Capital Area.
27
<PAGE>
Loss from continuing operations. Loss from continuing operations totaled
approximately $4,586,000 for the year ended December 31, 1997. Loss from
continuing operations for the year ended December 31, 1996 consisted of
$1,114,000 for the period from May 11, 1996 to December 31, 1996 and income of
$585,000 for the period from January 1, 1996 to May 10, 1996 for a total loss
of $529,000, due to the foregoing factors.
Income from discontinued operations. Income from discontinued operations
totaled $1,923,000 for the year ended December 31, 1997, compared to $799,000
for the year ended December 31, 1996. This was due primarily to rate increases
charged to customers for long distance telephone calls.
Liquidity and Capital Resources
To date, CAIS Internet has satisfied its cash requirements primarily through
borrowings, the sale of capital stock and internally generated funds. CAIS
Internet's continuing operations have been financed in part from operating
profits and cash flows generated from its now discontinued operation (i.e.,
Cleartel Communications, Inc.). Net cash provided by (used in) operating
activities for continuing operations for the years ended December 31, 1996,
1997 and 1998 was approximately $804,000, $(97,000) and ($4,939,000),
respectively. Cash used in operating activities in each period was primarily
affected by the net losses caused by increased costs relating to CAIS
Internet's expansion in infrastructure and personnel for its Internet-related
businesses.
In connection with the acquisition of Capital Area on May 10, 1996, CAIS
Internet obtained a $2,000,000 bank loan from First Union National Bank.
Interest on the loan accrued at a rate of prime plus one and one-half percent,
or 9.75 percent at that date, with payments on a five-year amortization
schedule and a maturity date of May 10, 1999. In October 1996, CAIS Internet
and First Union entered into an interest rate swap agreement in which the
effective interest rate on the remaining principal balance of approximately
$1,833,000 was fixed at 8.65%. In December 1997, CAIS Internet refinanced this
loan. This resulted in an increase in the principal balance outstanding at that
time from $1,400,000 to $2,000,000. In addition, the maturity date of the
refinanced note and the swap agreement was extended to December 2000. This loan
was repaid in full with the proceeds from the credit agreement with ING (U.S.)
Capital LLC discussed below.
In September 1998, CAIS Internet, together with CAIS, Inc. and certain of
their affiliates, entered into a credit agreement, as amended, with ING (U.S.)
Capital LLC to borrow up to $7,000,000 to repay existing debt with First Union,
fund the development of the OverVoice program and for general corporate
purposes. The loans extended under this credit agreement bear interest at the
one-month LIBOR rate plus 5%. The principal, premium and interest on any
outstanding loan will convert to senior secured notes bearing interest at a
rate of 5% over the 5-year U.S. Treasury Securities rate if borrowings under
this credit agreement are not repaid by September 4, 1999. CAIS Internet is in
compliance with the terms of this credit agreement. The current outstanding
principal balance under this credit agreement is $7,000,000, which will be
repaid from the proceeds of this offering.
In February 1999, CAIS Internet converted approximately $4.6 million of
indebtedness owed to Ulysses G. Auger, Sr. and Ulysses G. Auger, II into
1,119,679 shares of CAIS Internet's Series B cumulative mandatory redeemable
convertible preferred stock, par value $.01 per share.
In February 1999, after the spin-off of Cleartel Communications, Inc., CAIS
Internet issued 2,827,168 shares of Series A convertible preferred stock, par
value $0.01 per share, for total gross proceeds of $11.5 million. CAIS Internet
plans to use $10 million of the proceeds for capital expenditures and general
corporate purposes, with the remaining $1.5 million being used to reduce
outstanding debt owed by CAIS Internet to Cleartel Communications, Inc.
On April 13, 1999, CAIS Internet and Cisco Systems Capital Corporation
entered into a letter agreement for a three-year, $50 million equipment
financing facility. Under the facility, $25 million would be available during
the first year of the facility and an additional $25 million would be available
during the second year of the facility, provided CAIS Internet meets certain
financial performance requirements. Borrowings under the facility would be
limited to $12.5 million until completion of this offering. The first $25
million in borrowings
would bear interest at an annual rate equal to three-month LIBOR plus 7.0%
(reducing to 6.0% on the first interest payment after this offering). The
second $25 million in borrowings would bear interest at an annual
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<PAGE>
rate equal to three-month LIBOR plus 6.0%. The facility will require CAIS
Internet to meet certain financial covenants including EBITDA targets, revenue
targets and leverage and debt service ratios. Borrowings under the facility
will be secured by a first priority lien on all Cisco products and services
purchased using the facility and, where permitted, by a second priority lien on
all other assets of CAIS Internet. Closing on the facility is subject to the
execution and delivery of definitive agreements for the facility.
On April 21, 1999, CAIS, Inc. and Nortel Networks entered into a financing
letter agreement for a $30 million equipment financing. The financing would
require CAIS Internet and CAIS, Inc. to meet certain financial covenants
including EBITDA targets, revenue targets and leverage and debt service ratios.
Borrowings under the financing would be secured by a first priority lien on all
Nortel Networks products purchased using the financing. Provision of the
financing is subject to approval and the execution and delivery of definitive
financial and commercial agreements. In connection with the financing letter
agreement, CAIS, Inc. entered into a purchase agreement with Nortel Networks
and committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition to this commitment, CAIS, Inc. 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 twelve months ended April 1, 2001 and $9.9 million
for the twelve months ended April 1, 2002.
As of March 31, 1999, CAIS Internet had cash on hand of approximately
$5,922,000. CAIS Internet expects that its cash and financing needs for the
next twelve months can be met by cash on hand and additional capital financing
arrangements (including the net proceeds of this offering). If such sources of
financing are insufficient or unavailable, or if CAIS Internet experiences
shortfalls in anticipated revenue or increases in anticipated expenses, CAIS
Internet would curtail the planned roll-out of OverVoice and reduce marketing
and development activities.
Network Capacity. In June 1998, CAIS Internet signed a ten-year fiber
agreement with Qwest Communications Corporation. The agreement calls for a
graduated commitment to purchase $100 million of services over a ten-year
period.
OverVoice License and Royalty Agreement. CAIS Internet entered into a
license agreement with Inline Connection Corporation in November 1996, pursuant
to which Inline granted CAIS Internet an exclusive license to use, make, sub-
license or sell the OverVoice technology in hotels and multiple dwelling units.
We have minimum annual royalty obligations to Inline which began at $100,000 in
1998 and increase to a maximum of $250,000 during the term of the agreement.
Unless terminated by CAIS Internet with thirty days' notice, the agreement
remains in effect through the full life of all existing or future patents
related to the technology or future enhancements. In consideration for meeting
the $750,000 compensation benchmark set forth in the license agreement, in
January 1999, Inline assigned CAIS Internet a 50% ownership interest in the
OverVoice patents and patent applications covered by the Inline agreement.
Terk Litigation Settlement. On or about August 5, 1997, Inline instituted an
arbitration proceeding against Terk Technologies Corp. to terminate Inline's
contract with Terk, based on Terk's failure to perform under the contract's
best efforts clause. On or about September 24, 1998, Terk counterclaimed and
filed a lawsuit against CAIS, Inc., Ulysses G. Auger, II, Inline and others,
for, among other things, patent infringement of U.S. Patent No 5 010 399 and
other patent properties owned by or assigned to Inline and/or a principal of
Inline. On January 24, 1999, CAIS, Inc., Inline and Terk entered into a
settlement agreement pursuant to which the parties agreed to dismiss the case
against all parties with prejudice. As a result of the settlement agreement,
CAIS Internet agreed to pay Terk $500,000. $250,000 of the payment was made in
February 1999, an additional $150,000 is payable on or before July 1, 1999 and
the remaining $100,000 is payable on or before July 1, 2000. CAIS Internet also
agreed to issue Terk 25,000 shares of common stock and to issue additional
shares if the 25,000 shares, multiplied by the price at which shares are issued
in this offering, does not equal or exceed $250,000. CAIS Internet also granted
Terk the right to purchase up to 25,000 additional shares of common stock as
part of this offering in connection with CAIS Internet's directed share
program. In exchange, Terk and Inline modified their contract changing Terk's
license from exclusive to nonexclusive and eliminating Terk's
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<PAGE>
ability to sublicense. As a result, CAIS Internet now has the right to install
the OverVoice technology in single family residences and the exclusive right to
sublicense such technology to third parties.
CAIS Internet from time to time engages in discussions involving potential
business acquisitions. Depending on the circumstances, CAIS Internet may not
disclose material acquisitions until completion of a definitive agreement. CAIS
Internet 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 CAIS Internet's growth rate could materially
affect CAIS Internet'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." CAIS Internet's failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain of CAIS Internet's
normal business activities and operations. CAIS Internet has formulated and, to
a large extent, effected a plan to address Year 2000 issues.
During 1998, CAIS Internet established a Year 2000 compliance program to
coordinate appropriate activity and report to its Board of Directors with
regard to Year 2000 issues. CAIS Internet 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.
CAIS Internet's internal systems assessment and review consists of four-
phases: (1) assessment; (2) analysis and planning; (3) conversion and testing;
and (4) implementation.
CAIS Internet'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 CAIS Internet'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. CAIS Internet'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, CAIS Internet has moved various systems into production, installed
third party solutions, updated operational procedures, and trained users. This
implementation phase is substantially complete. CAIS Internet expects
completion of this internal systems assessment and corrective action prior to
the end of the third quarter of 1999.
CAIS Internet 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 CAIS Internet. First, CAIS Internet 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, CAIS
Internet 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, CAIS Internet 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, CAIS Internet has begun to focus on
evaluating different systems, reviewing such information with senior
management, and identifying any additional resources needed. CAIS Internet is
commencing work to develop a contingency plan associated with its findings in
this area. CAIS Internet believes these latter phases will be completed prior
to the end of the third quarter.
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During the year ended December 31, 1998, CAIS Internet spent over $1.4
million for capital expenditures related to the upgrade and continuing build-
out of its technical operations and network. We believe that all of this
equipment is Year 2000 compliant. We expect to incur additional costs in 1999
in connection with our Year 2000 program, which we believe will not be
material. In addition, we expect to acquire a new billing and customer care
system as part of our business strategy, which we believe will also be Year
2000 compliant. These additional costs are based on our best estimates and, in
our opinion, will not have a material adverse effect on our business, financial
condition and results of operations. If the actual costs of implementing our
Year 2000 program significantly exceed our estimates, it may have a material
adverse effect on our business, financial condition or results of operations.
CAIS Internet 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 and telecommunication capacity, CAIS Internet's network and
services could be adversely affected.
CAIS Internet 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 CAIS
Internet's operating results. Furthermore, despite the aforementioned testing
performed by CAIS Internet and its vendors, CAIS Internet'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 CAIS Internet with products,
services or systems that meet the Year 2000 requirements, CAIS Internet's
operating results could be materially adversely affected. Known or unknown
errors or defects that affect the operation of CAIS Internet'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 CAIS Internet's reputation and litigation costs. CAIS
Internet cannot guarantee that these or other factors relating to Year 2000
compliance issues will not have a material adverse effect on CAIS Internet's
business.
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BUSINESS
We provide cost-effective high-speed Internet connections to both commercial
and residential customers, primarily using digital subscriber line technology
(DSL) and our patented OverVoice technology. We currently offer our digital
subscriber line service, "HyperDSL," in conjunction with Covad and Bell
Atlantic. We use our OverVoice technology to simultaneously transmit voice and
data over a single traditional copper telephone line at speeds of up to 175
times those of 56.6k dial-up modems. An OverVoice user is therefore able to
have both always-on, high-speed Internet access and complete use of the
telephone at the same time over one traditional telephone line. Using our
OverVoice technology and existing copper telephone wiring, we are able to
create an Ethernet network connecting multiple computers or web-enabled devices
within a hotel, multiple dwelling unit or single family home. We believe we can
offer always-on, high-speed Internet access simultaneously to multiple users in
hotels and residences more cost-effectively than other technologies available
today.
As of April 16, 1999, we have installed the OverVoice technology in over
1,900 apartment units in 15 multiple dwelling unit buildings and in over 2,100
guest rooms in eight hotels. We have contracts with 11 additional hotel
properties to install OverVoice in more than 2,500 guest rooms. In addition, we
have national contracts with Hilton and with OnePoint.
We have entered into a master agreement with Hilton and a seven-year
contract with OnePoint to offer Internet access service and install our
OverVoice technology. We believe that the demand for high-speed Internet access
in single family homes and the trend toward using more than one personal
computer at home, also make OverVoice a cost-effective solution for providing
dedicated high-speed internet access in single family homes and for "home
networking." We currently offer our HyperDSL services to the residential
market. Furthermore, we are developing a commercially deployable OverVoice
solution for the single family home market, to be offered in conjuction with a
HyperDSL connection.
Industry Background
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. According to
industry estimates, the number of Internet users in the United States who
access the world wide web reached approximately 70.1 million in 1998 and is
forecasted to grow to approximately 178.7 million by the year 2003. Currently,
individuals most commonly access the Internet through a dial-up service.
However, dial-up access has several drawbacks including:
. delays when down-loading bandwidth intensive information (such as
streaming video and audio);
. loss of the use of the customer's phone line service while accessing the
Internet;
. requiring that a user pay both its Internet service provider for
Internet access and its telephone company for the local call;
. frequent busy signals;
. mid-use cut-offs (drops) from service; and
. long connection delays.
Due to the inconveniences of dial-up Internet service, most businesses that
are large enough to justify the costs opt for a dedicated high-speed Internet
connection, such as a T-1. Smaller businesses are also moving rapidly toward
high-speed access solutions as newer technologies like digital subscriber line
become available. However, until recently, high-speed Internet access has been
unavailable to most single family and multifamily homes and to hotel guests due
to the cost and difficulty of implementing such service.
We believe that business users have grown accustomed to the high-speed
Internet access that they have at work and are increasingly seeking cost-
effective options for high-speed access at home and while traveling. As a
result, we believe demand is ever increasing for cost-effective, high-speed
Internet connectivity in the hotel, business and residential communities.
Further, the increasing use by hotel guests of dial-up Internet access is
overloading many hotels' phone systems. This has resulted in increasing service
problems and heightened
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concerns for the safety of hotel guests (and the hotel's associated liability)
who may be unable to obtain help promptly in an emergency. As a result, hotels
are increasingly confronted with the expensive option of upgrading their
private branch exchange (PBX) switches to handle the increased traffic.
We believe that increased demand and evolving technology make the hotel and
multiple dwelling unit markets attractive for always-on, high-speed Internet
access. The economies of scale present in the hotel and multiple dwelling unit
markets create the opportunity to price always-on, high-speed Internet access
services at levels comparable to current dial-up services. In addition, many
multiple dwelling unit property owners believe high-speed Internet access is an
attractive building amenity for enhancing rental and occupancy rates.
Major hotel chains and multiple dwelling unit property owners are currently
evaluating alternative solutions to meet the need for faster Internet
connections and simultaneous voice and data transmission. Examples of such
solutions are:
. second phone lines and more powerful telecommunications switching
systems within a building, which are very costly and fail to address the
need for higher connection speeds;
. Category 5 rewiring, which involves the labor and capital intensive
solution of rewiring a building, resulting in significant cost,
construction, disturbance and time; and
. high speed technologies, including digital subscriber line and cable
modems, which are less expensive than comparable T-1 connections, but
require a separate digital subscriber line or cable modem for each
personal computer or laptop connection in a home, apartment unit or
hotel room.
While these and other technologies exist, to date none has been widely deployed
as a solution for high-speed Internet connectivity.
The OverVoice Solution
We believe that our OverVoice technology is the most cost-effective, always-
on, high-speed Internet solution for hotel guests and multiple dwelling unit
residents. We also believe OverVoice to be the most cost-effective solution for
providing always-on, high-speed Internet access in single family homes and for
"home-networking."
We use our OverVoice technology to simultaneously transmit voice and data
over a single copper telephone line at speeds of up to 175 times those of 56.6k
dial-up modems. This enables an OverVoice user to have both always-on, high-
speed Internet access and complete use of the telephone at the same time over
one traditional telephone line. While we believe digital subscriber line
technology is the most cost-effective high-speed Internet solution available to
our commercial customers today, we believe that its point-to-point nature
(i.e., each Internet user requiring an expensive digital subscriber line modem
and therefore his own Internet connection) significantly impedes its widespread
deployment in the residential market. OverVoice's point-to-multipoint
technology enables us to create an Ethernet local area network within a hotel,
multiple dwelling unit building or single family home. By combining our
OverVoice technology with any always-on, high-speed Internet connection, such
as digital subscriber line, T-1 or wireless, we can provide a single high-speed
Internet connection which can be shared simultaneously among many users in a
hotel, multiple dwelling unit building or single family home.
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Our OverVoice technology allows the coexistence of multiple signals (voice,
data and, in the future, video) on the same wire, by protecting the natural
frequency range of each signal from interference with the other signals. The
pictorial below demonstrates how, through the use of OverVoice technology,
voice, data and video can co-exist simultaneously on a single traditional
copper wire.
[GRAPH APPEARS HERE]
Standard telephone service (Plain Old Telephone Service) operates between 0 and
5KHz, while standard 10BaseT Ethernet (which is the standard for most of the
world's local area networks) operates between 3 and 15MHz. The video signal
will operate between 15 and 30 MHz.
In hotels and multiple dwelling units, the OverVoice solution requires only
a retrofit with OverVoice equipment in the telephone closet and the
installation of our proprietary OverVoice telephone jacks in each hotel guest
room or apartment unit. The OverVoice passive circuitry uses electronic filters
to separate signals at the control unit and at each wall jack. The OverVoice
wall jack has two ports, one which connects to the telephone and the other
which connects to an Ethernet adapter card inside the user's computer.
Ethernet is the standard networking protocol used to create local area
networks. To connect to a local area network, computers require an Ethernet
adapter card, which is a standard supplemental hardware device that can easily
be installed into most computers and typically costs approximately $50. In most
cases, an Ethernet card is required for any high speed Internet connectivity,
including T1, cable modem or digital subscriber line services.
CAIS Internet also expects in the near future to offer a universal serial
bus connectivity option for OverVoice. The universal serial bus is a new
standard plug-in protocol being integrated into most new computers (i.e., a new
port to plug in devices, such as printers). With a universal serial bus
connection, the user will have the ability to connect directly to an Ethernet
network without an Ethernet adapter card.
CAIS Internet has begun to deploy OverVoice DeskJacks in hotel guest rooms.
The OverVoice DeskJack has an Ethernet connection and can have a universal
serial bus connection, thereby allowing hotel guests to choose the connection
method that best suits their needs. Its highly visible, step-by-step
instructions direct the hotel guest through the log-on page to the CAIS
Internet promotional home page.
We can install the OverVoice technology in an average-sized hotel or
multiple dwelling unit building (300 units) for approximately $250 per hotel
guest room or apartment unit, which we believe is significantly less than the
cost of any competing technology. In addition, we can install OverVoice in a
hotel or multiple dwelling unit building with very minimal disruption to the
property owners, hotel guests or multiple dwelling unit residents.
Market Opportunity
We believe that the domestic hotel segment represents a significant market
opportunity for CAIS Internet. Nationwide, we estimate that as of December 31,
1997, there were 49,000 hotel properties with a total of 3.8 million hotel
rooms. In the top twenty-five hotel markets we estimate that there were more
than 7,775
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properties with a total of 1.25 million rooms. During the initial roll-out of
our OverVoice technology, we will focus on larger hotels and those most likely
to cater to business travelers. According to the American Hotel and Motel
Association, as of December 31, 1997, hotel properties with 300 or more rooms
represented 3.0% of all hotel properties, but 20.8% of total hotel rooms.
Examples of the companies operating within this segment include familiar hotel
chains such as Hilton, Sheraton, Hyatt, Wyndham, Westin and Marriott.
We are also targeting the domestic multiple dwelling unit market which we
believe is a highly promising market for OverVoice. As of 1998, approximately
18% of the U.S. population, or over 48 million people, lived in multiple
dwelling units and there were over nine million apartment units in buildings
with 50 or more units. We intend to initially target Class A and B buildings in
large metropolitan areas, whose residents typically have higher incomes and are
more likely to be Internet users.
An even larger market is the single family home market, which we believe
offers a significant opportunity for OverVoice in the future. According to
industry sources, as of December 1998, 38% of U.S. households with Internet
access have at least two personal computers. We believe that the demand for
simultaneous high-speed Internet access and interoperability between multiple
personal computers in a single family home or multiple dwelling unit will
further increase the demand for OverVoice. Approximately 99% of single family
homes in the United States have standard copper telephone wire that can support
home networking using OverVoice.
Although we intend to initially roll-out our OverVoice technology in the
United States, we believe that international markets represent another
significant opportunity. International demand for Internet access is expected
to increase as a result of a number of factors, including worldwide economic
growth, global deregulation of the telecommunications market, technological
advancements and the introduction of new services.
National Contracts and Long-Term Commitments
Hilton Hotels Corporation. We have entered into a master agreement with
Hilton, under which Hilton agreed to license us the right to offer high-speed
Internet access service in certain guest rooms, meeting rooms and other areas
in specified Hilton hotels throughout the United States. The term of the
agreement is for five years. Under the agreement, we have the right to install
wired high-speed data communication systems for laptop computers on an
exclusive basis in up to 50% (subject to increase with Hilton's consent) of the
rooms in the Hilton hotels covered by the master agreement. In order to
participate, each Hilton hotel must enter into an addendum to the master
agreement. As of April 16, 1999, 153 of these hotels have notified Hilton that
they intend to sign an addendum to participate under the terms of the master
agreement.
Under the agreement, we are responsible for the costs of installing,
maintaining and operating all necessary equipment, and as a result we will
incur significant up-front costs. Under the agreement, Hilton's share of net
revenues varies based on the number of rooms in a particular hotel property. As
a part of the Hilton contract, we have arranged to have a senior account
manager based at Hilton's headquarters to manage the relationship and serve as
Hilton's liaison to CAIS. We are also training front desk personnel and banquet
room staff on the benefits of OverVoice to enable them to better market the
service and create an overall positive experience for the hotel's patrons. For
technical assistance, users are directed to a toll-free number that connects
OverVoice users to our customer service representatives. Finally, Hilton and
CAIS Internet are developing in a joint marketing program to build awareness of
the OverVoice service offering among potential patrons.
In addition, on April 23, 1999, CAIS Internet signed an agreement with
Hilton to jointly pursue the development of future guest and meeting room
digital entertainment solutions in Hilton properties. To finance the
development of these solutions, CAIS Internet and Hilton are establishing a
fund which will be initially capitalized through the contribution of 133,000
shares of CAIS Internet's common stock. The shares will be jointly owned by
CAIS Internet and Hilton, with 50% of the contributed shares allocated to a
CAIS Internet sub-account within the fund and 50% of the contributed shares
allocated to a Hilton sub-account. We believe that the continued development of
video and audio applications utilizing the OverVoice platform represents a
significant future business opportunity.
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OnePoint Communications Corp. In April 1998, we entered into a trial
agreement with OnePoint, a provider of communications and entertainment
services to residents in multiple dwelling units. Under this trial agreement,
we installed OverVoice in 14 buildings within four properties.
We recently entered into a seven-year contract with OnePoint to install our
OverVoice technology. Under this agreement, we anticipate that we will install
OverVoice in a minimum of 30 multiple dwelling unit buildings with
approximately 10,000 units. Additionally, together with OnePoint, we will
market high-speed Internet service to approximately 300 additional multiple
dwelling unit buildings where OnePoint has a preferential right of entry to
provide Internet and other communications services. As part of our agreement
with OnePoint, we are making joint sales calls to property owners to discuss
the benefits of OverVoice.
Under the agreement, CAIS Internet generally bears all of the costs of
providing Internet services to the multiple dwelling units and receives 90% to
98% of the net revenues from the sale of services, with OnePoint receiving the
remaining revenues. OnePoint has the option of contributing 25% of the costs of
providing Internet services to specified multiple dwelling unit buildings. In
those circumstances, OnePoint's share of net revenues would range from 15% to
25%.
OverVoice Properties
As of April 16, 1999, CAIS has either installed OverVoice or has an
agreement for the installation of OverVoice in the hotel and multiple dwelling
unit properties set forth in the following tables.
HOTELS
Hotels which are currently or upon completion of installation will be operating
under trial agreements:
<TABLE>
<CAPTION>
Target
Property Location Number of Units Installation Date Completion Date
- -------- -------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Embassy Square.......... Washington, D.C. 232 4/98
Bellevue Courtyard...... Bellevue, WA 131 5/98
La Jolla Marriott....... La Jolla, CA 360 5/98
Washington Marriott..... Washington, D.C. 418 6/98
Sea Tac Marriott........ Seattle, WA 459 6/98
Las Colinas Wyndham..... Irving, TX 185 7/98
Sunnyvale Wyndham....... Sunnyvale, CA 179 7/98
Anaheim Hilton.......... Anaheim, CA 20 12/98
Westin Peachtree Plaza.. Atlanta, GA 200 4/99
Westin Copley Plaza..... Boston, MA 200 5/99
Metro Marriott.......... Washington, D.C. 163 5/99
The Washington Court
Hotel.................. Washington, D.C. 264 5/99
Westin Innisbrook....... Palm Harbor, FL 200 5/99
BWI Airport Marriott.... Baltimore, MD 200 5/99
Sheraton Inner Harbor... Baltimore, MD 289 6/99
</TABLE>
We are currently negotiating long-term contracts for all properties which are
operating under trial agreements. The Westin Peachtree Plaza, Westin Innisbrook
and the BWI Airport Marriott are all owned by Starwood Hotels and Resorts
Worldwide, Inc. and are the first of six properties where we will install
OverVoice in accordance with our trial agreement with Starwood.
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<PAGE>
Hotels which upon completion of installation will be operating under long-term
contracts:
<TABLE>
<CAPTION>
Target
Property Location Number of Units Installation Date Completion Date
- -------- -------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Hotel Lexington......... New York, NY 216 4/99
Club Doubletree Suites.. Palatine, IL 196 4/99
Kutshers Country Club... Monticello, NY 410 4/99
Hilton Pittsburgh &
Towers................. Pittsburgh, PA 200 4/99
Hilton Chicago &
Towers................. Chicago, IL 240 4/99
Palmer House Hilton..... Chicago, IL 239 4/99
Hilton New York &
Towers................. New York, NY 415 4/99
Hilton Washington &
Towers................. Washington, D.C. 200 5/99
Radisson Inn-Tulsa
Airport................ Tulsa, OK 172 5/99
Capital Hilton.......... Washington, DC 200 5/99
Hilton Dallas Parkway... Dallas, TX 200 5/99
Hilton Garden Inn- Las
Colinas................ Irving, TX 174 5/99
Hilton
Lisle/Naperville....... Lisle, IL 160 5/99
Hilton Northbrook....... Northbrook, IL 125 5/99
Hilton Phoenix Airport.. Phoenix, AZ 128 5/99
Hilton Short Hills...... Short Hills, NJ 150 5/99
Hilton Garden Inn-Albany
Airport................ Albany, NY 155 5/99
Hilton North Raleigh.... Raleigh, NC 184 5/99
Hilton Garden Inn-North
Johns Creek............ Atlanta, GA 124 6/99
Hilton Atlanta Airport &
Towers................. Atlanta, GA 204 6/99
Hilton Garden Inn-Green
Bay.................... Green Bay, WI 120 7/99
Hilton Garden Inn-
Saratoga Springs....... Saratoga, NY 112 7/99
Hilton Garden Inn-White
Marsh.................. Baltimore, MD 155 7/99
</TABLE>
MULTIPLE DWELLING UNITS
<TABLE>
<CAPTION>
Number of
Property Location Installed Units Completion Date
- -------- -------- --------------- ---------------
<S> <C> <C> <C>
Arlington Court House......... Arlington, VA 396 3/98
*Lincoln Towers............... Arlington, VA 673 6/98
*Water Park Towers............ Arlington, VA 323 7/98
*Springfield Station (5
buildings)................... Springfield, VA 280 10/98
*Summit Fair Lakes (7
buildings)................... Fairfax, VA 432 3/99
</TABLE>
- --------
*OnePoint properties
Business Strategy
Our objective is to become a leading national provider of dedicated high-
speed Internet access. The following are key elements of our business strategy
to achieve this objective:
Offer the Most Cost-Effective, Always-On, High-Speed Internet Access to Our
Customers. We believe that hotel and multiple dwelling unit property owners are
seeking to use high-speed Internet access as a tool to increase their occupancy
and rental rates. In addition, we believe that many members of the single
family home market are seeking cost-effective high-speed Internet access. We
believe our OverVoice technology is a cost-effective, always on, high-speed
Internet solution for hotel guests and multiple dwelling unit residents. In
addition, we believe OverVoice will be a cost-effective "home networking"
solution for single family residences. We use our OverVoice technology to
deliver high-speed Internet access, while allowing the user to
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simultaneously access voice services on the telephone. We also offer our
digital subscriber line service, "HyperDSL," to commercial customers in
conjunction with Covad and Bell Atlantic.
Roll-Out Our OverVoice Technology Nationwide. Our goal is to make our
OverVoice technology the standard for high-speed Internet access in hotels and
multiple dwelling units. We intend to continue to penetrate the hotel and
multiple dwelling unit markets through both direct sales and strategic
relationships. We have signed an agreement for the roll-out of OverVoice with
Hilton hotels throughout the United States. In addition, we are currently
rolling-out OverVoice to multiple dwelling units with OnePoint. We are
developing an OverVoice solution for the single family home market and expect
to offer it with our residential HyperDSL service once OverVoice becomes
commercially deployable in this segment.
Attract End-Users in Hotels and Multiple Dwelling Units. We intend to
stimulate the demand for our OverVoice services through joint marketing
programs and sales calls. For hotel guests we believe that it is important to
make always-on, high-speed Internet access simple and affordable. In hotel
rooms, the OverVoice DeskJack (an access device into which hotel guests plug
their laptop computer), with its highly visible, step-by-step instructions,
makes accessing the Internet quick and easy. We also believe that the use of
OverVoice services in hotel meeting rooms will further increase the awareness
of, and demand for, our services in hotel guest rooms by business travelers who
gain exposure while in the meeting room. For our multiple dwelling units, we
believe that our ability to offer multiple Internet connection speeds at
different price points, utilizing our rate shaper technology, enhances our
ability to attract end users. We are able to offer a multiple dwelling unit
resident dedicated high-speed Internet access at an entry level connection
speed and price and later upgrade the service to meet the user's demand for
faster Internet connection speeds.
Accelerate the Roll-Out of Our HyperDSL Services. We have initiated the
roll-out of a new always-on, high-speed Internet access service using digital
subscriber line technology under the name HyperDSL. Unlike traditional forms of
always-on Internet access, digital subscriber line uses the customer's existing
copper voice telephone wire to deliver high-speed Internet service. We believe
digital subscriber line technology currently represents the most economical
always-on, high-speed Internet solution for commercial customers. In addition,
we believe that digital subscriber line technology, used in conjunction with
OverVoice, provides the most cost-effective Internet solution for single-family
residences requiring multiple points of access.
Expand Our National Network. We operate a nationwide network and have
agreements with most of the major backbone providers to exchange Internet
traffic over their respective networks. We currently maintain six points of
presence in Baltimore, Chicago, McLean, Virginia, New York, San Francisco and
Washington, D.C. We intend to add points of presence in Atlanta, Boston,
Dallas, Houston, Los Angeles, Miami, Orlando, Palo Alto, Philadelphia, Phoenix
and Seattle by the end of 1999, and an additional 15 points of presence by the
end of 2000. In June 1998, we signed a ten-year fiber agreement with Qwest,
under which we have access to all of Qwest's points of presence nationwide,
which totaled 200 as of April 16, 1999. We intend to continue to evaluate
strategic relationships and acquisitions that will allow us to further expand
this network.
Leverage the OverVoice Platform to Deliver Future Services and Products. We
believe that our OverVoice technology provides a platform which enables us to
deliver a variety of broadband services and products to our customers. We are
developing a broad array of services and products including Internet protocol
telephony, video conferencing, traditional video services, high definition
television (HDTV) and digital audio radio. We intend to expand our service and
product offerings through internal research and development, and by acquiring
complementary businesses and technologies.
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Services
CAIS Internet currently offers a variety of services under two brand names
as illustrated by the following table:
<TABLE>
<CAPTION>
Brand Service Lines Pricing
----- ------------------------------------- ----------------------------
<S> <C> <C>
OverVoice............... Hotel Guest Room Service $7.95 to $14.95 per 24 hours
Hotel Meeting Room Service Varies by property
Multiple Dwelling Unit Service $24.95 to $49.95 per month
CAIS Internet........... HyperDSL $47.95 to $399 per month
Web Hosting $69 to $295 per month
Always-On Access
Fractional DS-3 to full DS-3 $5,500 to $30,000 per month
Fractional T-1 to full T-1 $695 to $1,750 per month
Dial-Up and Other Narrowband Services $24.95 to $250 per month
</TABLE>
OverVoice Services
Hotel Guest Room Service. We provide OverVoice services to hotel guests by
placing our OverVoice DeskJack (pictured below) beside the telephone. The
OverVoice DeskJack provides simple, step-by-step directions on how to access
the Internet. The guest first connects an ethernet-enabled, or universal serial
bus-enabled, laptop to an ethernet port or universal serial bus port within the
OverVoice DeskJack. Once connected, the guest launches the web browser, logs-on
to the OverVoice server and is launched on to the Internet starting at the CAIS
Internet promotional home page. The guest will have always-on, high-speed
Internet access and may leave the laptop connected to the Internet for the
duration of the stay, all while having the option to simultaneously talk on the
same telephone line. A hotel guest is typically charged between $7.95 and
$14.95 per 24-hour stay in a hotel, comparable to that of in-room hotel
entertainment services.
. Highly visible in-room
marketing
The OverVoice DeskJack
. Ethernet card or
universal serial bus
port connectivity
. Step-by-step simple
instructions
[PICTURE OF OVERVOICE DESK JACK]
Meeting Room Service. Hotels typically have dedicated sales staff to solicit
meeting room business. As corporate and independent meeting planners have
particular needs, hotels offer meeting room customers a menu of facilities,
including Internet services, guest room availability and food services. Once
the planner has selected a particular hotel, that hotel's sales staff books the
meeting room and arranges for the particular add-ons requested. We are
currently training hotel sales staff to assist them in selling OverVoice
Internet access to currently booked and prospective corporate meeting
customers.
Prior to the availability of OverVoice, corporate meeting planners and hotel
facilities generally had only two options for providing Internet services. The
first option is dial-up Internet access, which has several drawbacks including:
. delays when down-loading data and images;
. frequent busy signals;
. dropped connections; and
. long connection delays.
The second option is to make special arrangements for a temporary dedicated
high-speed Internet connection which:
. typically takes up to 60 days to order; and
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. usually requires a minimum 1-month commitment and the payment of
installation fees.
By installing OverVoice in the meeting and conference areas, a cost-
effective and simple to use high-speed Internet solution is immediately
available to the property staff, the corporate meeting planner and meeting room
guests. The user simply connects the ethernet-enabled computer to the OverVoice
wall jack in the room. The user then has always-on high-speed Internet access
at various price points and is able to simply launch the web browser and access
all Internet applications. Once connected, the OverVoice server prompts the
property management system to bill the user for the appropriate Internet
connection charge. We anticipate that hotels will be able to offer this
instantaneous, high-speed Internet connection for corporate meetings at a
fraction of the current cost of establishing a dedicated connection. We believe
that the meeting room program will also increase OverVoice brand recognition
and credibility among business travelers who gain exposure to the technology
while in the meeting room.
MDU Service. Once an apartment or condominium building is installed with the
high-speed OverVoice technology, we can provide Internet access to all of its
residents. Prior to launching OverVoice in a particular building, we generally
pre-market the service to residents through building management, using flyers
and direct mailings. We also typically have a marketing day in the building
during which we distribute marketing materials, demonstrate the system and
answer questions. Once OverVoice is installed, the resident simply connects the
ethernet-enabled computer to the OverVoice wall jack in the apartment unit. The
resident then has always-on high-speed Internet access and is able to launch
the web browser and access all Internet applications. Our rate shaping server
allows us to tailor the speed of the user's Internet connection and to offer
multiple connection speeds at different price points. A multiple dwelling unit
resident is typically charged between $24.95 and $49.95 per month for OverVoice
service, depending upon the transmission speed choice.
We believe that our pricing is extremely competitive with typical $19.95 to
$21.95 per month dial-up services. In order for a resident to enjoy
simultaneous voice and data transmission, a dial-up user must incur the cost of
a second phone line and is limited to the much slower access speeds of
traditional dial-up modems. While cable modems and digital subscriber line
allow high-speed always-on access, both involve equipment costs to the provider
well in excess of those of the OverVoice solution. In addition, unlike cable
modems and digital subscriber line services, OverVoice enables the user to have
multiple points of access within one unit on a cost-effective basis.
CAIS Internet Services
The primary services we offer are HyperDSL, web hosting, always-on access
and dial-up access. As of April 16, 1999, we had over 580 always-on access
subscribers and over 602 web hosting customers.
HyperDSL Services. We have initiated the roll-out of a new always-on, high-
speed Internet access service using digital subscriber line technology under
the name HyperDSL. Unlike traditional forms of always-on Internet access,
digital subscriber line services use the customer's existing copper voice
telephone wire to deliver high-speed Internet access.
HyperLINK DSL is our consumer-grade digital subscriber line service for
the residential, home office and small business markets. We currently
provide the service in conjunction with Bell Atlantic. After a two-year
trial with Bell Atlantic, HyperLINK DSL was introduced in the Washington,
D.C. metro area. In 1999, we intend to enter eight additional major
metropolitan areas, including Baltimore, New York, Philadelphia, Chicago,
Dallas, San Fransisco, Miami and Los Angeles. HyperLINK DSL services
currently range in price from $47.95 to $187.95 per month. Installation
fees are approximately $425, which includes approximately $325 for the
purchase of a required digital subscriber line modem.
HyperLAN DSL is our digital subscriber line service for the small and
medium-sized business markets, which we currently offer jointly with Covad.
We believe that HyperLAN DSL will be attractive to business customers who
traditionally have been unwilling to pay the higher costs of conventional
always-on high-speed Internet access. In addition, we believe that this
service will attract customers who currently incur the cost of high-speed
Internet access and who will now for a comparable cost be able to
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<PAGE>
significantly increase their bandwidth. We currently offer this service in
Washington, D.C. In 1999, we intend to enter eight additional major
metropolitan areas, including Baltimore, Chicago, Dallas, Los Angeles,
Miami, New York, Philadelphia and San Fransisco. Under the terms of our
agreement with Covad, we co-develop and implement targeted marketing and
advertising programs to stimulate sales. HyperLAN DSL services range in
price from $129 to $399 per month. Installation fees, including equipment,
generally range from $999 to $1,099.
Web Hosting Service. Web hosting can be defined as housing a customer's web
pages on our servers. Web hosting is an ideal solution for customers who want
to "publish" web pages on the Internet without purchasing, configuring,
maintaining and administering the necessary sophisticated hardware and
software. Due to economies of scale, we can generally offer web hosting
solutions far more sophisticated than customers can provide for themselves. Our
staff of Internet engineers and system administrators enables us to offer
multiple platforms for web hosting. These hosting servers are located within
our points of presence infrastructure and make use of multiple high bandwidth
connections to the Internet backbone. File structure directories, domain name
registration and security privileges are set-up for customers on our hosting
servers, thus enabling customers to remotely "publish" their content for
distribution over the Internet. In addition, we provide network and systems
administration and maintenance, tape back-ups and security. Web hosting
services range in price from $69 to $295 per month.
High-Speed Always-On Access Service. We provide always-on access services to
other Internet service providers and commercial customers. This type of
connectivity is generally used to connect local area networks, wide area
networks or server applications to the Internet, ensuring an always-on
connection. These services include a wide range of connectivity options
tailored to the requirements of the customer, including: T-1 (1.54 Mbps) or
fractional T-1 connections and DS-3 (45 Mbps) or fractional DS-3 connections.
Always-on services range in price from $695 to $30,000 per month depending on
the connection type. Installation fees generally range from $300 to $5,000.
Dial-Up and Other Narrowband Services. We offer high-quality, digital dial-
up, integrated services digital network connections (ISDN) and dedicated
integrated services digital network connections, with Internet access speeds up
to 128 Kbps. These are primarily amenity services provided to always-on access
services customers upon request, but are not marketed generally. Dial-up and
other narrowband services range in price from $24.95 to $250 per month.
New Products and Services
We intend to continue expanding the OverVoice product line as well as
introduce additional integrated communications services that leverage the
convergence of voice and data communications. We are developing a commercially
deployable OverVoice solution for the single family home market to be offered
in conjunction with a HyperDSL connection. Because OverVoice is a point-to-
multipoint distribution technology, we believe that it is particularly well-
suited for a wide array of existing and new applications, including Internet
protocol telephony services, laser disk video services, digital audio radio and
high definition television (HDTV). We will continue to research and develop new
products and services to be offered in the future, using the OverVoice
technology.
Sales and Marketing
OverVoice. We market OverVoice services primarily through our direct sales
group which:
. focuses on securing hotel chains' endorsements of OverVoice as the
preferred Internet infrastructure solution for the chain's properties;
and
. sells directly to hotel properties owned or managed by the hotel chain
and to hotel chain franchisees.
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<PAGE>
In addition, we are continuing to aggressively pursue opportunities to
increase OverVoice awareness within the hospitality and multiple dwelling unit
industries. We participate in major industry trade shows and events such as
HITEC (Hospitality Industry Technology Exposition and Conference), IH/M&RS
(International Hotel, Motel and Restaurant Show), NAREIT (National Association
of Real Estate Investment Trusts) Annual Convention and COMNET (Communications
Network).
We also continue to identify strategic partners that have existing
relationships with hotel chains, multiple dwelling units and multiple dwelling
unit/real estate investment trusts for the installation and maintenance of
various communications services in these properties. This allows us to package
OverVoice in a pre-existing "bundle" of services, thus providing the
opportunity to maximize in-building penetration rates. We believe that by
working directly with hotel chains, real estate investment trusts and carefully
selected strategic partners, OverVoice will become the industry standard
Internet infrastructure solution.
In addition, on March 30, 1999, we entered into a ten-year exclusive
distribution agreement with Overnet, Inc., a Korean corporation. Under the
agreement, Overnet became our exclusive importer and distributor of OverVoice
in North and South Korea, subject to certain limited exceptions, and we became
Overnet's sole supplier.
CAIS Internet. We offer Internet services to Internet service providers,
commercial dedicated accounts and small and medium-sized businesses using a
direct sales force. Direct mail and print advertising is utilized to both
further generate sales leads and to build awareness of CAIS Internet and our
services. In addition, we are regularly featured in the Boardwatch directory of
national Internet backbone providers and exhibit at select trade shows. With
respect to dial-up and other narrowband services, leads are handled on a
"demand only" basis by a technical support division. Finally, public relations
efforts and a routine program of press releases and contacts are conducted to
focus attention on CAIS Internet in the print, on-line and TV media.
Customers
OverVoice. The ultimate customers for our services are individuals in
hotels, multiple dwelling units and single family homes. In the hotel market,
we primarily target the frequent business traveler with a laptop computer who
needs to connect to the Internet. We believe that our OverVoice technology
overcomes the connection problems that these customers currently encounter with
dial-up service while enabling them to use the same telephone line for
conversations and Internet access simultaneously. In the multiple dwelling unit
market, we target individuals in Class A and B apartment buildings who
typically already own a personal computer and have some experience with the
Internet and/or on-line services. For the single family home market, we will
target business people who are connecting to their office's local area network
and families who are seeking home networking solutions.
CAIS Internet. As a tier one Internet service provider, we have historically
offered always-on Internet access to tier two Internet service providers in the
Washington, D.C. metro area and select international markets. As of April 16,
1999, we continue to provide dedicated Internet connections to more than 50
Internet service providers in the Washington, D.C. area and 5 international
Internet service providers in Europe, Latin America and Asia. Over the past
year, we have actively sought to diversify our dedicated customer base to
commercial and other institutional accounts, while maintaining a presence in
the Internet service provider market. As of April 16, 1999, we had 284 business
customers for always-on, high-speed Internet access. We also maintain a base of
over 3,200 dial-up and other narrowband accounts, though this is not a market
we actively pursue. Furthermore, we have developed a base of more than 500
small and medium-sized businesses as web site hosting customers since June
1997.
For the fiscal year ended December 31, 1998, one customer, Hongkong Telecom,
accounted for 15% of CAIS Internet's consolidated net revenues.
Customer Service
Our Customer and Account Management division provides comprehensive customer
support. The division consists of three principal departments: Customer
Support, Technical Support and Account Management. As of
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<PAGE>
April 16, 1999, this division consisted of 26 persons. We intend to continue to
emphasize customer support for the nationwide roll-out of OverVoice and our
HyperDSL services.
The Customer Support and Technical Support departments maintain quality
service standards and respond to customer inquiries 24 hours a day, 365 days a
year. Established standards are continuously monitored and evaluated through
detailed trouble tickets, phone logs, bandwidth utilization reports, server
log-in reports as well as network and service up time reports. Our technical
support representatives are trained in an effort to ensure superior customer
service. The Technical Support department is further strengthened by a network
operations center, located in McLean, Virginia, which continuously monitors our
network and supporting infrastructure. We are currently building a second
network operations center in our corporate headquarters in Washington, D.C. The
new network operations center will utilize state-of-the-art network monitoring
and will include remote capabilities. Once the second network operations center
is complete, we will continue to maintain the McLean, VA network operations
center as a redundant facility. The Account Management department acts as a
single point of contact for major account customers for the coordination,
management and implementation of all of our services.
Network Topology
Our infrastructure is a nationwide clear-channel DS-3, OC-3 and asynchronous
transfer mode network. We provide high-speed Internet access from our points of
presence to commercial and residential customers through always-on high-
capacity leased lines over local exchange facilities. In June 1998, we entered
into a 10-year fiber agreement with Qwest, under which we have access to all of
Qwest's points of presence nationwide, which totaled 200 as of April 16, 1999.
Access to these points of presence enables us to provide OverVoice services to
customers throughout the country. We are migrating our existing asynchronous
transfer mode backbone links to the Qwest fiber network.
We currently maintain six points of presence in Baltimore, Chicago, McLean,
Virginia, New York, San Francisco and Washington, D.C. We intend to add points
of presence in Atlanta, Boston, Dallas, Houston, Los Angeles, Miami, Orlando,
Palo Alto, Philadelphia, Phoenix and Seattle by the end of 1999, and an
additional 15 points of presence by the end of 2000. The network is monitored
24 hours per day, 365 days per year from our network operations center in
McLean, VA.
We maintain private and public arrangements with most major Internet service
providers to exchange Internet traffic over our respective networks. We will
continue to add additional arrangements, as necessary, to deliver the highest
quality of service to our customers.
Suppliers
Equipment Procurement and Manufacturing. Q-TEL, the manufacturing subsidiary
of Compania Dominicana de Telefonos, C. por A. (a wholly owned subsidiary of
GTE) has begun production and delivery of 10,000 OverVoice control units. Q-TEL
is an offshore manufacturing facility that performs functions for major U.S.
telecom equipment providers. Currently, Q-TEL is able to produce the control
units for substantially less than domestic manufacturers.
Equipment Warehousing, Distribution and Installation. We intend to support
the nationwide roll-out of OverVoice through strategic relationships with
warehousing, distribution and installation companies. We have entered into an
agreement with Farnor Enterprises, Inc. to receive, barcode, warehouse and
distribute nationally OverVoice equipment inventory. We have made arrangements
with AmeriLink d/b/a NaCom, Volt Information Sciences, Inc. and MasTec, Inc. to
perform national OverVoice installation functions. All three of these companies
have experience in handling thousands of work orders per week, have attended
OverVoice installation training provided by The Siemon Company and are
designated as Certified Installers of the Siemon Cabling System. We believe
that these relationships will enable us to deploy OverVoice under large
national contracts promptly and on a cost-effective basis.
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The OverVoice technology is economical, easy to implement and does not
involve a disruptive installation procedure. We can install the OverVoice
technology in an average size hotel or multiple dwelling unit (300 units) in
two to three weeks for approximately $250 per hotel guest room or apartment
unit. Installation can be accomplished at full occupancy, as the in-room
installation time is only 10-15 minutes per room.
Competition
We operate in a highly competitive environment for each of our lines of
business and we believe that competition is increasing. The competitive
environments for our different lines of business are as follows:
OverVoice. We face several major groups of competitors in the business of
providing high-speed Internet access to hotels and multiple dwelling units.
These include local exchange carriers and other digital subscriber line
providers, cable TV companies and other providers using cable modems, and
installation firms that deploy Category 5 rewiring in hotels and multiple
dwelling units. Although we believe OverVoice is the most cost-effective, user-
friendly and easily deployable high-speed Internet infrastructure solution
available, several of our competitors have extensive marketplace presence and
much greater technological and financial resources than we possess.
In addition, the OverVoice technology also competes with technologies using
other transmission media, such as coaxial cable, wireless facilities and fiber
optic cable. To the extent that telecommunications service providers, hotels,
multiple dwelling units or single family residences install any of these
alternative transmission media, demand for OverVoice may decline.
CAIS Internet. Because the Internet services market has no substantial
barriers to entry, we expect that competition will continue to intensify. Our
principal competitors include other tier one national backbone providers such
as UUNET Technologies, Inc., PSINet Inc. and BBN (a GTE subsidiary). To a
lesser extent, we also compete for always-on and dial-up access and web
services business with regional, tier two Internet service providers and cable
companies that operate in the same geographic markets that we serve.
Accordingly, we expect the market for Internet access services to continue to
grow and to be highly competitive with a variety of regional and national
players vying for new business. In many instances, we compete directly with our
downstream tier two Internet service provider customers. Eventually, we expect
some form of a market consolidation to occur, with those Internet service
providers that furnish the most value-added solutions ultimately surviving.
Government Regulation; Potential Taxes
We provide Internet access, in part, through transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. As an Internet service
provider we are not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations
applicable to businesses generally. In a report to Congress adopted on April
10, 1998, the FCC reaffirmed that Internet service providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the Telecommunications Act of
1996.
This finding is important because it means that we are not subject to
regulations that apply to telephone companies and similar carriers. We also are
not required to contribute a percentage of our gross revenues to support
"universal service" subsidies for local telephone services and other public
policy objectives, such as enhanced communications systems for schools,
libraries and certain health care providers. Although there can be no
assurance, the FCC action may also discourage states from separately regulating
Internet service providers as telecommunications carriers or imposing similar
subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. The FCC is also considering whether such
Internet-based telephone service should be subject to universal service support
obligations, or pay carrier access charges on the same basis as traditional
telecommunications companies.
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Local telephone companies assess access charges to long distance companies
for the use of the local telephone network to originate and terminate long
distance calls, generally on a per-minute basis. Access charges have been a
matter of continuing dispute, with long distance companies complaining that the
rates are substantially in excess of cost, and local telephone companies
arguing that access rates are justified to subsidize lower local rates for end
users and other purposes. Both local and long distance companies, however,
contend that Internet-based telephony should be subject to these charges. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments. However,
we cannot predict whether these debates will cause the FCC to reconsider its
current policy of not regulating Internet service providers.
In addition, a number of 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 access taxes. We cannot
accurately predict whether the imposition of any such taxes would have a
material adverse effect on our financial condition.
Patents and Other Proprietary Information
We are a licensee and joint-owner of certain patents and patent applications
of Inline relating to the OverVoice technology. We, together with Inline, have
a total of two U.S. patents and nine U.S. patent applications. Two of these
nine patent applications have recently been allowed and, therefore, are
expected to become patents in the next few months.
We own 50% of all U.S. and foreign (with the exception of Israel) patents
and patent applications relating to the OverVoice technology. We own the patent
applications we filed in Canada, Europe, Mexico, Australia and New Zealand.
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 divisional
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 wiring 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;
. 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.
Of the two allowed applications, one is a continuation of the first U.S.
patent and the other describes new features related to communication of video
and data over active telephone wires. These additional features are
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also embodied in applications filed by Inline in Israel and under the Patent
Cooperation Treaty, and in applications we have filed in Canada, Europe,
Mexico, Australia and New Zealand.
Pursuant to our license agreement with Inline, we have 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 we have non-exclusive rights. We further have 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 we
have non-exclusive rights, with the exception of Israel, which Inline reserved
for itself.
Under our license agreement with Inline, we pay royalties generally ranging
from 3.0% to 5.5% of net sales of the OverVoice technology. In the rare cases
where we do not provide the internet access or own the OverVoice equipment
installed, this percentage may be as high as 70.0%. If we sublicense the
patents and pending patent applications relating to the OverVoice technology to
a third party, we are required to pay Inline a percentage of the income
received from the sublicense. Additionally, we have minimum annual royalty
payments starting at $100,000 in 1998 and increasing to $250,000. The license
agreement is self-terminating upon the lapse of the last Inline patent included
in the license agreement, with the list of included patents to be supplemented
in the event that any future patent applications relating to the OverVoice
technology are filed by Inline personnel.
Inline retains the authority to control prosecution and maintenance of
patent rights, except for the patent applications we own. However, if Inline
decides not to:
. file a patent application;
. prevent a patent application from being abandoned; or
. keep a patent or application in force; we may elect to have Inline
assign the patent, application or invention to us. We have the right to
enforce these patent rights against potential infringers, although we
must share any recovery with Inline.
Legal Proceedings
We are not a party to any lawsuit or proceeding which, in the opinion of our
management, is likely to have a material adverse effect on our business,
financial condition or results of operation.
On March 25, 1999, CAIS Internet filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. in the United States District Court for the
District of Maryland, Greenbelt Division. The complaint charges LodgeNet with
infringement of Patent No. 5,844,596, which is directed to the delivery of
high-speed audio and video signals over active telephone wiring. This patent is
jointly owned by CAIS Internet and Inline Connection Corp. We are currently in
discussions with LodgeNet to resolve this issue.
On April 9, 1999, Laura Neuman, a former employee of CAIS Internet, filed a
demand for arbitration against CAIS Internet with the American Arbitration
Association, asserting breach of contract and breach of covenant of good faith
and fair dealing, and requesting damages in the amount of $750,000. In
addition, Ms. Neuman filed a charge of discrimination against CAIS Internet
with the Maryland Commission on Human Relations, alleging gender-based
discrimination and retaliation. Ms. Neuman also filed a complaint against Evans
K. Anderson, Executive Vice President of Sales and Marketing of CAIS Internet,
in the Circuit Court for Montgomery County, alleging defamation and invasion of
privacy, and seeking compensatory damages in the amount of $1 million and
punitive damages in the amount of $1 million. We do not believe that any of the
actions filed by Ms. Neuman has merit, and we intend to vigorously defend these
charges. CAIS Internet will indemnify Evans K. Anderson for any damages
resulting from Ms. Neuman's complaint against Mr. Anderson.
46
<PAGE>
Employees
As of April 16, 1999, we employed approximately 128 full-time employees. In
addition to our full-time employees, we also employ part-time personnel from
time to time in various departments. None of our employees are covered by a
collective bargaining agreement. We believe that our employee relations are
satisfactory.
Properties
Our principal executive offices are located in Washington, D.C. In addition
to our corporate headquarters, we lease office space in McLean, Virginia. The
leases expire at various times between December 31, 1999 and February 15, 2009.
<TABLE>
<CAPTION>
Location Type Square Footage
- -------- ------ --------------
<S> <C> <C>
McLean, Virginia.......................................... Office 7,033
McLean, Virginia.......................................... Office 1,566
Washington, D.C........................................... Office 32,500
</TABLE>
We consider that, in general, our physical properties are well maintained,
in good operating condition and adequate for our purposes.
47
<PAGE>
MANAGEMENT
Officers, Directors and Other Key Employees
The officers, directors and other key employees of CAIS Internet, and their
ages as of April 16, 1999 are set forth below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ulysses G. Auger, II(2)........... 46 Chairman of the Board and Chief
Executive Officer
William M. Caldwell, IV........... 51 President and Director
Evans K. Anderson................. 51 Executive Vice President of Sales and
Marketing and Chief Operating Officer
Gary H. Rabin..................... 33 Executive Vice President of Finance and
Strategic Planning
Stephen D. Price.................. 27 Vice President of Business Development
Richard W. Durkee................. 43 Vice President of Information Technology
and Operations
Barton R. Groh.................... 46 Vice President, Chief Financial Officer
and Treasurer
Michael G. Plantamura............. 43 Vice President, General Counsel and
Secretary
Duncan M. Fitchet, Jr. ........... 44 Vice President of Marketing
Tara Pierson Dunning.............. 35 Vice President of Customer and Account
Management of CAIS, Inc.
Durand Achee...................... 47 Vice President of Content and Broadcast
Networks of CAIS, Inc.
Frank R. Kent, III................ 46 Vice President of Human Resources of
CAIS, Inc.
Ulysses G. Auger, Sr.............. 77 Director
Richard F. Levin(1)(2)............ 46 Director
Vernon L. Fotheringham(1)(2)...... 50 Director
R. Theodore Ammon................. 49 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Ulysses G. Auger, II has served as the Chairman of the Board and Chief
Executive Officer of CAIS Internet since January 1998. Mr. Auger has an
extensive background in the telecommunications industry, and is a three-term
member of the Board of Directors of Comptel, a telecommunications industry
trade association with approximately 225 member companies. Until February 1999,
Mr. Auger chaired Comptel's IP Committee, which was formed to address Internet
issues affecting the telecommunications industry. In 1987, Mr. Auger founded
Cleartel Communications, Inc. and has served as a director since July 1987. Mr.
Auger also served as President of Cleartel from August 1987 to June 1988, and
then again from June 1990 to February 1999. In addition, Mr. Auger has served
as President and a Board Member of CAIS, Inc. since May 1996, and assumed the
roles of Chairman of the Board and Chief Executive Officer of CAIS, Inc. in
January 1998. Mr. Auger is the son of Ulysses G. Auger, Sr., a director of CAIS
Internet.
William M. Caldwell, IV has served as a member of the Board of Directors of
CAIS Internet since January 1998 and of CAIS, Inc. since May 1996, as CAIS
Internet's Vice Chairman from January 1998 to February 1999 and as CAIS
Internet's and CAIS, Inc.'s President since February 1999. Mr. Caldwell also
served as the Vice Chairman of CAIS, Inc. and Cleartel Communications, Inc.
from September 1997 to February 1999. Since June 1995, Mr. Caldwell also has
served as a member of the Board of Directors of Cleartel. Mr. Caldwell has an
extensive background in the areas of marketing, financial management,
investment banking and general corporate management. Prior to joining CAIS,
Inc. and Cleartel, from 1993 to August 1997, Mr. Caldwell
48
<PAGE>
served as President of Digital Satellite Broadcasting Corporation. Prior to
1993, Mr. Caldwell founded The Union Jack Group, an investment banking advisory
firm, and served as a Vice President in Corporate Finance at Kidder Peabody. In
addition, Mr. Caldwell also has served as both President and Chief Financial
Officer of Van Vorst Industries, an international home furnishing manufacturer;
as Vice President of Marketing for Flying Tiger Line, Inc., one of the world's
largest all-cargo air carriers before its acquisition by Federal Express
Corporation; and as a consultant with Booz Allen, Hamilton Inc. Mr. Caldwell
currently sits on the Board of directors for both Lee Pharmaceuticals and King
Koil Franchising, Inc.
Evans K. Anderson has served as the Executive Vice President of Sales and
Marketing and Chief Operating Officer of CAIS Internet and CAIS, Inc. since
February 1999. Prior to that, he served as CAIS Internet's and CAIS, Inc.'s
Senior Vice President of Sales and Marketing and the General Manager of CAIS,
Inc. from January 1998 to February 1999. Mr. Anderson also has served as a
member of the Board of Directors of CAIS, Inc. since December 1997. In
addition, from June 1998 to February 1999, Mr. Anderson served as Cleartel
Communications, Inc.'s Senior Vice President of Sales and Marketing. Mr.
Anderson brings 20 years of experience in the telecommunications and related
industries and is currently responsible for all of CAIS Internet's and CAIS,
Inc.'s sales and marketing functions and for CAIS, Inc.'s overall management,
including customer service, technical support, OverVoice operations and account
management. Prior to joining CAIS, Inc., from March 1996 to March 1997, Mr.
Anderson served as Director of Sales for the Northeast region for Advanced
Radio Telecom, a leading provider of advanced 38GHz digital wireless
technology. From January 1993 to February 1996, Mr. Anderson was a principal in
Vitel International, Inc., a nationwide provider of sales and distribution for
Airborne Express and telecommunications products. Prior to 1993, Mr. Anderson
held the position of Executive Vice President of Sales and Marketing at Oncor
Communications, a communications company, where he was responsible for the
sales, marketing and customer service functions. Prior to that, Mr. Anderson
served as Director of Sales with Contel Texocom, a national distributor of
telecommunications equipment, and held various sales and management positions
with ITT U.S.T.S. and Sprint Communications Company, L.P.
Gary H. Rabin has served as the Executive Vice President of Finance and
Strategic Planning since April 1999. Mr. Rabin has approximately 12 years of
investment banking experience including significant capital raising, public
offering and merger advisory work in the telecommunications and Internet
sectors. Prior to joining CAIS Internet, he served as Managing Director, co-
head and founder of the Telecommunications Group at ING Baring Furman Selz LLC
from May 1997 to April 1999. From September 1994 through April 1997, Mr. Rabin
was a founding member of the telecommunications investment banking group at UBS
Securities LLC. From July 1989 through April 1994 he was a principal of Beale
Lynch Partners LLC, a private investment banking boutique specializing in
international financings and general strategic advisory services. He was also
previously with The First Boston Corporation, the Sumitomo Bank Limited and
Manufacturers Hanover Trust Company.
Stephen D. Price has served as CAIS Internet's Vice President of Business
Development since March 1999. Prior to joining CAIS Internet, he served as an
investment banker in the Telecommunications Group of ING Baring Furman Selz LLC
from September 1997 to March 1999. While at ING Baring, Mr. Price specialized
in the financing and advising of Internet service providers and Internet-
related communications companies. Previously, from June 1994 to September 1997,
Mr. Price served as an investment banker at UBS Securities LLC, focusing
primarily on telecommunications, technology and biotechnology.
Richard W. Durkee has served as CAIS Internet's Vice President of
Information Technology and Operations since September 1998. Mr. Durkee also has
served as CAIS, Inc.'s Vice President of Information Technology and Operations
since September 1998, and served in the same capacity at Cleartel from
September 1998 to February 1999. Mr. Durkee has over 20 years of experience in
Systems and Network Development, Operations and Management. Prior to joining
CAIS Internet, from April 1996 to September 1998, Mr. Durkee served as Director
of Information Technology for ORBCOMM Global, L.P., a global messaging and data
communications company. From March 1995 to March 1996, Mr. Durkee served as
Vice President, Information Technology and Network Operations, for GTS/Global
Link, a facilities based provider of
49
<PAGE>
telecommunications services. From June 1989 to February 1995, Mr. Durkee served
as Director of Information Systems for Oncor Communications, Inc.
Barton R. Groh has served as CAIS Internet's Vice President, Chief Financial
Officer and Treasurer since January 1998. Mr. Groh also has served as CAIS,
Inc.'s Vice President and Chief Financial Officer since May 1996, as CAIS,
Inc.'s Assistant Secretary since December 1996, and as CAIS, Inc.'s Treasurer
since December 1997. Mr. Groh joined Cleartel Communications, Inc. in July 1989
as Director of Finance and Administration and served as Cleartel's Vice
President and Chief Financial Officer from June 1992 to February 1999. In
addition, Mr. Groh served as Cleartel's Assistant Secretary from June 1993 to
February 1999 and as Cleartel's Treasurer from June 1998 to February 1999.
Prior to joining Cleartel, Mr. Groh held positions as a Senior Auditor with
Price Waterhouse from 1974 to 1979, as an accounting manager with Comsat
Corporation from 1979 to 1987, and as Controller, Franchise Operations with
Entre Computer Centers from 1987 to 1989. Mr. Groh is a Certified Public
Accountant.
Michael G. Plantamura has served as CAIS Internet's Vice President,
Secretary and General Counsel since January 1998. Mr. Plantamura also has
served as Vice President and General Counsel of CAIS, Inc. since September
1996, and as CAIS, Inc.'s Secretary since December 1997. From September 1996 to
February 1999, Mr. Plantamura served as Vice President and General Counsel of
Cleartel Communications, Inc. and as Cleartel's Secretary from June 1998 to
February 1999. Mr. Plantamura is currently responsible for all of CAIS
Internet's and CAIS, Inc.'s legal, regulatory, corporate, contract and
litigation issues. From April 1996 to September 1996, Mr. Plantamura served as
Cleartel's Director of Legal and Regulatory Affairs, and from May 1996 to
September 1996, Mr. Plantamura held the same position at CAIS, Inc. From
December 1986 to March 1996, Mr. Plantamura served as in-house General Counsel
for WBDC-TV50, Washington, D.C. and WUNI-TV27, Worcester/Boston, MA.
Duncan M. Fitchet, Jr. has served as CAIS Internet's Vice President of
Marketing since January 1998. Mr. Fitchet also has served as Vice President of
Marketing for CAIS, Inc. since January 1997, and held the same position at
Cleartel Communications, Inc. from January 1997 to February 1999. Mr. Fitchet's
responsibilities include strategic planning and marketing strategies, product
management, market research, product and service promotions, public relations
and marketing communications activities. From May 1996 to December 1996, Mr.
Fitchet served as Director of Marketing and Business Development for CAIS,
Inc., and from August 1995 to December 1996, Mr. Fitchet held the same position
at Cleartel. Prior to joining Cleartel, from June 1991 to August 1995, Mr.
Fitchet served as Senior Group Product Manager at GTE Telephone Operations.
Tara Pierson Dunning has served as CAIS, Inc.'s Vice President of Customer
and Account Management since September 1998. Previously, Ms. Dunning served as
Director of Marketing for CAIS Internet from January 1998 to September 1998;
Director of Marketing for CAIS, Inc. and Cleartel Communications, Inc. from
October 1997 to September 1998; Director of Business Development for CAIS, Inc.
and Cleartel from January 1997 to October 1997; and as Manager of Business
Development for CAIS, Inc. and Cleartel from September 1996 to December 1996.
Prior to joining CAIS, Inc. and Cleartel, from September 1993 to September
1996, Ms. Dunning founded and served as Vice President of Marketing for New
Vision Communications.
Durand Achee has served as CAIS, Inc.'s Vice President of Content and
Broadcast Networks since April 1999. Prior to joining CAIS Internet, from
October 1993 to April 1, 1999, Mr. Achee was a founder and principal of M3
Group, Inc., a pioneer in representing software developers, and content
providers for the creation of interactive media and Internet content. While at
M3, Mr. Achee also worked actively with companies developing e-commerce and
online advertising initiatives. Prior to founding M3 Group, Mr. Achee served as
Vice President of Business Development for Time Warner Interactive Group
responsible for overseeing interactive media content development with third
party software providers and other Time Warner divisions. Mr. Achee has an
extensive publishing, advertising, and media background and was responsible for
launching the in-house magazine publishing group at Walt Disney Company.
50
<PAGE>
Frank R. Kent, III has served as CAIS Inc.'s Vice President of Human
Resources since April 1999. Mr. Kent is responsible for recruiting, employee
relations, training, benefits, organizational development and related areas.
From May 1996 to April 1999, Mr. Kent served as CAIS, Inc.'s Director of
Corporate Human Resources. Mr. Kent joined Cleartel Communications, Inc. in
June 1992 as Manager of Human Resources, and served as Cleartel's Director of
Corporate Human Resources from 1993 to May 1996. From September 1991 through
January 1997, Mr. Kent also served as a human resources management consultant
for Auger Enterprises. Prior to joining Cleartel and CAIS, Inc., Mr. Kent
served as Director of Human Resources for the D.C. Housing Finance Agency.
Ulysses G. Auger, Sr. has served as a member of the Board of Directors of
CAIS Internet since December 1997. Mr. Auger served as Secretary, Treasurer and
a director of Cleartel Communications, Inc. from June 1993 to June 1998. From
April 1996 to December 1997, Mr. Auger served as Secretary, Treasurer and a
director of CAIS, Inc. Mr. Auger is a private investor and entrepreneur who
founded the nationally renowned Blackie's House of Beef in 1946. Mr. Auger's
financial interests include hotels, commercial real estate and Mid-Atlantic
region restaurants. Mr. Auger, Sr. is the father of Ulysses G. Auger, II, the
Chairman of the Board and Chief Executive Officer of CAIS Internet.
Richard F. Levin has served as a member of the Board of Directors of CAIS
Internet since December 1997. Mr. Levin also served as a member of the Board of
Directors of Cleartel Communications, Inc. from June 1995 to June 1998. Mr.
Levin is a partner in the Washington, D.C. law firm of Grossberg, Yochelson,
Fox and Beyda, where he has practiced since 1979.
Vernon L. Fotheringham has served as a member of the Board of Directors of
CAIS Internet since January 1999. Mr. Fotheringham has served as Chairman,
President and Chief Executive Officer of Nutel Corporation since August 1998.
From December 1995 to August 1998, Mr. Fotheringham served as Chairman and
Chief Executive Officer of Advanced Radio Telecom. Prior to that, from April
1993 to December 1995, Mr. Fotheringham served as President and Chief Executive
Officer of Norcom Networks Corporation, a nationwide provider of mobile
satellite services. Over the last ten years, Mr. Fotheringham has advised
several businesses in the telecommunications industry, including American
Mobile Satellite Corporation, ClairCom Communications and McCaw Cellular
Communications, Inc.
R. Theodore Ammon has served as a member of the Board of Directors of CAIS
Internet since February 1999. Mr. Ammon has served as the Chairman of the Board
of Big Flower Holdings, Inc. (and predecessors) since its inception in 1993 and
was the Chief Executive Officer of a Big Flower Holdings, Inc. predecessor from
inception until April 1997. Mr. Ammon is also a director of Big Flower Press
Holdings, Inc., a subsidiary of Big Flower Holdings, Inc. Mr. Ammon was a
General Partner of Kohlberg Kravis Roberts & Co. from 1990 to 1992, and an
executive of such firm prior to 1990. Mr. Ammon is also a member of the Board
of Directors of Host Marriott Corporation and Chairman of the Board of
Directors of 24/7 Media, Inc. In addition, Mr. Ammon serves on the Board of
Directors of the New York YMCA, The Municipal Art Society of New York,
Jazz@Lincoln Center and on the Board of Trustees of Bucknell University.
All officers serve at the discretion of the Board.
Board Committees
The Board has established an Audit Committee and a Compensation Committee.
The Audit Committee will review the results and scope of the audit and other
services provided by CAIS Internet's independent accountants and consists of
Messrs. Auger, II, Levin and Fotheringham. The Compensation Committee will
approve salaries and certain incentive compensation for management and key
employees of CAIS Internet and administer CAIS Internet's Amended and Restated
1998 Equity Incentive Plan and consists of Messrs. Levin and Fotheringham.
51
<PAGE>
Executive Compensation
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
CAIS Internet's Chief Executive Officer and each of the four other most highly
compensated executive officers, whose total cash and cash equivalent
compensation exceeded $100,000, with respect to the fiscal year ended December
31, 1998. Each of CAIS Internet's officers received perquisites and other
personal benefits in addition to salary and bonuses. The aggregate amount of
these perquisites and other personal benefits, however, did not exceed the
lesser of $50,000 or 10% of the total of the annual salary and bonus reported
for any of the persons listed in this chart for 1998. For a complete discussion
regarding options granted to these persons with respect to the fiscal year
ended December 31, 1998, please see "--Options Granted in Fiscal Year 1998."
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
------------------------------------------- ------------
Other Securities All
Salary Bonus Annual Underlying Other
Name and Principal Position Year ($) ($) Compensation($) Options(#) Compensation
- --------------------------- ----- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ulysses G. Auger, II..... 1998 $280,140 $28,000 -- -- --
Chairman of the Board
and
Chief Executive Officer
William M. Caldwell, IV.. 1998 237,498(/1/) -- -- -- --
President and Director
Evans K. Anderson........ 1998 179,956 -- -- 135,800 --
Executive Vice President
of Sales and Marketing
Laura A. Neuman(/2/) .... 1998 148,076 50,000 -- 60,000 --
Vice President of Sales
Duncan M. Fitchet, Jr. .. 1998 127,961 10,000 -- 40,000 --
Vice President of
Marketing
</TABLE>
- --------
(1) During 1998, Mr. Caldwell received a base salary of $176,922 for services
performed in 1998 and $60,576 in deferred income for services performed in
1997.
(2) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
The following table sets forth certain information regarding options to
acquire common stock granted to CAIS Internet's Chief Executive Officer and
each of the four other most highly compensated executive officers, whose total
cash and cash equivalent compensation exceeded $100,000 with respect to the
fiscal year ended December 31, 1998. There were no stock appreciation rights
granted in 1998. The assumed rates of growth were selected for illustration
purposes only. They are not intended to forecast possible future appreciation,
if any, of stock prices. No gain to the optionees is possible without an
increase in stock prices, which will benefit all stockholders.
52
<PAGE>
Options Granted in Fiscal Year 1998
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
Percent of for
Total Options Exercise Option Term(/1/)
Options Granted in Price -------------------
Name Granted Fiscal Year ($/sh) Expiration Date 5%($) 10%($)
---- ------- ------------- -------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ulysses G. Auger, II..... -- -- -- -- -- --
William M. Caldwell, IV.. -- -- -- -- -- --
Evans K. Anderson........ 100,000(/2/) 10.4 3.07 April 15, 2008 2,136,342 3,583,614
35,800(/2/) 3.7 4.31 December 10, 2008 720,418 1,238,542
Laura A. Neuman(/3/) .... 20,000 2.1 3.07 April 15, 2008 -- --
40,000 4.2 3.07 June 29, 2008 -- --
Duncan M. Fitchet, Jr. .. 40,000 4.2 3.07 April 15, 2008 854,537 1,433,445
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon an assumed initial public offering price
of $15.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
(2) Mr. Anderson was awarded options to purchase 100,000 shares of CAIS
Internet's common stock at an exercise price of $3.07 per share on April
15, 1998. On December 10, 1998, pursuant to CAIS Internet's stock option
plan, Mr. Anderson was awarded options to purchase 35,800 shares of CAIS
Internet's common stock, at an exercise price of $4.31 per share.
(3) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999
and therefore Ms. Neuman's options were forfeited prior to vesting.
Fiscal Year End Option Values
The following table sets forth certain information regarding unexercised
options held by CAIS Internet's Chief Executive Officer and each of the four
other most highly compensated executive officers, whose total cash and cash
equivalent compensation exceeded $100,000 with respect to the fiscal year ended
December 31, 1998. There were no options exercised in 1998. The calculations of
the value of unexercised options are based on the difference between the
assumed initial public offering price of $15.00 per share, and the exercise
price of each option, multiplied by the number of shares covered by the option.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
End(#) at Fiscal Year End($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ulysses G. Auger, II....... -- -- -- --
William M. Caldwell, IV.... -- 1,684,342 -- $23,625,928
Evans K. Anderson.......... -- 437,220 -- 5,737,046
Laura A. Neuman(/1/)....... -- -- -- --
Duncan M. Fitchet, Jr. .... -- 40,000 -- 477,200
</TABLE>
- --------
(1) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
Employment Agreements; Covenants-not-to-Compete
On September 8, 1997, CAIS Internet entered into an employment agreement
with William M. Caldwell, IV. The agreement, as amended, provides that Mr.
Caldwell will be employed as CAIS Internet's President. The term of the
agreement is for a period of four years commencing on September 8, 1997. The
agreement establishes a base salary of $175,000 per annum. This base salary is
subject to periodic increases as CAIS
53
<PAGE>
Internet may determine. If CAIS Internet terminates Mr. Caldwell's employment
without cause, Mr. Caldwell will be entitled to receive nine months of his then
current base salary. The agreement contains non-competition and non-
solicitation covenants which prohibit Mr. Caldwell, during the term of his
employment and for a period of 24 months thereafter, from engaging in
competition with CAIS Internet or from soliciting any of CAIS Internet's
customers. The agreement also prohibits Mr. Caldwell from disclosing
confidential or proprietary information of CAIS Internet. In connection with
his employment agreement, Mr. Caldwell was granted an option to purchase a 14%
limited partnership interest in each of CAIS Limited Partnership and Cleartel
Communications Limited Partnership for a purchase price of $1.68 million. In
connection with the October 1998 reorganization, this option was replaced with
options to purchase 1,635,610 shares of CAIS Internet's common stock at an
exercise price of $.9732 per share. Pursuant to the terms of the employment
agreement, 50% of such options vest after Mr. Caldwell's third employment year
and the remaining 50% of the options vest at the end of Mr. Caldwell's fourth
employment year. As a result of this offering, however, 75% of the options will
vest on the date immediately prior to the earliest to occur of: (i) the
effective date of a registration statement; or (ii) the pricing of the initial
public offering; or (iii) the execution and delivery of an underwriting
agreement related to an initial public offering, and 25% of the options will
vest at the end of Mr. Caldwell's fourth employment year.
On June 3, 1997, CAIS Internet entered into an employment agreement with
Evans K. Anderson. The agreement, as amended, provides that Mr. Anderson will
be employed as CAIS Internet's Executive Vice President of Sales and Marketing.
The term of the agreement is for a period of four years commencing on March 3,
1997. The agreement established an initial base salary of $125,000 per annum,
and as of November 1, 1997, a base salary of $150,000 per annum. This base
salary is subject to periodic increases as CAIS Internet may determine. If CAIS
Internet terminates Mr. Anderson's employment without cause, Mr. Anderson will
be entitled to receive nine months of his then current base salary. The
agreement contains non-competition and non-solicitation covenants which
prohibit Mr. Anderson, during the term of his employment and for a period of
twenty-four months thereafter, from engaging in competition with CAIS Internet
or from soliciting any of CAIS Internet's customers. The agreement also
prohibits Mr. Anderson from disclosing confidential or proprietary information
of CAIS Internet. In connection with his employment agreement, Mr. Anderson was
granted an option to purchase a 3% limited partnership interest in each of CAIS
Limited Partnership and Cleartel Communications Limited Partnership for a
purchase price of $360,000. In connection with the reorganization in October
1998, such option was replaced with options to purchase 301,420 shares of CAIS
Internet's common stock at an exercise price of $1.1942 per share, of which one
third of the options vest after Mr. Anderson's third employment year and the
remaining two-thirds of the options vest at the end of Mr. Anderson's fourth
employment year. As a result of this offering, however, one third of the
options will vest on the date immediately prior to the earliest to occur of:
(i) the effective date of a registration statement; or (ii) the pricing of the
initial public offering; or (iii) the execution and delivery of an underwriting
agreement related to an initial public offering, and two-thirds of the options
will vest at the end of Mr. Anderson's fourth employment year.
On June 29, 1998, CAIS Internet entered into an employment agreement with
Laura A. Neuman. The agreement provided that Ms. Neuman would be employed as
CAIS Internet's Vice President of Sales. The term of the agreement was for a
period of one year commencing on June 29, 1998, with the possibility of an
extension by mutual consent. The agreement established a base salary of
$150,000 per annum, subject to periodic increases as CAIS Internet may have
determined. In addition, the agreement entitled Ms. Neuman to receive cash
incentive compensation of $25,000 per quarter for achieving a minimum of 70% of
CAIS Internet's budgeted performance target. Subject to vesting and forfeiture
provisions, the agreement also granted Ms. Neuman options to purchase 40,000
shares of CAIS Internet's common stock at an exercise price of $3.07 per share.
As a result of this offering, however, one eighth of the options (5,000) would
have vested on the day the underwriting agreement relating to an initial public
offering is signed. Ms. Neuman's employment terminated effective April 1, 1999,
therefore entitling Ms. Neuman to receive six months of her then current base
salary, plus a pro-rated amount equal to six months of the calculated cash
incentive compensation immediately upon the termination. The agreement contains
non-competition and non-solicitation covenants which prohibit Ms. Neuman,
during the term of her employment and for a period of 24 months thereafter,
from
54
<PAGE>
engaging in competition with CAIS Internet or from soliciting any of CAIS
Internet's customers. The agreement also prohibits Ms. Neuman from disclosing
confidential or proprietary information of CAIS Internet. On April 9, 1999, Ms.
Neuman filed a demand for arbitration against CAIS Internet alleging, among
other things, breach of contract. For more information, please see "Business--
Legal Proceedings."
Amended and Restated Stock Option Plan
On February 12, 1999, the Board of Directors of CAIS Internet adopted and
the stockholders of CAIS Internet approved the Amended and Restated 1998 Equity
Incentive Plan, which provides for the grant to officers, key employees and
directors of CAIS Internet and its subsidiaries of both "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986, and stock options that are nonqualified for federal income tax purposes.
The total number of shares for which options may be granted pursuant to this
stock option plan and the maximum number of shares for which options may be
granted is 1,500,000 shares, subject to adjustments reflecting changes in CAIS
Internet's capitalization. As of April 28, 1999, options to purchase 1,305,800
shares of CAIS Internet's common stock were outstanding under the stock option
plan. The stock option plan is currently administered by CAIS Internet's Board
of Directors. Upon the completion of this offering, the stock option plan will
be administered by the Compensation Committee. The Compensation Committee will
determine, among other things, which officers, employees and directors will
receive options under the plan, the time when options will be granted, the type
of option (incentive stock options, nonqualified stock options, or both) to be
granted, the number of shares subject to each option, the time or times when
the options will become exercisable, and, subject to certain conditions
discussed below, the option price and duration.
The exercise price of incentive and nonqualified stock options will be
determined by the Compensation Committee, but may not be less than the fair
market value of the common stock on the date of grant and the term of any such
option may not exceed ten years from the date of grant. With respect to any
stock option plan participant who owns stock representing more than 10% of the
voting power of all classes of the outstanding capital stock of CAIS Internet
or of its subsidiaries, the exercise price of any incentive stock option may
not be less than 110% of the fair market value of the shares on the date of
grant and the term of the option may not exceed five years from the date of
grant.
Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of common stock having a fair market value in
the aggregate equal to the option price. Options granted pursuant to this stock
option plan are not transferable, except by will or the laws of descent and
distribution. During an optionee's lifetime, the option is exercisable only by
the optionee.
The Compensation Committee has the right at any time and from time to time
to amend or modify this stock option plan, without the consent of CAIS
Internet's stockholders or optionees; provided, that no such action may
adversely affect options previously granted without the optionee's consent, and
provided further that no such action, without the approval of a majority of the
stockholders of CAIS Internet, may increase the total number of shares of
common stock which may be purchased pursuant to options under the plan,
increase the total number of shares of common stock which may be purchased
pursuant to options under the plan by any person, expand the class of persons
eligible to receive grants of options under the plan, decrease the minimum
option price, extend the maximum term of options granted under the plan, extend
the term of the plan or change the performance criteria on which the granting
of options is based.
Promptly after the completion of this offering, CAIS Internet expects to
file with the SEC a registration statement on Form S-8 covering the shares of
common stock underlying the options granted under this stock option plan and
other compensatory plans and arrangements.
Directors and Officers Insurance
Upon the closing of this offering, CAIS Internet intends to obtain directors
and officers liability and company reimbursement insurance. Under the policy,
the insurance carrier will pay, on behalf of directors and officers of CAIS
Internet, certain losses incurred as a result of certain wrongful acts by such
persons, for which they would not otherwise be indemnified by CAIS Internet.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 16, 1999
regarding the beneficial ownership of CAIS Internet's capital stock, after
giving effect to the offering, by:
. each person known by CAIS Internet to beneficially own 5% or more of any
class of CAIS Internet's capital stock;
. each director of CAIS Internet;
. CAIS Internet's Chief Executive Officer and each of the four other most
highly compensated executive officers, whose total cash and cash
equivalent compensation exceeded $100,000; and
. all directors and executive officers of CAIS Internet as a group.
Under the SEC's rules, a person is deemed to be the beneficial owner of a
security if such person has or shares the power to vote or direct the voting of
such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of a security if
that person has the right to acquire beneficial ownership within 60 days.
Accordingly, more than one person may be deemed to be a beneficial owner of the
same security. Unless otherwise indicated by footnote, the named entities or
individuals have sole voting and investment power with respect to the shares of
common stock which they beneficially own. All persons listed have an address in
care of CAIS Internet's principal executive offices. All information with
respect to beneficial ownership has been furnished to CAIS Internet by the
respective stockholders of CAIS Internet.
This table includes shares issuable upon the conversion of the remaining
outstanding Series A and Series B shares upon consummation of the offering and
shares which may be acquired upon the exercise of options and debt and equity
warrants exercisable within 60 days following the offering.
<TABLE>
<CAPTION>
Shares Beneficially
Owned after Offering
----------------------------
Common Stock
----------------------------
Name Number Percent
---- ------------ ----------
<S> <C> <C>
Ulysses G. Auger, II................................ 4,832,934 25.5%
William M. Caldwell, IV............................. 1,275,440 6.1
Evans K. Anderson................................... 125,473 *
Laura A. Neuman..................................... 0(/1/) *
Duncan M. Fitchet, Jr. ............................. 13,333 *
Ulysses G. Auger, Sr. .............................. 4,821,824 25.5
Richard F. Levin.................................... 15,000 *
Vernon L. Fotheringham.............................. 15,000 *
R. Theodore Ammon................................... 3,376,256 17.4
All executive officers and directors as a group (16
persons)........................................... 14,620,788 70
</TABLE>
- --------
* Less than 1%
(1) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
On September 4, 1998, Ulysses G. Auger, II and Ulysses G. Auger, Sr. pledged
all of their ownership interests in CAIS Internet to secure the credit
agreement CAIS Internet entered into with ING (U.S.) Capital LLC. We intend to
use proceeds from the offering to repay all of the indebtedness under the
credit agreement. Once the credit agreement is repaid in full, the pledges will
be released.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Organization of CAIS Internet
CAIS Internet is a closely held corporation. It was organized under Delaware
law in December 1997 under the name CGX Communications, Inc., as a holding
company. CAIS Internet changed its name to CAIS Internet, Inc. in February
1999. CAIS, Inc., currently CAIS Internet's only subsidiary, was formed by
certain current stockholders of CAIS Internet to acquire Capital Area, a tier
one Internet service provider that was owned by persons unaffiliated with CAIS
Internet.
In October 1998, CAIS Internet completed a reorganization pursuant to which,
among other things:
. CAIS, Inc. was merged with a newly formed acquisition subsidiary of CAIS
Internet, with CAIS, Inc. surviving as a wholly owned subsidiary of CAIS
Internet;
. Cleartel Communications, Inc. which owns certain telecommunications
authorizations and was the general partner of Cleartel Communications
Limited Partnership, a long distance telecommunications entity owned
substantially by the shareholders of CAIS, Inc., was merged with a
second newly formed acquisition subsidiary of CAIS Internet, with
Cleartel Communications, Inc. surviving as a wholly owned subsidiary of
CAIS Internet;
. the former shareholders of CAIS, Inc. and Cleartel Communications, Inc.
exchanged their shares in such companies for shares of CAIS Internet's
common stock at a rate of 62,938 shares of CAIS Internet's common stock
for each share of Cleartel Communications, Inc. common stock and at a
rate of 500 shares of CAIS Internet's common stock for each share of
CAIS, Inc.'s common stock;
. the limited partners of Cleartel Communications Limited Partnership, who
were substantially the shareholders of Cleartel Communications, Inc.,
exchanged their limited partnership interests in Cleartel Communications
Limited Partnership at a rate of 5,350 shares of CAIS Internet's common
stock for each 1% limited partnership interest in Cleartel
Communications Limited Partnership; and
. CAIS Internet acquired all of the limited partnership interests in
Cleartel Communications Limited Partnership and Cleartel became the sole
general partner of Cleartel Communications Limited Partnership with a 1%
general partnership interest.
Prior to the reorganization, all of CAIS Internet, Inc.'s outstanding common
stock was held by Ulysses G. Auger, Sr., who held 4,220,982 shares of common
stock; Ulysses G. Auger, II, who held 4,306,730 shares of common stock; the ten
Auger Trusts, each holding 8,577 shares of common stock; and R. Theodore Ammon,
who held 317,073 shares of common stock. In addition, Ulysses G. Auger, Sr.,
Ulysses G. Auger, II, and the ten Auger Trusts held all of the interests in
CAIS, Inc., Cleartel Communications, Inc. and Cleartel Communications Limited
Partnership.
Following the reorganization, in exchange for their interests in CAIS, Inc.,
Cleartel Communications, Inc. and Cleartel Communications Limited Partnership,
Ulysses G. Auger, Sr., Ulysses G. Auger, II, and the ten Auger Trusts were
given the following shares of CAIS Internet's common stock:
. Ulysses G. Auger, Sr., received 258,101 shares of CAIS Internet's common
stock for his 49% limited partnership interest in Cleartel LP, 2,675
shares of CAIS Internet's common stock for his 42.5 shares of Cleartel,
and 245,000 shares of CAIS Internet's common stock for his 490 shares of
CAIS, Inc;
. Ulysses G. Auger, II, received 266,147 shares of CAIS Internet's common
stock for his 50% limited partnership interest in Cleartel
Communications Limited Partnership, 1,337 shares of CAIS Internet's
common stock for his 21.3 shares of Cleartel Communications, Inc. and
250,000 shares of CAIS Internet's common stock for his 500 shares of
CAIS, Inc; and
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. Each of the ten Auger Trusts received 535 shares of CAIS Internet's
common stock for their .10% limited partnership interest in Cleartel
Communications Limited Partnership, 134 shares of CAIS Internet's common
stock for their 2.1 shares of Cleartel Communications, Inc.and 500
shares of CAIS Internet's common stock for their 50 shares of CAIS, Inc.
R. Theodore Ammon's holdings did not change as a result of the
reorganization.
In February 1999, CAIS Internet transferred all of its limited partnership
interests in Cleartel Communications Limited Partnership to Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership was
dissolved. CAIS Internet then completed the spin-off of Cleartel
Communications, Inc. by means of a distribution of all of its shares in
Cleartel Communications, Inc. to CAIS Internet's stockholders pro rata based on
their percentage ownership of the outstanding shares of CAIS Internet. As a
result of the spin-off of Cleartel Communications, Inc., Cleartel
Communications, Inc. ceased to be a subsidiary of CAIS Internet.
As a result of the spin-off of Cleartel Communications, Inc., Ulysses G.
Auger, Sr. and Ulysses G. Auger, II received 31,512 and 32,161 shares of the
common stock of Cleartel Communications, Inc., respectively.
Intercompany Relationships
Prior to and after the October 1998 reorganization, CAIS Internet, Cleartel
Communications Limited Partnership, Cleartel Communications, Inc. and CAIS,
Inc. were all under common ownership and management. During that time, all of
these companies purchased goods, services and facilities from each other.
As of December 31, 1996, 1997 and 1998, CAIS Internet owed Cleartel
Communications Limited Partnership approximately $980,000, $3,735,000 and
$5,342,000, respectively, for monies advanced from Cleartel Communications
Limited Partnership to CAIS Internet. As of the date of the spin-off of
Cleartel Communications, Inc., the total amount of the loan from Cleartel
Communications Limited Partnership was $4,941,000. This balance was reduced by
$1,450,000 as a result of CAIS Internet's assumption of a note payable by
Cleartel Communications Limited Partnership to Ulysses G. Auger, Sr., a
director of CAIS Internet. For a further discussion of the terms of the
transaction, please see "--Loans to and from Executive Officers and
Affiliates." The loan balance of Cleartel Communications Limited Partnership
was further reduced by an additional $1,500,000 with a portion of the proceeds
from CAIS Internet's issuance of Series A shares. As a result of these
reductions, the total principal amount of the loan from Cleartel Communications
Limited Partnership was reduced to $1,991,000 in February 1999. No interest is
payable in respect of the loan from Cleartel Communications Limited
Partnership.
CAIS Internet will provide certain administrative and other support services
to Cleartel Communications, Inc. pursuant to a services agreement, at cost plus
five percent, until Cleartel Communications, Inc. replaces this arrangement
with its own services or outsources such support from third parties, which is
expected to occur by the end of 1999. In addition, Cleartel will sublease
certain office space from CAIS Internet at CAIS Internet's headquarters in
Washington, D.C., according to a sublease agreement between CAIS Internet and
Cleartel Communications, Inc. The sublease provides that Cleartel
Communications, Inc. is responsible for the percentage of the rent as it
relates to the square footage that Cleartel Communications, Inc. utilizes. The
standard five percent mark up on goods and services is not applied because
Cleartel Communications, Inc. did not share in the build-out credits for the
new office space. Cleartel Communications, Inc. may also purchase dedicated
Internet connections from CAIS, Inc. CAIS Internet believes that these
arrangements are at least as favorable to CAIS Internet as those which could
have been negotiated with an unaffiliated third party.
CAIS Internet may purchase certain services from Cleartel Communications,
Inc. including, but not limited to:
. the license of certain co-location space at Cleartel Communications,
Inc.'s switch site facilities in Washington, D.C.;
. the purchase of certain long distance telephone and other
telecommunications services; and
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. the purchase of certain private branch exchange, telephone and other
telecommunications equipment and computer equipment.
Real Property Leases
Until February 25, 1999, Cleartel Communications Limited Partnership leased
its corporate headquarters office space from Ulysses G. Auger, Sr., a director
of CAIS Internet, and Lulu H. Auger, his wife. The lease for the space expired
on February 28, 1996; however, the parties verbally agreed to extend the lease
until February 25, 1999. Cleartel Communications Limited Partnership paid total
annual rents of $180,000 for the space during each of the years ended December
31, 1996, 1997 and 1998. CAIS Internet believes that the terms of the lease,
including the rental rate, were at least as favorable to CAIS Internet as those
which could have been negotiated with an unaffiliated third party.
On November 21, 1998, CAIS Internet entered into a ten-year lease for its
corporate headquarters office space commencing February 15, 1999. Ulysses G.
Auger, Sr. and Lulu H. Auger hold a 44.8% limited partnership interest in the
entity which owns the building. Annual base rent is $861,250, subject to annual
adjustments. CAIS Internet believes that the terms of the lease, including the
rental rate, are at least as favorable to CAIS Internet as those which could
have been negotiated with an unaffiliated third party.
Indemnification Agreements
CAIS Internet has entered into indemnification agreements with its directors
and certain of its senior executive officers. Pursuant to the terms of the
indemnification agreements, each of the senior executive officers and directors
of CAIS Internet will be indemnified by CAIS Internet to the fullest extent
permitted by Delaware law in the event such officer is made or threatened to be
made a party to a claim arising out of such person acting in his capacity as an
officer or director of CAIS Internet.
Loans to and from Executive Officers and Affiliates
CAIS, Inc. had a note payable due to Ulysses G. Auger, II, CAIS Internet's
Chairman and Chief Executive Officer, in the principal amount of $100,000,
dated as of March 15, 1996. The note bore interest at a rate of 10% per annum,
and was payable as follows: accrued interest due monthly on the 15th day of
each month, and the $100,000 in principal due on March 15, 1999.
CAIS, Inc. had a note payable due to Ulysses G. Auger, II in the principal
amount of $250,000, dated as of October 31, 1997. The note bore interest at a
rate of 10% per annum, and was payable as follows: accrued interest due monthly
on the last day of each month, and the $250,000 in principal due on April 30,
1999.
CAIS, Inc. had a note payable due to Ulysses G. Auger, Sr., a director of
CAIS Internet, in the principal amount of $1,000,000, dated as of May 8, 1996.
The note bore interest at a rate of 13% per annum, and was payable as follows:
monthly installments of $10,000 plus interest commencing on June 8, 1996, and
continuing thereafter on the 8th of each month, until May 8, 1999, whereupon
the remaining outstanding principal balance and any accrued and unpaid interest
are due.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the
principal amount of $500,000, dated as of February 27, 1998. The note bore
interest at a rate of 10% per annum, and was payable as follows: accrued
interest due monthly on the 27th day of each month, and the $500,000 in
principal due on February 27, 1999.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the amount
of $500,000, dated as of July 9, 1998. The note bore interest at a rate of 10%
per annum, and was payable as follows: accrued interest due quarterly on the
9th day of each month, and the $500,000 in principal due on July 9, 1999.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the
principal amount of $1,000,000, dated as of January 6, 1999. The note bore
interest at a rate of 10% per annum, and was payable as follows:
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accrued interest due quarterly on the 6th day of each quarter, and the
$1,000,000 in principal due on demand upon thirty days advance written notice
by the holder of the note to CAIS Internet.
All of the foregoing promissory notes were subordinated to the loans made to
these companies by ING (U.S.) Capital LLC, pursuant to the credit agreement
CAIS Internet entered into with ING (U.S.) Capital LLC.
Cleartel Communications Limited Partnership had a note payable due to
Ulysses G. Auger, Sr. in the principal amount of $2.1 million, dated as of
January 2, 1994. The note bore interest at a rate of 1% per annum, plus the
prime rate, and was payable as follows: accrued interest in arrears due monthly
on the first day of each month, and the principal balance, together with all
interest accrued and unpaid, due on August 1, 2001.
Immediately prior to the spin-off of Cleartel Communications, Inc.:
. Mr. Auger, Sr. contributed $650,000 of such principal to the capital of
Cleartel Communications, Inc. and forgave accrued interest of $434,123;
. in consideration of indebtedness in the total principal amount of
$4,941,000 owed by CAIS, Inc. to Cleartel Communications Limited
Partnership, CAIS Internet assumed the remaining obligations on this
note in the total principal amount of $1,450,000;
. all of the foregoing remaining indebtedness owed by CAIS Internet and
CAIS, Inc. to Ulysses G. Auger, Sr., in the total principal amount of
$4,083,000, plus accrued interest totaling $89,757, was exchanged for a
total of 1,025,247 Series B shares; and
. all of the foregoing indebtedness owed by CAIS, Inc. to Ulysses G. Auger,
II, in the total principal amount of $350,000, plus accrued interest
totaling $34,339, was exchanged for a total of 94,432 Series B shares.
CAIS Internet has committed to advance a $400,000 unsecured loan to Gary H.
Rabin, Executive Vice President of CAIS Internet, within 30 days following the
closing of this offering. The loan will bear interest at the rate of 7% per
annum, with the interest payable quarterly, and the principal amount due three
years from the date of the loan.
The Credit Agreement with ING (U.S.) Capital LLC
In September 1998, CAIS Internet, together with CAIS, Inc. and all of CAIS
Internet's holders of common stock, other than R. Theodore Ammon, entered into
a credit agreement with ING (U.S.) Capital LLC to borrow up to $7,000,000 to
repay existing debt, fund the development and roll-out of the OverVoice program
and for general corporate purposes. The loans extended under this credit
agreement bear interest at the one-month LIBOR rate plus 5%. The principal,
premium and interest on any outstanding loan will convert to senior secured
notes bearing interest at a rate of 5% over the 5-year U.S. Treasury Securities
rate if borrowings under the credit agreement are not repaid by September 4,
1999. Pursuant to the credit agreement, ING (U.S.) Capital LLC was granted
warrants to purchase 390,000 shares of CAIS Internet's common stock at an
exercise price of $0.01 per share and was paid fees totaling $345,000. In
addition, if the credit agreement is not paid in full by September 4, 1999, ING
(U.S.) Capital LLC will receive warrants to purchase an additional 3.0% of CAIS
Internet's outstanding shares on a fully diluted basis. In connection with an
amendment to the credit agreement, CAIS Internet paid a $210,000 extension fee.
CAIS Internet is in compliance with the terms of the credit agreement. The
current outstanding principal balance under the credit agreement is $7,000,000.
Substantially all of the assets of CAIS Internet have been pledged to ING
(U.S.) Capital LLC to secure the obligations under this credit agreement.
Other Transactions
For the past several years, Richard F. Levin, a director of CAIS Internet,
has performed legal services on CAIS Internet's behalf in his capacity as a
partner in the Washington, D.C., law firm of Grossberg, Yochelson,
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Fox & Beyda. However, at no time were the fees paid by CAIS Internet to the
law firm in excess of 5% of the law firm's gross revenues. CAIS Internet
believes that the costs of such services are at least as favorable to CAIS
Internet as those which could have been negotiated with an unaffiliated third
party.
Issuances of Securities
On April 22, 1998, 317,073 shares of common stock were issued to R.
Theodore Ammon at $3.15378 per share for a total price of $1,000,000.
On October 2, 1998, in connection with the reorganization, CAIS Internet
exchanged 5,350 shares of common stock for each 1.0% limited partnership
interest in Cleartel Communications Limited Partnership, 62,938 shares of
common stock for each share of Cleartel Communications, Inc. common stock and
500 shares of common stock for each share of CAIS, Inc. common stock. As a
result, CAIS Internet issued an aggregate of 1,034,970 shares of common stock
as follows:
Ulysses G. Auger, Sr., 245,000 shares of common stock in exchange for his
shares of CAIS, Inc. and 267,483 shares of common stock in exchange for
his shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
Ulysses G. Auger, II, 250,000 shares of common stock in exchange for his
shares of CAIS, Inc. and 259,527 shares of common stock in exchange for
his shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Constandinos Ulysses Francisco Auger Economides Trust, 500 shares of
common stock in exchange for its shares of CAIS, Inc. and 796 shares of
common stock in exchange for its shares of Cleartel Communications, Inc.
and limited partnership interest in Cleartel Communications Limited
Partnership;
The Constandina Francisca Auger Economides Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel Communications, Inc. and
limited partnership interest in Cleartel Communications Limited
Partnership;
The Vassiliki Illias Auger Economides Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
The Annabel-Rose Auger Trust, 500 shares of common stock in exchange for
its shares of CAIS, Inc. and 796 shares of common stock in exchange for
its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The James Frederick Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Ulysses George Hawthorne Auger, III Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
The Alexander Robert Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Gregory Ulysses Auger, II Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
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The Bridgette Kathryn Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership; and
The Nicholas William Randolph Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership.
On February 19, 1999, pursuant to a private placement and in exchange for
approximately $4.6 million of indebtedness owed by CAIS Internet or CAIS, Inc.
to Ulysses G. Auger, Sr. and Ulysses G. Auger, II, CAIS Internet issued
1,119,679 Series B shares to Ulysses G. Auger, Sr. and Ulysses G. Auger, II.
On February 19, 1999, pursuant to a private placement, CAIS Internet issued:
2,458,407 Series A shares and warrants to purchase an aggregate of 2.61%
of the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B shares), at an exercise price of the initial
public offering price per share to Chancery Lane, L.P. for the total
consideration of $10,000,000; and
368,761 Series A shares and warrants to purchase an aggregate of .39% of
the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B shares), at an exercise price of the initial
public offering price per share to CAIS-Sandler Partners, L.P. for the
total consideration of $1,500,000.
The Series A shares and the Series B shares were issued pursuant to a
private placement exemption under Regulation D of the Securities Act. CAIS
Internet filed a Form D pertaining to these shares with the Commission on
February 25, 1999, and amended the filing on March 9, 1999.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary of the terms of our capital stock and does not
purport to be complete. For more information, please review our certificate of
incorporation.
General
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.01 per share, and 25,000,000 shares of preferred stock, par value
$.01 per share, of which 2,827,168 shares are designated as Series A shares,
and 1,119,679 shares are designated as Series B shares.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock,
including the Series B shares, the holders of common stock are entitled to
receive ratably the dividends, if any, that may be declared from time to time
by the Board of Directors out of funds legally available for such dividends. We
have never declared a dividend and do not anticipate doing so in the
foreseeable future. In the event of a liquidation, dissolution or winding up of
CAIS Internet, subject to the prior rights of the preferred stock, the holders
of common stock are entitled to share ratably in any remaining assets after
payment of liabilities. The common stock has no preemptive or other
subscription rights and is not subject to any future calls or assessments.
There are no conversion rights or redemption or sinking fund provisions
applicable to shares of common stock. All of the outstanding shares of common
stock are fully paid and nonassessable.
Preferred Stock
The preferred stock may be issued from time to time by the Board as shares
of one or more classes or series. Subject to the provisions of our amended and
restated certificate of incorporation and limitations prescribed by law, the
Board is expressly authorized to issue the shares, fix the number of shares,
change the number of shares constituting any series, and provide for or change
the voting powers, designations, preferences and relative, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights, and liquidation preferences
of the shares constituting any class or series of the preferred stock, in each
case without any further action or vote by the stockholders.
One of the effects of undesignated preferred stock may be to enable the
Board to render more difficult or to discourage an attempt to obtain control of
CAIS Internet by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of CAIS Internet's management. The
issuance of shares of the preferred stock pursuant to the Board's authority
described above may adversely affect the rights of the holders of common stock.
For example, preferred stock issued by CAIS Internet may rank prior to common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
common stock or may otherwise adversely affect the market price of common
stock.
Series A Shares. The following summarizes the terms of the Series A shares:
Conversion. Holders of Series A shares can convert shares at any time
into common stock, initially on a one-for-one basis. The conversion
ratio will be adjusted for stock reclassifications, stock dividends,
stock splits, stock issuances and other similar events.
Series A shares automatically convert into common stock if any of the
following occurs:
. an initial public offering for total gross proceeds of at least $35
million at a price per shares of at least $8.14;
. an initial public offering that does not satisfy the requirements of
the first clause if the closing price of the common stock equals at
least $16.28 per share for 20 consecutive days; and
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. the affirmative vote of the holders of at least 75% of the Series A
shares.
Ranking. The Series A shares rank senior to the common stock and the
Series B shares upon the liquidation of CAIS Internet.
Liquidation Preference. The Series A shares are entitled to a
liquidation preference equal to the conversion price per share, an 8%
cumulative return and all accumulated but unpaid dividends.
Redemption. At any time after February 1, 2004, the holders of a
majority of the Series A shares may require CAIS Internet to redeem
shares at a price equal to the greater of: (1) the conversion price per
share plus accumulated but unpaid dividends and an 8% cumulative return
or (2) the fair market value of the shares.
Voting. The Series A shares vote with the common stock on an as-
converted basis.
The consent of the holders of 75% of the Series A shares is required
for actions that:
. materially and adversely affect the Series A shares' rights;
. increase the number of shares designated as Series A shares;
. pay or declare dividends or redeem, repurchase or acquire shares of
junior stock;
. enter into certain employment agreements;
. enter into an acquisition, merger, reorganization or re-
capitalization transaction;
. transfer shares of CAIS Internet's common stock to a third party
enabling him to elect a majority of CAIS Internet's Board of
Directors;
. enter into financial commitments in excess of $250,000;
. dismiss or hire certain executive officers;
. approve CAIS Internet's annual budget;
. permit the existence of certain liens;
. incur certain debt; or
. liquidate or dissolve CAIS Internet.
Dividends. The Series A shares rank pari-passu with the common stock
and the Series B shares on any declared dividends. The Series A shares
shall participate on an as-if converted basis on all dividends paid on
common stock.
Registration Rights. The Series A shares are entitled to unlimited pro
rata piggy back registration rights. Once CAIS Internet is public,
Chancery Lane, L.P., will be entitled to demand and piggy back
registration rights under certain circumstances.
Board Representation. Until the Series A shares convert into common
stock, Chancery Lane, L.P. will have the right to designate one
director to CAIS Internet's Board of Directors.
Series B Shares. The following summarizes the terms of the Series B shares:
Conversion. Holders do not have the right to convert Series B shares at
their option. However, any outstanding Series B shares will
automatically convert into common stock on the earlier of:
. an initial public offering for total gross proceeds of at least $35
million at a price per share of at least $8.14; and
. an initial public offering that does not satisfy the requirements of
the first clause if the closing price of the common stock equals at
least $16.28 per share for 20 consecutive days. The conversion price
in either event will be the initial public offering price.
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<PAGE>
Redemption. If CAIS Internet completes an initial public offering that
meets the criteria of the first clause under "Conversion," CAIS
Internet will be required to redeem for cash Series B shares having a
total face amount of $3.0 million, plus accrued but unpaid dividends.
Of this amount, $2.65 million of Series B shares will be redeemed from
Ulysses G. Auger, Sr. and $350,000 will be redeemed from Ulysses G.
Auger, II.
Ranking. The Series B shares rank junior to the Series A shares, but
senior to the common stock, upon the liquidation of CAIS Internet.
Liquidation Preference. The Series B shares are entitled to a
liquidation preference equal to $4,557,096, interest thereon at the
rate of 8% per annum and all accumulated but unpaid dividends.
Voting. The Series B shares will vote with the common stock on an as-
converted basis. However, the consent of the holders of 75% of the
Series B shares is required to:
. materially and adversely affect the rights of the Series B shares;
. increase the number of Series B shares;
. pay or declare dividends or redeem, repurchase or acquire shares
ranking junior to the Series B shares; or
. liquidate or dissolve CAIS Internet.
Dividends. The Series B shares rank pari-passu with the common stock
and the Series A shares on any declared dividends.
If CAIS Internet completes the offering at a price to the public within the
range set forth on the cover page of this prospectus and for the number of
shares on the cover page, then:
. all of the Series A shares will convert automatically into 2,827,168
shares of common stock;
. CAIS Internet will redeem 737,101 Series B shares (which have a total face
value of approximately $3.0 million); and
. the remaining Series B shares will convert automatically into the number
of shares of common stock determined by dividing $1,557,096 by the
initial public offering price (103,806 shares of common stock based on
the midpoint of the price range appearing on the cover page of this
prospectus.)
Debt Warrants
Pursuant to a credit agreement, on September 4, 1998, CAIS Internet granted
ING (U.S.) Capital LLC warrants to purchase 390,000 shares of CAIS Internet's
common stock at an exercise price of $0.01 per share. In connection with the
warrants, ING (U.S.) Capital LLC received both demand and piggyback
registration rights and is entitled to anti-dilution protection. The warrants
expire September 4, 2008. In the event the credit agreement is not paid in full
by September 4, 1999, ING (U.S.) Capital LLC will receive warrants to purchase
an additional 3.0% of CAIS Internet's outstanding shares on a fully diluted
basis.
Equity Warrants
The holders of Series A shares (Chancery Lane, L.P. and CAIS-Sandler
Partners, L.P.) will receive, on a pro rata basis, warrants for shares of
common stock equal to 3.0% of the total number of shares of common stock
outstanding on a fully diluted basis at the close of this offering. The
warrants will have an exercise price equal to the price per share of the common
stock in this offering. The holders of Series A shares will receive
registration rights and are entitled to anti-dilution protection. The warrants
expire February 19, 2009.
Hilton Warrants and Shares
In connection with CAIS Internet's master agreement with Hilton, Hilton
received warrants to purchase 66,667 shares of our common stock at an exercise
price of $.01 per share as an additional contribution by CAIS Internet in
support of Hilton's marketing of OverVoice services. In connection with the
warrants, Hilton received certain demand and incidental registration rights.
The warrants expire on April 23, 2004. Additionally, commencing upon the
effective date of this initial public offering, Hilton shall have a put option
to sell all of
its warrants (or shares of CAIS Internet resulting from the exercise of the
above-mentioned warrants) back to us at a share price equal to the initial
public offering share price. The put option expires ninety days following
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<PAGE>
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 Hilton may
sell all of the warrant shares within a three-month period pursuant to
Securities Act Rule 144.
In connection with the development of future digital entertainment solutions
at Hilton properties, CAIS Internet will contribute 133,000 shares of common
stock to a fund. The shares will be jointly owned by CAIS Internet and Hilton,
with 50% of the contributed shares allocated to a Hilton sub-account within the
fund and 50% of the contributed shares allocated to a CAIS Internet sub-
account. The Hilton shares will be entitled to the same registration rights as
the shares underlying the Hilton warrants as discussed above.
Statutory Business Combination Provision
Upon consummation of the offering, CAIS Internet will be subject to the
provisions of section 203 of the Delaware General Corporation Law. Section 203
provides, with certain exceptions, that a Delaware corporation may not engage
in any of a broad range of business combinations with a person or an affiliate
or associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless:
. the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of
Directors of the corporation before the person becomes an interested
stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction is commenced, excluding for purposes of determining the
number of shares outstanding those shares owned:
. by persons who are directors and officers; and
. by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors
and by the holders of at least 66 2/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by
the interested stockholder. Under section 203, an "interested
stockholder" is defined as any person who is:
. the owner of 15% or more of the outstanding voting stock of the
corporation; or
. an affiliate or associate of the corporation and who was the owner of
15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date
on which it is sought to be determined whether such person is an
interested stockholder.
The provisions of section 203 could delay or frustrate a change in control
of CAIS Internet, deny stockholders the receipt of a premium on their common
stock and have an adverse effect on the common stock. The provisions also could
discourage, impede or prevent a merger or tender offer, even if such event
would be favorable to the interests of stockholders. CAIS Internet's
stockholders, by adopting an amendment to the certificate of incorporation, may
elect not to be governed by section 203, which election would be effective
12 months after adoption.
Limitations on Directors' Liability
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. This duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors could be accountable to corporations and their stockholders for
monetary damages for conduct that does not satisfy their duty of care. Although
Delaware law does not change directors' duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. CAIS Internet's certificate of incorporation limits the liability
of CAIS Internet's directors to CAIS Internet and its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of CAIS
Internet will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability for:
. any breach of the director's duty of loyalty to CAIS Internet or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Delaware General Corporation Law section 174;
or
. any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in CAIS Internet's certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted CAIS Internet and its stockholders.
Potential Anti-takeover Effect of Certain Provisions of the Certificate of
Incorporation and By-Laws
CAIS Internet's certificate of incorporation and by-laws contain other
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited
proposal from a third party which has acquired a block of stock of CAIS
Internet, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interest of the stockholders. The following is a summary of such provisions
included in CAIS Internet's certificate of incorporation and by-laws.
CAIS Internet's certificate of incorporation divides the Board of Directors
into three classes of directors, serving staggered three-year terms. The
certificate of incorporation also provides that stockholder action can be taken
only at an annual or special meeting of stockholders and cannot be taken by
written consent in lieu of a meeting. The certificate of incorporation and the
by-laws also provide that, except as otherwise required by law, special
meetings of the stockholders can only be called pursuant to a resolution
adopted by a majority of the Board or by the chief executive officer of CAIS
Internet. Stockholders will not be permitted to call a special meeting or to
require the Board to call a special meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of CAIS Internet,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given CAIS Internet's secretary timely written notice, in proper form, of
the stockholder's intention to bring that business before the meeting. Although
the by-laws do not give the Board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at an annual meeting, these procedures may have the effect of
prohibiting stockholders from raising proposals at annual meetings if the
proper procedures are not followed or may discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of CAIS Internet.
CAIS Internet's certificate of incorporation and by-laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their provisions. This requirement of a super-majority vote
to approve amendments to the certificate of incorporation and by-laws could
enable a minority of CAIS Internet's stockholders to exercise veto power over
any such amendments. The Board has no current plans to formulate or effect
additional measures that could have an anti-takeover effect.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock will be American
Securities Transfer & Trust, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
The market price of the common stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the common stock in the
public market following the offering. The 6,000,000 shares being sold in the
offering will be freely tradable unless held by affiliates of CAIS Internet.
Upon completion of the offering:
. executive officers and directors of CAIS Internet will own a total of:
. 12,448,676 shares of common stock including 2,476,845 shares
converted from Series A shares and 103,806 shares converted from
Series B shares;
. options to acquire 3,057,562 shares of common stock;
. warrants exercisable for 612,798 shares of common stock;
. ING (U.S.) Capital LLC will hold warrants exercisable for 390,000 shares
of common stock; and
. Hilton Hotels Corporation will hold 66,500 shares of common stock and
warrants exercisable for 66,667 shares of common stock.
The securities issued prior to the offering have not been registered under the
Securities Act, and, therefore, may not be sold unless registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of common stock from CAIS Internet
or from any affiliate of CAIS Internet, the acquiror or subsequent holder of
the shares may sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
1.0% of the then outstanding shares of the common stock, or the average weekly
trading volume of the common stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the SEC. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about CAIS Internet. If two years have elapsed since the later of
the date of the acquisition of restricted shares of common stock from CAIS
Internet or any affiliate of CAIS Internet, a person who is not deemed to have
been an affiliate of CAIS Internet at any time for 90 days preceding a sale
would be entitled to sell such shares under Rule 144 without regard to the
volume imitations, manner of sale provisions or notice requirements.
CAIS Internet and certain stockholders of CAIS Internet (including Chancery
Lane, L.P. and all directors and officers of CAIS Internet) owning a total of
9,868,025 shares of common stock, options and warrants exercisable for
3,670,360 shares of common stock and preferred stock convertible into 2,580,651
shares of common stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities convertible into or exchangeable for, any
rights to purchase or acquire, shares of common stock during the 180 days after
the date of this prospectus, subject to certain limited exceptions. CAIS
Internet has agreed to provide registration rights with respect to shares of
common stock issued to Terk Technologies Corp. and Hilton Hotels Corporation,
and shares of common stock issuable to ING (U.S.) Capital LLC, Hilton and the
holders of Series A shares upon the conversion or exercise of warrants and
convertible preferred stock.
CAIS Internet intends to register the 3,860,295 shares of common stock
reserved for issuance upon exercise of stock options granted pursuant to its
stock option plan and under other compensatory arrangements as soon as
practicable after the date of this prospectus.
Prior to the offering, there has been no public market for the common stock,
and no prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
common stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the common stock in the public
market could adversely affect prevailing market prices and the ability of CAIS
Internet to raise equity capital in the future.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Volpe Brown Whelan & Company, LLC, First Union Capital
Markets Corp., Friedman, Billings, Ramsey & Co., Inc. and Wit Capital
Corporation, have severally agreed to purchase from CAIS Internet the number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. ..................................
Volpe Brown Whelan & Company, LLC...........................
First Union Capital Markets Corp. ..........................
Friedman, Billings, Ramsey & Co., Inc. .....................
Wit Capital Corporation.....................................
---------
Total..................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock of
this offering are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock (other than those shares
covered by the over-allotment option described below) if any are purchased.
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers, a concession not in excess of $ per share. After the initial offering
of the shares of common stock, the public offering price and other selling
terms may be changed by Bear, Stearns & Co. Inc. at any time without notice.
The following table shows the underwriting fees to be paid to the
underwriters by CAIS Internet in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by CAIS Internet
are expected to be approximately $2 million.
CAIS Internet has granted to the underwriters an option, exercisable within
30 days after the date of this prospectus, to purchase, from time to time, in
whole or in part, up to a total of 900,000 additional shares of common stock at
the public offering price less the underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the
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extent that the underwriters exercise this option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's percentage underwriting
commitment as indicated in the table above.
CAIS Internet has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
Each of CAIS Internet, its executive officers, directors and stockholders
has agreed, subject to certain exceptions, not to: (1) issue, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into, exercisable or exchangeable for, or
represent the right to receive common stock, except CAIS Internet may grant
options and issue and sell common stock pursuant to (A) any employee stock
plan, stock ownership plan or dividend reinvestment plan of CAIS Internet or
(B) this offering or (2) grant any options or warrants to purchase common stock
or enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in the first or second
clause is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise) for a period of 180 days after the date of
this prospectus without the prior written consent of Bear, Stearns & Co. Inc.
In addition, during such period, CAIS Internet has also agreed not to file any
registration statement with respect to (other than a Form S-8 registration
statement in connection with shares received under a CAIS Internet stock plan,
stock ownership plan, employment agreement or dividend reinvestment plan), and
each of its executive officers, directors and certain stockholders of CAIS
Internet has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Bear, Stearns & Co. Inc.
At the request of CAIS Internet, the underwriters have reserved for sale, at
the initial public offering price, 300,000 shares of common stock offered
hereby to be sold to certain directors, officers and employees of CAIS Internet
and other persons who have expressed an interest in purchasing such shares. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit Capital Corporation. In addition, all dealers purchasing
shares from Wit Capital Corporation in this offering have agreed to make a
prospectus in electronic format available on web sites maintained by each of
them. Other than the prospectus in electronic format, the information on Wit
Capital Corporation's web site and any information contained on any other web
site maintained by Wit Capital Corporation or any dealer purchasing shares from
it is not to be part of this prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by CAIS
Internet or any underwriter in its capacity as underwriter and should not be
relied upon by investors.
Other than in the United States, no action has been taken by CAIS Internet
or the underwriters that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of common stock offered hereby may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about, and to observe, any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This
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prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock offered hereby in any jurisdiction in which such an
offer or solicitation is unlawful.
We have been informed that the underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority without the
prior written approval of the customer.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price has been determined by
negotiations between CAIS Internet and the representatives of the underwriters.
Among the factors considered in determining the initial public offering price
were the history of and prospects for CAIS Internet's business and the industry
in which it competes, an assessment of CAIS Internet's management and the
present state of CAIS Internet's development, the past and present revenues,
earnings and cash flows of CAIS Internet, the prospects for growth of CAIS
Internet's revenues, earnings and cash flows, the current state of the economy
in the United States and the current level of economic activity in the industry
in which CAIS Internet competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to CAIS
Internet.
CAIS Internet has applied to list the common stock on The Nasdaq National
Market, under the symbol "CAIS."
Until the distribution of CAIS Internet's common stock is completed, rules
of the SEC may limit the ability of the underwriters and certain selling group
members to bid for and purchase the common stock. As an exception to these
rules, the representatives of the underwriters are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of the common
stock than are set forth on the cover pages of this prospectus, the
representatives of the underwriters may reduce that short position by
purchasing the common stock in the open market. The representatives of the
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The representatives of the underwriters may also impose a penalty bid on
certain underwriters and selling group members. This means that if the
representatives purchase shares of the common stock in the open market to
reduce the underwriters' short position or to stabilize the price of the common
stock, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the common stock to the extent that
it were to discourage resales of the common stock.
Neither CAIS Internet nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither CAIS Internet nor any of the underwriters makes any
representation that the representatives of the underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
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CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
CAIS Internet, Inc., Consolidated Financial Statements
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-5
Consolidated Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1996, 1997 and 1998.................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Capital Area Internet Service, Inc. (Predecessor Company)
Report of Independent Public Accountants................................. F-27
Statement of Operations for the Period from January 1, 1996 to May 10,
1996.................................................................... F-28
Statement of Changes in Stockholders' Equity for the Period from January
1, 1996 to May 10, 1996............................................... F-29
Statement of Cash Flows for the Period from January 1, 1996 to May 10,
1996.................................................................... F-30
Notes to Financial Statements............................................ F-31
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To CAIS Internet, Inc. and subsidiaries
(formerly CGX Communications, Inc.):
We have audited the accompanying consolidated balance sheets of CAIS Internet,
Inc. (a Delaware corporation, formerly CGX Communications, Inc.) and
subsidiaries, as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CAIS
Internet, Inc. and subsidiaries, as of December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
(except with respect to the matters
discussed
in Note 15 to the consolidated
financial statements,
as to which the date is April 23,
1999)
F-2
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Balance Sheets
(in thousands)
Assets
<TABLE>
<CAPTION>
December 31
---------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash......................................................... $ 149 $ 95
Accounts receivable, net of allowance for doubtful accounts
of $179 and $137, respectively.............................. 466 648
Prepaid expenses and other current assets.................... 79 228
Net current assets of discontinued operations (Note 3)....... 9,072 8,170
------- -------
Total current assets...................................... 9,766 9,141
------- -------
Property and equipment, net................................... 1,149 2,638
Deferred debt financing and offering costs, net............... -- 529
Intangible assets, net of accumulated amortization of
approximately $586 and $968, respectively.................... 1,816 1,434
Noncurrent assets of discontinued operations (Note 3)......... 2,307 1,936
------- -------
Total noncurrent assets................................... 5,272 6,537
------- -------
Total assets.............................................. $15,038 $15,678
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Balance Sheets
(in thousands except share and per share data)
Liabilities and Stockholders' Deficit
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses ...................... $ 1,038 $ 4,396
Current portion of long-term debt........................... 2,000 --
Payable to discontinued operations.......................... 3,735 5,342
Notes payable to related parties ........................... 173 --
Unearned revenues........................................... 456 572
Net current liabilities of discontinued operations (Note
3)......................................................... 8,804 8,205
------- -------
Total current liabilities................................ 16,206 18,515
------- -------
Loan, net of unamortized debt discount of $817............... -- 6,183
Notes payable to related parties, net of current portion
(Note 9).................................................... 1,342 1,983
Long-term liabilities of discontinued operations (Note 3).... 2,768 2,601
------- -------
Total liabilities........................................ 20,316 29,282
------- -------
Commitments and contingencies (Notes 1, 6, 7, 8, 9, 10, 12,
and 15)
Stockholders' deficit (Note 10):
Common stock, $0.01 par value; 100,000,000 shares
authorized; 9,648,000 and
9,965,000 shares issued and outstanding, respectively...... 97 100
Additional paid-in capital.................................. 6,230 7,544
Warrants outstanding........................................ -- 1,226
Deferred compensation....................................... (4,314) (2,888)
Accumulated deficit......................................... (7,291) (19,586)
------- -------
Total stockholders' deficit.............................. (5,278) (13,604)
------- -------
Total liabilities and stockholders' deficit.............. $15,038 $15,678
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Net revenues........................................ $2,410 $ 4,556 $ 5,315
Cost of services.................................... 834 2,010 3,118
Operating expenses:
Selling, general and administrative................ 2,126 5,550 10,407
Depreciation and amortization...................... 352 678 831
Non-cash compensation.............................. -- 616 1,426
------ ------- --------
Total operating expenses.......................... 2,478 6,844 12,664
------ ------- --------
Loss from operations................................ (902) (4,298) (10,467)
Interest and other (income) expense:
Interest income.................................... (1) (2) --
Interest expense................................... 213 283 1,090
Other expense, net................................. -- 7 11
------ ------- --------
Total interest and other expense.................. 212 288 1,101
------ ------- --------
Loss from continuing operations before income
taxes.............................................. (1,114) (4,586) (11,568)
Provision for income taxes.......................... -- -- --
------ ------- --------
Loss from continuing operations................... (1,114) (4,586) (11,568)
Income (loss) from discontinued operations of
Cleartel (less applicable state (taxes) benefit of
$(30), $(108), and $34, respectively).............. 799 1,923 (671)
------ ------- --------
Net loss.......................................... $ (315) $(2,663) $(12,239)
====== ======= ========
Basic and diluted earnings (loss) per share:
Continuing operations.............................. $(0.11) $ (0.48) $ (1.17)
Discontinued operations............................ 0.08 0.20 (0.07)
------ ------- --------
Total............................................. $(0.03) $ (0.28) $ (1.24)
====== ======= ========
Weighted-average common shares outstanding--basic
and diluted........................................ 9,648 9,648 9,869
====== ======= ========
Supplemental basic and diluted loss per share
(unaudited):
Continuing operations.............................. $ (0.79)
Discontinued operations............................ (0.04)
--------
Total............................................. $ (0.83)
========
Supplemental weighted-average common shares
outstanding--
basic and diluted (unaudited)...................... 13,517
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Changes in Stockholders' Deficit
For the Years Ended December 31, 1996, 1997, and 1998
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Paid-In Warrants Deferred Accumulated
Shares Par Capital Outstanding Compensation Deficit Total
------ ---- ---------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995....... 9,648 $ 97 $ -- $ -- $ -- $ (4,139) $ (4,042)
Capital contribution... -- -- 1,300 -- -- -- 1,300
Distributions declared
to equity holders..... -- -- -- -- -- (76) (76)
Net loss............... -- -- -- -- -- (315) (315)
------ ----- ------ ------ ------- -------- --------
December 31, 1996....... 9,648 $ 97 1,300 -- -- (4,530) (3,133)
Unearned compensation
pursuant to issuance
of stock options...... -- -- 4,930 -- (4,930) -- --
Amortization of
unearned
compensation.......... -- -- -- -- 616 -- 616
Distributions declared
to equity holders..... -- -- -- -- -- (98) (98)
Net loss............... -- -- -- -- -- (2,663) (2,663)
------ ----- ------ ------ ------- -------- --------
December 31, 1997....... 9,648 97 6,230 -- (4,314) (7,291) (5,278)
Capital contribution... -- -- 317 -- -- -- 317
Distributions declared
to equity holders..... -- -- -- -- -- (56) (56)
Issuance of common
stock................. 317 3 997 -- -- -- 1,000
Amortization of
unearned
compensation.......... -- -- -- -- 1,426 -- 1,426
Warrants issued in
connection with Loan
(Note 7).............. -- -- -- 1,226 -- -- 1,226
Net loss............... -- -- -- -- -- (12,239) (12,239)
------ ----- ------ ------ ------- -------- --------
December 31, 1998....... 9,965 $ 100 $7,544 $1,226 $(2,888) $(19,586) $(13,604)
====== ===== ====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (315) $(2,663) $(12,239)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Compensation pursuant to stock options.......... -- 616 1,426
Amortization of debt discount and deferred
financing costs................................ -- -- 555
Loss on disposal of fixed assets................ -- 63 --
Depreciation and amortization................... 352 678 831
Depreciation and amortization of discontinued
operations..................................... 684 668 520
Changes in operating assets and liabilities, net
of Capital Area acquisition:
Accounts receivable, net....................... 67 (104) (182)
Prepaid expenses and other current assets...... (18) (46) (148)
Accounts payable and accrued expenses.......... 424 380 2,984
Payable to discontinued operations............. 980 2,755 1,047
Unearned revenues.............................. 113 147 116
Changes in operating assets and liabilities of
discontinued operations....................... (888) (1,802) 1,882
------- ------- --------
Net cash provided by (used in) operating
activities................................... 1,399 692 (3,208)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (542) (556) (1,435)
Purchases of property and equipment of
discontinued operations.......................... (623) (551) (387)
Payment for Capital Area acquisition.............. (3,068) -- --
Net payments received on notes receivable......... 13 129 (265)
Net payments received on related party accounts
receivable....................................... 190 180 317
------- ------- --------
Net cash used in investing activities......... (4,030) (798) (1,770)
------- ------- --------
Cash flows from financing activities:
Net (repayments) borrowings under receivables-
based credit facility of discontinued
operations....................................... 38 (211) (1,451)
Borrowings under Loan............................. -- -- 7,000
Borrowings under long-term debt................... 2,000 600 --
Repayments under long-term debt................... (233) (367) (2,000)
Borrowings under notes payable--related parties... 1,100 675 1,000
Repayments under notes payable--related parties... (114) (162) (107)
Principal payments under capital lease
obligations...................................... (250) (337) (173)
Payment of loan commitment, debt financing and
offering costs................................... (82) (16) (345)
Proceeds from issuance of common stock............ -- -- 1,000
Distribution to equity holders.................... (43) -- --
------- ------- --------
Net cash provided by financing activities..... 2,416 182 4,924
------- ------- --------
Net (decrease) increase in cash.................... (215) 76 (54)
Cash, beginning of year............................ 288 73 149
------- ------- --------
Cash, end of year.................................. $ 73 $ 149 $ 95
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest of continuing operations... $ 190 $ 246 $ 412
======= ======= ========
Cash paid for interest of discontinued
operations....................................... $ 832 $ 870 $ 791
======= ======= ========
Supplemental disclosure of noncash activities:
Equipment acquired under capital lease of
discontinued operations.......................... $ 80 $ -- $ 228
======= ======= ========
</TABLE>
In 1996, the Company paid $43 of declared distributions to equity holders, with
theremainder of approximately $187 of distributions declared in 1996, 1997, and
1998,converted to capital in 1998.
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Business Description:
Organization
CAIS Internet, Inc. (the "Company") 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. ("CAIS"),
a Virginia "S" Corporation, and Cleartel Communications Limited Partnership
("Cleartel"), a District of Columbia partnership. The Company completed a
reorganization in October 1998 such that CAIS and Cleartel became wholly owned
subsidiaries of the Company. The reorganization has been accounted for similar
to a pooling-of-interests as CAIS and Cleartel were under common ownership. The
Company changed its name from CGX Communications, Inc. to CAIS Internet, Inc.
in February 1999.
CAIS was formed in May 1996 by the owners of Cleartel to acquire Capital
Area Internet Service, Inc. ("Capital Area") from its founders. It is a tier
one Internet Service Provider ("ISP"), connecting with other major internet
providers at various equipment locations in the United States. CAIS sells full-
time, dedicated connections to the Internet to commercial customers, dial-up
connections to the Internet to residential and smaller commercial customers,
and various ancillary Internet services, including hosting of web sites. It is
also a licensee and joint-owner of a new Internet technology that allows high-
speed data and voice traffic to travel simultaneously over one standard
telephone line. CAIS is marketing this technology under the name of OverVoice
for use primarily in hotels and apartment buildings (multiple dwelling units,
or "MDU's").
Cleartel began operations in 1987 to provide operator-assisted long-distance
telephone services to hotels and payphones, and provides commercial and
residential long-distance services, mainly in the eastern United States.
Cleartel's corporate headquarters and telephone switch equipment are located in
Washington, D.C. Operator services are provided as part of a contractual
relationship with a subsidiary of GTE International, located in the Dominican
Republic. A second operator center has been maintained in the corporate offices
in Washington for overflow traffic and redundancy. In February 1999, the
Company spun-off Cleartel to the Company's stockholders (see Notes 2 and 3).
Risks and Other Important Factors
The Company's net loss from continuing operations has increased from
$1,114,000 in 1996 to $11,568,000 in 1998. As of December 31, 1998, the Company
had negative working capital of approximately $9,374,000, and an accumulated
deficit of approximately $19,586,000. The Company has financed its operations
with various debt and equity placements. The Company's continuing operations
have also been financed in part from operating profits and cash flows generated
from its now discontinued operation (Cleartel). As more fully described in Note
7, the Company obtained a $7,000,000 loan in September 1998, which has been
fully drawn by the Company as of December 1998. In January 1999 the Company
borrowed $1,000,000 from a stockholder (See Note 9). As described in Note 10,
the Company issued $11,500,000 of convertible preferred stock in February 1999
after the spin-off of Cleartel. The Company received $3,500,000 in cash,
$1,500,000 of which was used to repay amounts due to Cleartel in February 1999,
and an unconditional promissory note due in March 1999 for the remaining
$8,000,000 (see Note 15). In addition to this preferred stock issuance,
management intends to obtain equipment financing to help fund the roll-out of
OverVoice (see Note 15). Management believes that without additional financing
such as the equipment financing or the Company's anticipated initial public
offering (the "IPO") in 1999, the Company would curtail the planned roll-out of
OverVoice and reduce marketing and development activities. There can be no
assurance that additional capital will be available to the Company or that the
terms of such capital will be acceptable to
F-8
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management. Further, there can be no assurance that the Company will generate
positive cash flows or income from operations in the future.
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 OverVoice. Net revenues generated from
OverVoice through December 31, 1998 were approximately $37,000. There can be no
assurance that the Company will be successful in its roll-out of OverVoice 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.
Year 2000
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure, which could affect the Company's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the Company, including those related
to the efforts of customers, suppliers, or other third parties will be fully
resolved.
2. Summary of Significant Accounting Principles:
Consolidated Financial Statements
The consolidated financial statements include the results of CAIS, Inc.
after its acquisition of Capital Area on May 11, 1996 through December 31, 1996
and for the years ended December 31, 1997 and 1998. They also include the
results of Cleartel, presented as discontinued operations, for the years ended
December 31, 1996, 1997 and 1998.
In February 1999, the Company spun-off its operator and long-distance
services subsidiary, Cleartel, to its stockholders as a noncash distribution.
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 that will be
continuing with the Company are included within income from continuing
operations.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Revenue Recognition
The Company records revenues for all services, including installation fees,
when the services are provided to customers. Amounts for services billed in
advance of the service period and cash received in advance of
F-9
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 on a monthly or annual basis.
Cost of Services
Cost of services represent primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These direct charges
include long haul bandwidth and local interconnection charges.
Fair Value of Financial Instruments
The carrying amounts for current assets and liabilities, other than the
current portion of notes payable to related parties, approximate their fair
value due to their short maturity. The fair value of notes payable to related
parties cannot be reasonably and practicably estimated due to the unique nature
of the related underlying transactions and terms (see Note 9). However, given
the terms and conditions of these instruments, if these financial instruments
were with unrelated parties, interest rates and payment terms could be
substantially different than the currently stated rates and terms.
Property and Equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets ranging from three to five
years, or for leasehold improvements, the life of the lease, if shorter. Costs
of additions and improvements are capitalized and repairs and maintenance are
charged to expense as incurred. Upon sale or retirement of property and
equipment, the costs and related accumulated depreciation are eliminated from
the accompanying consolidated balance sheets, and any resulting gain or loss is
reflected in the accompanying consolidated statements of operations.
Debt Discount and Deferred Debt Financing and Offering Costs
As more fully discussed in Note 7, in September 1998, the Company entered
into a loan facility (the "Loan") with an investment banking firm. Debt
discount costs of $1,226,000 represent amounts attributable to the redeemable
warrants issued in connection with the Loan. The unamortized debt discount as
of December 31, 1998, was approximately $817,000. These costs are reflected as
an offset to the related Loan in the accompanying consolidated balance sheets
as of December 31, 1998. Unamortized deferred debt financing costs of
approximately $292,000 represent other direct financing costs incurred in
connection with the placement of the Loan. Both the debt discount and the
deferred financing costs are being amortized over the extended one-year term of
the Loan using the effective interest method.
In connection with the Company's anticipated IPO, the Company also has
incurred direct costs of $237,000 associated with the offering. These costs are
reflected as deferred offering costs and will be offset against the proceeds
from the anticipated IPO or expensed if the IPO is unsuccessful.
Excess of Cost over Net Assets Acquired (Goodwill)
Goodwill recorded as a result of the acquisition of Capital Area by CAIS in
1996 (see Note 4) is being amortized over seven years. The Company continually
evaluates whether events and circumstances have
F-10
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. Management believes that no such impairment existed as of December
31, 1998. Goodwill for all periods presented is included in intangible assets
in the accompanying consolidated balance sheets, net of accumulated
amortization.
Amortization of goodwill was approximately $212,000, $329,000, and $382,000
for the years ended December 31, 1996, 1997, and 1998, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. For trade
accounts receivable, the risk is limited due to the large number of customers,
the dispersion of those customers across many industries and geographic
regions, and the ability to terminate access on delinquent accounts.
Recently Adopted Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires "comprehensive income" and the
components of "other comprehensive income," to be reported in the financial
statements and/or notes thereto. There was no difference between the Company's
net loss and its total comprehensive loss for the years ended December 31,
1996, 1997, and 1998.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company has adopted SFAS No. 131 for the year
ended December 31, 1998 (see Note 13).
In July 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, 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. The Company will adopt this standard in
its December 31, 1999 financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued 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 not yet evaluated the effect of this standard on the financial statements.
The Company will adopt this standard in its December 31, 1999 financial
statements.
Stock Compensation
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has adopted SFAS No.
123, "Accounting for Stock-Based Compensation," for disclosure purposes. The
Company has recognized non-cash compensation expense on certain stock options
granted to management (see Note 10).
F-11
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Swaps
In late 1996, the Company entered into a forward interest rate swap
agreement to hedge its interest rate exposure. The Company was the fixed rate
payor and the lender was the floating rate payor. The swap, which did not
involve any exchange of the underlying principal amount, had been designated as
a hedge. As discussed in Note 8, the swap agreement was terminated in September
1998 upon repayment of the related bank loan. The net settlement amount under
the swap agreement resulted in a charge to interest expense of $39,000 in the
accompanying statements of operations.
Income Taxes
Until the Company's reorganization in October 1998, the federal income tax
obligations of CAIS and Cleartel were passed through to their respective
subchapter S shareholders and partners. Cleartel was subject to state
unincorporated business franchise taxes on any profits in the District of
Columbia.
The Company accounts for federal, state and local income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
tax assets and liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. SFAS No. 109 requires that a net deferred tax asset
be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized.
Net Loss Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share on the face of the statements of operations. Basic
earnings per share excludes dilution and is computed by dividing income or loss
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Options to purchase approximately 2,034,000 and 2,946,000 shares of common
stock were excluded from the computation of diluted loss per share in 1997 and
1998, respectively, and warrants to purchase approximately 390,000 shares of
common stock were excluded from the computation of diluted loss per share in
1998, because inclusion of these options and warrants would have an anti-
dilutive effect on loss per share.
Supplemental basic and diluted net loss per share gives effect to the
assumed conversion of 2,827,168 shares and approximately 104,000 shares of
Series A and Series B Convertible Preferred Stock, respectively, (see Note 10)
to the Company's common stock upon the IPO, the anticipated repayment of
$7,000,000 in debt with proceeds from the IPO, and the redemption of certain
related party indebtedness converted into Series B Redeemable Preferred Stock
subsequent to year-end (see Note 10). Supplemental net loss per share has been
computed by dividing net loss, after adjustment for applicable interest expense
and debt discount, by the weighted average common shares outstanding adjusted
for the assumed conversion of the Series A and Series B Convertible Preferred
Stock to the Company's common stock, and the estimated number of shares that
the Company would need to issue in the IPO to repay the debt and redeem certain
of the Series B Redeemable Preferred Stock.
F- 12
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Spin-off/Discontinued Operations:
On February 12, 1999, the Company completed a spin-off of Cleartel, its
operator and long-distance services subsidiary, pursuant to which ownership of
Cleartel was transferred to the Company's stockholders. The Company distributed
all of the shares of common stock to its stockholders on a pro rata basis, and
the holders of options to acquire the Company's stock and warrants were granted
stapled rights to acquire shares in Cleartel. For financial reporting purposes,
the Company has presented the results of operations for Cleartel as
discontinued operations. A summary of the statement of the assets and
liabilities of discontinued operations are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, Date of Spin-Off
1998 February 12, 1999
------------ -----------------
<S> <C> <C>
Balance Sheets
Cash......................................... $ 21 $ 1
Accounts receivable, net of allowance for
doubtful accounts of $1,450 and $1,395,
respectively................................ 2,224 2,129
Notes receivable, current.................... 530 437
Advances receivable from CAIS................ 5,342 4,941
Prepaid expenses and other assets............ 53 59
------- ------
Total current assets....................... 8,170 7,567
------- ------
Property and equipment, net of accumulated
depreciation of $3,142 and $3,201,
respectively................................ 1,305 1,260
Notes receivable, net of current portion..... 607 632
Other noncurrent assets...................... 24 27
------- ------
Total noncurrent assets.................... 1,936 1,919
------- ------
Total assets............................... $10,106 $9,486
======= ======
Accounts payable and accrued liabilities..... $ 5,410 $4,827
Borrowings under receivable-based financing.. 2,714 3,027
Capital leases, current...................... 81 77
------- ------
Total current liabilities.................. 8,205 7,931
------- ------
Notes payable to related party............... 2,100 1,450
Accrued interest to related party............ 411 --
Capital leases, net of current portion....... 69 62
Other liabilities............................ 21 --
------- ------
Total liabilities.......................... 10,806 9,443
------- ------
Owners' (deficit) equity..................... (700) 43
------- ------
Total liabilities and owners' deficit...... $10,106 $9,486
======= ======
Statement of Changes in Owners' Deficit
Beginning owners' deficit, December 31,
1998........................................ $ (700)
Conversion of related party debt to equity... 1,083
Net loss..................................... (340)
------
Ending owners' equity, February 12, 1999..... $ 43
======
</TABLE>
F-13
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of results for the discontinued operations for the years ended
December 31, 1996, 1997, and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Statements of Operations:
Net revenues..................................... $32,484 $33,959 $27,424
Operating expenses:
Cost of services............................... 19,685 19,319 17,880
Selling, general, and administrative........... 10,475 11,158 8,996
Depreciation and amortization.................. 684 668 519
------- ------- -------
Total operating expenses..................... 30,844 31,145 27,395
------- ------- -------
Income from operations........................... 1,640 2,814 29
Interest expense, net of interest income......... 811 783 734
------- ------- -------
Income (loss) before taxes....................... 829 2,031 (705)
(Provision) benefit for state taxes.............. (30) (108) 34
------- ------- -------
Net income (loss)................................ $ 799 $ 1,923 $ (671)
======= ======= =======
</TABLE>
Income (loss) related to discontinued operations reflect those revenues and
expenses directly incurred by Cleartel and allocations of shared corporate
costs based primarily on methodologies established by management between the
Company and Cleartel to reflect the cost sharing agreement between both
companies.
During the years ended December 31, 1996, 1997, and 1998, CAIS and Cleartel
shared certain support services such as bookkeeping, information systems, and
advertising and marketing support. After the spin-off, the Company will provide
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 for the years ended
December 31, 1996, 1997, and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Bookkeeping, MIS, advertising, and marketing support......... $272 $302 $227
Office lease................................................. $159 $161 $164
</TABLE>
Through December 31, 1998, profits and cash flows from Cleartel were used to
finance operating losses at CAIS. 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 balance is
due at the earlier of thirty days after the closing date of the anticipated IPO
or June 30, 2000.
4. Acquisition:
CAIS purchased the capital stock and operations of Capital Area on May 10,
1996 for a purchase price of approximately $3,100,000, including penalties
related to closing delays. The purchase price (plus the closing delay
penalties) was paid to the sellers at closing and was financed through loans of
$2,000,000 from a bank (Note 8), $1,000,000 from a stockholder and $100,000
from another stockholder (Note 9). The purchase price was allocated as follows:
tangible assets, principally cash, accounts receivable and property and
equipment of approximately $1,143,000; assumed liabilities of $(445,000); and
goodwill of approximately $2,402,000.
F-14
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The goodwill is being amortized over seven years. The Company accounted for
the acquisition under purchase accounting.
5. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Internet equipment........................................ $ 660 $1,287
OverVoice equipment....................................... -- 802
Computer hardware and software............................ 154 384
Office furniture and fixtures............................. 662 747
Leasehold improvements.................................... 46 207
------ ------
1,522 3,427
Less Accumulated depreciation............................. (373) (789)
------ ------
$1,149 $2,638
====== ======
</TABLE>
6. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Accounts payable........................................... $ 823 $2,917
Accrued salaries and vacation.............................. 69 186
Accrued legal settlement (Note 12)......................... -- 500
Accrued professional fees.................................. 60 495
Accrued interest........................................... 27 150
Other...................................................... 59 148
------ ------
$1,038 $4,396
====== ======
</TABLE>
7. Loan:
On September 4, 1998, the Company signed an agreement for a $7 million Loan
with an investment banking firm. The Loan required a commitment fee and a
facility fee totaling $345,000. The Loan was for a six-month term, converting
to a five-year Senior Note if not repaid prior to expiration of the initial
term. In February 1999, the initial term was extended to September 1999 for an
additional fee of $210,000. Borrowings bear interest at a rate of LIBOR plus 5
percent (10.625 percent as of December 31, 1998). The Loan was secured by
substantially all of the assets of the Company and Cleartel. The Loan contains
certain covenants and restrictions, including, but not limited to, limitations
on additional indebtedness, acquisition or transfer of assets, payment of
dividends, new ventures or mergers, and issuance of additional equity. In
February 1999, the agreement was revised such that Cleartel is no longer a
borrower and Cleartel's assets no longer serve as security for the loan. In
addition, the revised agreement allows specific indebtedness and specific
equity issuances. The use of proceeds is limited to repayment of the Bank Loan,
funding for OverVoice expenditures, and general corporate purposes. The
weighted-average interest rate under the Loan during 1998 was
F-15
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately 10 percent. The amount of interest expense incurred related to
the Loan, including amortization of the debt discount and deferred debt
financing costs totaled approximately $747,000 during 1998.
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 warrants have
an exercise price of $0.01 per share and expire on the tenth anniversary after
issuance, or September 4, 2008. The warrants fully vested upon closing of the
Loan and include certain anti-dilution provisions. The fair value of the
warrants, totaling approximately $1,226,000, or $3.14 per share, is classified
as a component of additional paid-in capital as of December 31, 1998. During
1998, the Company recorded approximately $409,000 of debt discount amortization
expense related to these warrants.
8. Bank Loan and Interest Rate Swap
In connection with the acquisition of Capital Area on May 10, 1996, the
Company obtained a $2,000,000 loan from a bank (the "Bank Loan"). Interest on
the Bank Loan accrued at a rate of prime plus one and one-half percent (9.75
percent at that date), with payments on a five-year amortization schedule and a
maturity date of May 10, 1999. The Bank Loan was guaranteed by one of the
principal stockholders of the Company and was secured by investments from
another principal stockholder of the Company.
On October 17, 1996, CAIS entered into an interest rate swap transaction
with the bank, and refinanced the remaining principal balance of approximately
$1,833,000 at that time into a new promissory note. Interest on the refinanced
note was based on the LIBOR rate, plus 2 percent. The bank also entered into a
hedging transaction to control fluctuation in the LIBOR rate, which had the
effect of converting the variable interest rate on the Bank Loan into a fixed
rate of 8.65 percent as of December 31, 1996.
On December 5, 1997, CAIS again refinanced the Bank Loan to increase the
principal balance outstanding at that time of $1,400,000 to the original
$2,000,000, thus netting CAIS $600,000 in cash proceeds. In addition, the
maturity date of the refinanced Bank Loan and the swap agreement was extended
to December 10, 2000.
On September 4, 1998, the entire Bank Loan principal and interest and
interest rate swap totaling $1,782,000 was paid off with proceeds from the Loan
(see Note 7). The amount of interest expense incurred related to the Bank Loan
was $115,000, $137,000, and $151,000 for the years ended December 31, 1996,
1997, and 1998, respectively.
9. Transactions with Related-Parties:
Notes Payable to Related Parties
Notes payable to related parties of $1,515,000 and $1,983,000 as of December
31, 1997 and 1998, respectively, consist of notes payable to stockholders with
interest accruing at annual rates of 10 to 13 percent. In February 1999,
related party notes totaling $4,433,000, including the $1,983,000 outstanding
as of December 31, 1998, the $1,450,000 assumed from Cleartel, and the
$1,000,000 borrowed in 1999, were converted into Series B Cumulative Mandatory
Redeemable Convertible Preferred Stock (see Note 10).
Interest expense of approximately $97,000, $131,000, and $128,000 was
accrued during the years ended December 31, 1996, 1997, and 1998, respectively,
related to related party loans.
In January 1999, a principal stockholder lent $1,000,000 to the Company
under a note which accrues interest quarterly at 10 percent with principal due
on the earlier of thirty days after the closing date of the
F-16
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
anticipated IPO or March 31, 2000. As described above, the note was converted
into cumulative mandatory redeemable convertible preferred stock in February
1999.
Related Party Lease
During the years ended December 31, 1996, 1997 and 1998, the Company leased
a building in Washington D.C. for their corporate headquarters from a
stockholder. Rent expense of $180,000 was incurred for this lease during the
years ended December 31, 1996, 1997, and 1998. Beginning in February 1999, the
Company will be relocating to a new building in Washington, D.C. that is
approximately 45 percent owned by the same stockholder and his spouse.
10.Stockholders' Deficit:
Common Stock
On April 22, 1998, an individual invested $1,000,000 in the Company in
exchange for approximately 317,000 shares of common stock. Since the Company
had not yet been reorganized, the investor received a 2.439 percent equity
interest in CAIS and Cleartel, subject to any future corporate restructurings.
In February 1999, the Company increased its authorized common stock from
25,000,000 to 100,000,000 shares of common stock.
Convertible Preferred Stock
In February 1999, the Company authorized the issuance of up to 25,000,000
shares of preferred stock, par value $0.01 per share. Of these authorized
shares, 2,827,168 shares have been designated as Series A Convertible Preferred
Stock, par value $0.01 per share (the "Series A Shares") and 1,119,679 shares
have been designated as Series B Cumulative Mandatory Redeemable Convertible
Preferred Stock, par value $0.01 per share (the "Series B Shares").
In February 1999, after the Spin-off, the Company issued 2,827,168 Series A
Shares to an entity controlled by a director of the Company and to a related
party to the investment banking firm that provided the Loan to the Company for
total gross proceeds of $11,500,000. The Company received $3,500,000 in cash,
$1,500,000 of which was used to pay amounts due to Cleartel, and an
unconditional promissory note due in March 1999 for the remaining $8,000,000.
The Series A Shares are convertible at the option of the holder, initially on a
one-to-one basis into common stock. The shares automatically convert into
common stock upon certain events including a qualified IPO as defined in the
certificate of incorporation. The Series A Shares are entitled to a liquidation
preference equal to $11,500,000, plus a return of 8 percent per annum thereon,
and all accrued but unpaid dividends thereon. The Series A Shares vote with the
common stock on an as converted basis. The Series A Shares contain certain
protective provisions regarding significant business decisions affecting the
Company's future operations such as to increase the number of shares designated
as Series A; pay or declare dividends or redeem, repurchase or acquire shares
of junior stock; enter into certain employment agreements; enter into an
acquisition, merger, reorganization or re-capitalization transaction; enter
into financial commitments in excess of $250,000; and, liquidate or dissolve
the Company, among other protective provisions. The holders of the Series A
Shares may require the Company to redeem the shares on February 1, 2004 at a
price equal to the greater of the liquidation preference or the fair market
value. The Company also issued to the purchasers of the Series A Shares,
warrants to purchase a number of shares of common stock equal to 3.0% of the
total number of shares outstanding on a fully diluted basis at the close of the
IPO. The
F-17
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
warrants will have an exercise price equal to the price per share of common
stock at the IPO, and will vest upon the earlier of the closing of an IPO, or a
change of ownership or insolvency as defined in the certificate of
incorporation. The warrants expire on the earlier of February 19, 2009, or the
date five years after the warrants are first exercisable. The fair value of the
warrants will be estimated using the Black-Scholes option pricing model based
upon the price per share of common stock at the IPO.
In February 1999, after the Spin-off, the Company issued 1,119,679 Series B
Shares to certain stockholders of the Company, in exchange for indebtedness,
including accrued interest, totaling $4,557,000 payable by the Company to the
Stockholders. Upon consummation of a qualified IPO, as defined, the Company is
required to redeem for cash $3,000,000 of the face amount of the Series B
Shares, plus a return of 8 percent per annum thereon, and all accrued but
unpaid dividends thereon. Any remaining Series B Shares convert into common
stock at the IPO on the earlier of a qualified IPO at the IPO price or the
conversion of the Series A Shares upon a nonqualified IPO. The Series B Shares
are entitled to a liquidation preference of $4,557,000, a return of 8 percent
per annum thereon, plus all accumulated but unpaid dividends thereon. The
Series B Shares vote with the common stock on a one-for-one basis. The Series B
Shares also contain certain protective provisions regarding significant
business decisions affecting the Company's future operations, including voting
rights with respect to increasing the number of shares designated as Series B
Shares, paying or declaring dividends to redeem, repurchase or acquire shares
of junior stock, and liquidating or dissolving the Company.
Executive Stock Options
During 1997, the Company issued stock options to two members of executive
management as part of their four-year employment contracts. Since the Company
had not yet been reorganized at the time of the grants, the executives received
options to purchase equal interests in CAIS, Inc. and Cleartel. In February
1997, one of the members of executive management received options to acquire
approximately 301,000 shares of common stock at an exercise price of $1.19 per
share. One-third of these options vest on the earlier of the end of year three
of the employment contract or the date immediately prior to the earliest to
occur of: (i) the effective date of a registration statement; or (ii) the
pricing of the IPO; or (iii) the execution and delivery of an underwriting
agreement related to an IPO, and the remainder at the end of year four of the
employment contract. In September 1997, another member of executive management
received options to acquire approximately 1,733,000 shares of common stock at
an exercise price of $0.9732 per share. Approximately 97,000 options fully vest
on April 1, 1999. Of the remaining 1,636,000 options, 50 percent vest at the
end of employment years three and four, respectively. If the Company completes
an IPO prior to the end of employment year two, 75 percent of these remaining
options will vest on the date immediately prior to the earliest to occur of:
(i) the effective date of a registration statement; or (ii) the pricing of the
IPO; or (iii) the execution and delivery of an underwriting agreement related
to an IPO or the end of year three of the employment contract, whichever is
earlier, with the remaining 25 percent vesting at the end of employment year
four.
As a result of these grants, the Company recorded deferred compensation of
$4,930,000 to be amortized over the vesting period relating to these options.
The amount of deferred compensation was based upon the difference between the
estimated fair market value of the Company at the date of the grants and the
applicable exercise prices. Accordingly, the Company amortized $616,000 and
$1,426,000 for the years ended December 31, 1997 and 1998, respectively, in the
consolidated statements of operations.
Employee Stock Option Plan
On March 24, 1998, the Company's stockholders approved the 1998 Equity
Incentive Plan (the "Stock Option Plan"). In February 1999, the Stock Option
Plan was amended and currently provides for the grant of both incentive and
nonstatutory stock options to eligible employees and consultants of the Company
and reserves 1,500,000 shares of common stock for issuance under the Stock
Option Plan. Options granted under the Stock Option Plan must have an exercise
price of no less than fair market value of the Company's common
F-18
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock at the date of grant and expire ten years after grant date. As of
December 31, 1998, approximately 912,000 shares were outstanding under the
Stock Option Plan. The stock options outstanding under the Stock Option Plan
generally vest over three to four year periods.
A summary of the Company's aggregate stock option activity and related
information under the Stock Option Plan, including the Executive Stock Options,
is as follows (in thousands, except per share prices):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
----------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................... -- $ -- 2,034 $1.00
Granted................................... 2,034 1.00 960 3.13
Exercised ................................ -- -- -- --
Forfeited................................. -- -- 48 3.07
----- ----- ----- -----
Options outstanding at end of period...... 2,034 $1.00 2,946 $1.66
===== ===== ===== =====
Options exercisable at end of period...... -- $-- -- $ --
===== ===== ===== =====
</TABLE>
Exercise prices for options outstanding under the Stock Option Plan and for
the Executive Stock Options as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Number of Options Weighted-Average
Range of Exercise Outstanding Remaining Contractual Weighted-Average
Prices (in thousands) Life in Years Exercise Price
- ----------------- ----------------- --------------------- ----------------
<S> <C> <C> <C>
$0.97 1,733 8.67 $0.97
$1.19 301 8.42 $1.19
$3.07 866 9.31 $3.07
$4.31 46 9.96 $4.31
----------- ----- ---- -----
$0.97-$4.31 2,946 8.85 $1.66
=========== ===== ==== =====
</TABLE>
The Company has elected to account for stock and stock rights in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation."
Had compensation cost for the Company's employee stock options been
determined based on fair value at the grant date, consistent with the
provisions of SFAS No. 123, the Company's net loss from continuing operations
and loss per share from continuing operations would have been (in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Loss from continuing operations pro forma............... $(4,859) $(12,125)
Basic and diluted loss per share from continuing
operations pro forma................................... $ (0.50) $ (1.23)
</TABLE>
The fair value of options granted in the years ended December 31, 1997 and
1998, were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free interest rates
of 5.68 and 4.55 percent, respectively, no dividend yield, weighted-average
expected lives of the options of 4 years, and expected volatility of 70
percent. There were no options granted in 1996.
F-19
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of options granted during the year ended
December 31, 1997 and 1998, were $2.64, and $1.75, respectively. For purposes
of pro forma disclosures, the estimated fair value of the options are amortized
to expense over the estimated service period. The options granted in 1997 were
granted below fair market value, while options granted in 1998 were granted at
fair market value.
In January and February 1999, under the 1998 Equity Incentive Plan, the
Company granted 280,000 incentive stock options to employees with an exercise
price of $4.31 per share. The stock options expire ten years after grant and
vest over three to four years.
11. Income Taxes:
Until the Company's Reorganization in October 1998, all earnings and losses
were passed through to the individual equity holders. At December 31, 1998, the
Company had net operating loss carryforwards of approximately $3,954,000 for
income tax purposes that expire in 2018. Net operating loss carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of changes in ownership pursuant to Section 382 of
the Internal Revenue Code.
The Spin-off of Cleartel in February 1999 was a taxable transaction.
Accordingly, the Company will be subject to income taxes on the excess of the
fair value of the spun-off assets (stock) over the Company's basis in the
assets distributed. Management believes that the net operating losses available
for carryforward into 1999 together with the losses expected to be generated in
1999 will offset any potential gain for income tax purposes. To the extent that
net operating losses are used to offset the taxable gain upon the Spin-off,
such operating losses will not be available to offset any future operating
income. If carryforward losses are used to offset the gain from the Spin-off,
the Company may be subject to the Alternative Minimum Tax ("AMT"). Any AMT
imposed would be allowed as a credit to offset future regular tax liability.
Significant components of the Company's net deferred tax asset as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ 1,582
Unearned stock compensation....................................... 817
Allowance for doubtful accounts................................... 635
Book over tax goodwill............................................ 190
Accrued vacation.................................................. 56
Other deferred tax assets......................................... 154
-------
Total deferred tax assets....................................... 3,434
Deferred tax liabilities:
Tax over book depreciation........................................ (84)
-------
Net deferred tax asset.............................................. 3,350
Valuation allowance for net deferred tax assets..................... (3,350)
-------
$ --
=======
</TABLE>
The Company has determined that the net deferred tax assets as of December
31, 1998 do not satisfy the recognition criteria set forth in SFAS No. 109.
Accordingly a valuation allowance was recorded against the applicable net
deferred tax assets.
F-20
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Commitments and Contingencies:
Leases
The Company leases office space under noncancellable operating leases, one
of which was from a related party (see Note 9). The Company entered into a new
lease in 1999 for office space for its corporate headquarters. The lease term
will commence in February 1999 for a period of ten years. The initial base
annual rent will be approximately $861,000 per year with annual rent
escalations of 2 percent each year thereafter. The Company recognizes rental
expense on a straight-line basis over the lease term based on the total lease
commitment, including escalations. The Company will have no remaining lease
obligation in its existing corporate headquarters office space, after it has
completed the office move.
The new building is approximately 45% owned by one of the principal
stockholders of the Company and his wife. The Company believes that the terms
of the lease, including the rental rate, are at least as favorable to the
Company as those which could have been negotiated with an unaffiliated third
party.
Total rental expense for operating leases, including related party rent, was
approximately $241,000, $300,000, and $329,000 for the years ended December 31,
1996, 1997, and 1998, respectively.
Minimum future lease payments at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999............................................................... $ 910
2000............................................................... 1,042
2001............................................................... 1,008
2002............................................................... 914
2003............................................................... 932
2004 and thereafter................................................ 5,080
------
$9,886
======
</TABLE>
OverVoice Litigation
The Company, one of its principal officers and the corporate inventor of
OverVoice (the "Corporate Inventor") were named as defendants in a federal
civil action filed in the Eastern District of New York in September 1998. The
plaintiff alleged patent infringement, unfair competition, breach of contract
and related claims. On January 24, 1999, the parties in this litigation signed
a Settlement Agreement (the "Settlement"). Under the terms of the Settlement,
the Company agreed to pay the plaintiff $500,000 as follows: $250,000 upon
dismissal of this action, $150,000 on or before July 1, 1999, and $100,000 on
or before July 1, 2000. The Company also agreed to issue the plaintiff 25,000
shares of common stock and to issue additional shares if the 25,000 shares,
multiplied by the price at which shares are issued in this offering, does not
equal or exceed $250,000. In exchange, the plaintiff also agreed to modify
their exclusive license agreement with the Corporate Inventor to a nonexclusive
agreement. As a result, the Company now has the right to install the OverVoice
technology in single family residences and food establishments. The Company has
valued the issuance of these 25,000 shares, together with the fair value
guarantee, at $250,000 and will account for the license rights received as an
intangible asset. The Company also granted the plaintiff the right to purchase
an additional 25,000 shares of common stock at the offering price in any IPO.
F-21
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
From time to time, certain other claims and suits have been filed or are
pending against the Company and senior management. In management's opinion,
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations (see Note 15).
Network Capacity
In June 1998, CAIS signed a Memorandum of Understanding ("MOU") with Qwest
Communications, Inc. This agreement provides the basis for a long-term
contractual relationship to provide considerable nationwide bandwidth capacity
at prices which are significantly below the Company's current cost structures.
Although the agreement calls for a commitment to purchase $100 million of
services over a ten-year period, the commitment for the first three years of
the agreement only totals $5 million.
License and Royalty Agreement
In November 1996, the Company and the Corporate Inventor entered into a
license agreement that provided the Company with an option to acquire an
exclusive license to use, make, sub-license or sell the OverVoice technology,
subject only to certain geographical and pre-existing contract limitations
described in the license agreement. The Company paid $50,000 for this option
and an additional $50,000 when it exercised its option to acquire the license
in April 1997. Unless the Company terminates the license agreement, it will
remain in effect until the lapse of the last patent existing at the time of the
agreement or any additional patents filed during the term. Following the
exercise of the option, the Company agreed to expend up to $200,000 for
research and development efforts to design and build a system that incorporated
the patented technology, and to hire the individual inventor of OverVoice
("Individual Inventor") for a two year consulting contract.
The license agreement calls for royalties to be paid to the Corporate
Inventor equal to a variable percentage of net revenues, depending both upon
the specific type of service provided and the total annual revenue from all
services. The royalty percentage for services in which the Company is an active
participant either by selling proprietary equipment or by selling Internet
services ranges up to 5.5%. In cases where the Company is an inactive
participant and merely sub-licenses its rights, the Corporate Inventor receives
a royalty percentage that ranges from 40-70%. Management plans to remain an
active participant in all or substantially all OverVoice activities at this
time.
The Company has annual royalty obligations to the Corporate Inventor of
$100,000 for 1998 and increasing to a maximum of $250,000 per year during the
term of the agreement, unless the license agreement is terminated at the
Company's option.
In August 1997, the Corporate Inventor and the Company signed an amendment
that states that the Company would advance funds for approved expenses related
to patent applications. As of December 31, 1997 and 1998, respectively, the
Company has recorded notes receivables for patent fund advances totaling
$38,000 and $82,000. These notes receivable balances have been fully reserved
in the accompanying consolidated balance sheets.
In a January 1999 amendment, the Company and the Corporate Inventor agreed
to transfer 50% of the patent ownership to the Company.
F-22
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Segment Reporting
The Company has two reportable segments: "Internet Services" and
"OverVoice." During the years presented, the Company derived most of its
revenue from the sale of dedicated Internet access services, Web hosting and
dial-up Internet access ("Internet Services"). During 1998, the Company began
to market dedicated high-speed Internet access to hotels and multiple dwelling
units ("MDUs") using OverVoice.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Since OverVoice is a new
product, 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 OverVoice segment's performance is only based on the
accumulation of revenues and specific costs identified to OverVoice operations.
The following is a summary of information about each of the Company's
reportable segments that are used by the Company to measure the segment's
operations (in thousands):
<TABLE>
<CAPTION>
1998
--------------------------------
Internet
Services OverVoice Consolidated
-------- --------- ------------
<S> <C> <C> <C>
Revenues....................................... $ 5,278 $ 37 $ 5,315
Depreciation and amortization.................. 824 7 831
Interest expense............................... 802 288 1,090
Segment losses................................. (8,228) (3,340) (11,568)
Segment assets................................. 2,404 882 3,286
Expenditures for segment assets................ 623 812 1,435
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------
Internet
Services OverVoice Consolidated
-------- --------- ------------
<S> <C> <C> <C>
Revenues....................................... $ 4,556 $ -- $ 4,556
Depreciation and amortization.................. 678 -- 678
Interest expense............................... 238 45 283
Segment losses................................. (3,807) (779) (4,586)
Segment assets................................. 1,615 -- 1,615
Expenditures for segment assets................ 556 -- 556
</TABLE>
All 1996 results relate to the Internet Services segment except for $97,000
of research and development expenses.
F-23
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the reportable segments' losses and
assets to the Company's consolidated totals (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Losses
Total losses for reportable segments........................ $(4,586) $(11,568)
Income (loss) from discontinued operations.................. 1,923 (671)
------- --------
Consolidated net loss....................................... $(2,663) $(12,239)
======= ========
Assets
Total assets for reportable segments........................ $ 1,615 $ 3,286
Total current assets, excluding reportable segment assets... 9,300 8,493
Deferred financing and offering costs, net.................. -- 529
Intangible assets, net...................................... 1,816 1,434
Noncurrent assets of discontinued operations................ 2,307 1,936
------- --------
Consolidated total assets................................... $15,038 $ 15,678
======= ========
</TABLE>
Major Customer and Geographical Information
During the year ended December 31, 1998, one customer in Hong Kong
represented 15 percent of the Company's consolidated net revenues.
Substantially all other net revenues were earned from customers in the United
States.
14. 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.
15. Subsequent Events
Collection of Promissory Note
In March 1999, the Company collected the $8,000,000 unconditional promissory
note from the February 1999 issuance of the Series A shares.
Litigation
On April 1, 1999, the Company terminated the employment of one of its
executives, and on April 9, 1999, the former executive filed a Demand for
Arbitration with the American Arbitration Association against the Company,
asserting breach of contract and breach of covenant of good faith and fair
dealing, and requested damages in the amount of $750,000. The former employee
also filed a charge of discrimination with the
F-24
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maryland Commission on Human Relations, complaining of alleged gender-based
discrimination and retaliation. In addition, a complaint against one of the
Company's indemnified executive officers was filed in Montgomery County Circuit
Court, alleging defamation and invasion of privacy, and seeking compensatory
damages of $1 million and punitive damages of $1 million. Management intends to
vigorously defend these claims. Although the ultimate outcome of this matter
cannot be predicted, management believes the resolution of these matters will
not have a material impact on the Company's financial position or results of
operations.
Upon the employee's termination, the Company became liable for severance
payments equal to six months of the base salary plus a prorated amount equal to
six months of cash incentive compensation, totaling approximately $125,000,
which was expensed upon termination.
On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. ("LodgeNet") in Maryland U.S. District Court. The
complaint charges 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. The Company and the OverVoice Corporate Inventor
jointly own the patent. The Company is in discussions with LodgeNet in an
attempt to resolve the matter.
Executive Stock Options and Loan Commitment
In March and April 1999, the Company issued stock options to two new members
of management as part of their three-year employment contracts. The Company
granted these executives non-qualified options to acquire 380,000 shares of
common stock at an exercise price of $4.31 per share and non-qualified options
to acquire 140,000 shares of common stock at an exercise price of $12.00 per
share. The options expire ten years after the grant date and vest at a rate of
one-third each year of employment. As defined in the stock option agreements,
the options will accelerate and fully vest one day prior to a change in
control. In the event of an IPO prior to the end of the executives' first year
of employment, one-third of the options will vest six months after the
effective date of the IPO, and then one-third after each of the second and
third years of employment.
The Company will record compensation for these option grants based upon the
difference between the estimated fair market value of the Company's stock at
the date of grant and the respective exercise price. The compensation expense
will be recognized over the respective vesting periods.
The Company also committed to advance a $400,000 unsecured loan to one of
the executives within 30 days following the closing of an IPO. The loan will
bear interest at a rate of 7% per annum, with the interest payable quarterly,
and the principal amount due 3 years from the date of the loan.
In April 1999, as part of a third employment agreement and under the 1998
Equity Incentive Plan, the Company issued incentive stock options to a new
employee to acquire 45,000 shares of common stock at an exercise price of
$12.00 per share. The options vest at a rate of 20,000 options after one year
of employment and 12,500 options after each of the second and third employment
years, and expire at the end of ten years. As defined in the stock option
certificate, the options will fully vest one day prior to the occurrence of a
change in control.
Equipment Financing
On April 13, 1999, the Company and Cisco Systems Capital Corporation entered
into a letter agreement for a three-year, $50 million equipment financing
facility. Under the facility, $25 million would be available during the first
year of the facility and an additional $25 million would be available during
the second year of the facility provided the Company meets certain financial
performance requirements. Borrowings under the facility would be limited to
$12.5 million until completion of the IPO. The first $25 million in borrowings
F-25
<PAGE>
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
would bear interest at an annual rate equal to three-month LIBOR plus 7.0%
(reducing to 6.0% on the first interest payment after this offering). The
second $25 million in borrowings would bear interest at an annual rate equal to
three-month LIBOR plus 6.0%. The facility will require the Company to meet
certain financial covenants including EBITDA targets, revenue targets and
leverage and debt service ratios. Borrowings under the facility will be secured
by a first priority lien in all Cisco products and services purchased using the
facility and, where permitted, by a second priority lien in all other assets of
the Company. Closing on the facility is subject to the execution and delivery
of definitive agreements for the facility, and there can be no assurance that
the facility will be consummated.
On April 21, 1999, the Company and Nortel Networks entered into a financing
letter agreement for a five-year, $30 million equipment financing. The
financing would require the Company to meet certain financial covenants
including EBITDA targets, revenue targets and leverage and debt service ratios.
Borrowings under the financing would be secured by a first priority lien on all
Nortel Networks products purchased using the financing. Provision of the
financing is subject to approval and the execution and delivery of definitive
financial and commercial agreements. In connection with the financing letter
agreement, the Company entered into a purchase agreement with Nortel Networks
and committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition to this commitment, 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.
Warrants and Shares
On April 23, 1999, in connection with an amendment to the Company's master
agreement with an OverVoice customer (the "Customer"), 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 OverVoice. If the IPO price is less
than $15, the number of warrants to purchase common stock shall be increased
such that the total number of warrants multiplied by the IPO price will equal
at least $1 million. In connection with the warrants, the Customer received
certain demand and incidental registration rights. The warrants expire on April
23, 2004. Commencing upon the effective date of the IPO, 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 the IPO price 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 Securities Act Rule 144.
Also, in connection with the development of future technologies at the
Customer's properties, the Company will contribute 133,000 shares of common
stock to a fund, within 10 days of the IPO. The shares will be jointly owned by
the Company and the Customer, with 50% of the contributed shares allocated to a
Customer sub-account within the fund and 50% of the contributed shares
allocated to the Company's sub-account. The Customer's shares will be entitled
to the same registration rights as the shares underlying the Customer warrants
as discussed above.
F-26
<PAGE>
Report of Independent Public Accountants
To Capital Area Internet Service, Inc.:
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Capital Area Internet Service, Inc. (a
Virginia S corporation), for the period from January 1, 1996, to May 10, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Capital Area Internet
Service, Inc. and its cash flows for the period from January 1, 1996, to
May 10, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
F-27
<PAGE>
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF OPERATIONS
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
<TABLE>
<S> <C>
Net revenues............................................................ $1,287
Cost of services........................................................ 323
Operating expenses:
Selling, general and administrative................................... 339
Depreciation.......................................................... 42
------
Total operating expenses.......................................... 381
------
Income from operations.................................................. 583
Other income.......................................................... 2
------
Net income.............................................................. $ 585
======
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-In Retained
Shares Par Capital Earnings Total
------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996............... 1,000 $ 1 $474 $ 273 $ 748
Distribution to stockholders......... -- -- -- (500) (500)
Net income........................... -- -- -- 585 585
------- ----- ---- ----- -----
Balance, May 10, 1996.................. 1,000 $ 1 $474 $ 358 $ 833
======= ===== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF CASH FLOWS
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income............................................................ $ 585
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation........................................................ 42
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (11)
Inventory......................................................... 57
Other current assets.............................................. (15)
Accounts payable.................................................. 85
Accrued liabilities............................................... 95
Unearned revenues................................................. 62
-----
Net cash provided by operating activities....................... 900
-----
Cash flows from investing activities:
Purchases of property and equipment................................... (225)
-----
Net cash used in investing activities........................... (225)
-----
Cash flows from financing activities:
Distribution to shareholders.......................................... (500)
-----
Net cash used in financing activities........................... (500)
-----
Net increase in cash.................................................... 175
Cash at January 1, 1996................................................. 113
-----
Cash at May 10, 1996.................................................... $ 288
=====
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
For the Period From January 1, 1996 to May 10, 1996
1. Business Description:
Capital Area Internet Service, Inc. ("Capital Area"), a Virginia S
corporation, was formed in October 1995 as a tier one Internet services
provider connecting with other major Internet providers at various equipment
locations in the United States.
Capital Area was formerly known as Pimmit Run Research, a sole
proprietorship, from 1993 until its name and structure change in 1995.
Capital Area was acquired on May 10, 1996, by the owners of Cleartel through
their commonly-controlled Virginia "S" corporation, CAIS. CAIS purchased the
capital stock and operations of Capital Area for a purchase price of
approximately $3,100,000. The purchase was accounted for under purchase
accounting.
2. Significant Accounting Principles:
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Revenue Recognition
The Company records revenues for all telecommunications services when the
services are provided to customers. Amounts for services billed in advance of
the service period are recorded as unearned revenues.
Cost of Services
Cost of services represents primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These direct charges
include long haul bandwidth and local interconnection charges.
Income Taxes
Capital Area was not subject to federal income taxes for the period from
January 1 through May 10, 1996. Any federal tax effects on Capital Area were
passed through to the Subchapter S shareholders.
3. Stockholders' Equity:
As of May 10, 1996, prior to the acquisition, Capital Area had 5,000 shares
of no par common stock authorized for issuance. Of these authorized shares,
1,000 shares were issued and outstanding to two individuals. In April 1996, the
shareholders received a distribution totaling $500,000 for taxes related to the
period prior to May 10, 1996.
4. Commitments and Contingencies:
Leases
Capital Area leased office space for their headquarters. Total rental
expense for operating leases was approximately $36,000 for the period from
January 1 through May 10, 1996.
F-31
<PAGE>
[NATIONAL NETWORK MAP APPEARS HERE]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any informa-
tion or to represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This prospectus is an
offer to sell or a solicitation of an offer to buy only the shares offered
hereby, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of
its date.
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the shares of common stock, whether or not partici-
pating in this distribution, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
---------------------
TABLE OF
CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Where You Can Find More Information...................................... 16
Cautionary Note Regarding Forward-Looking Statements..................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 32
Management............................................................... 48
Principal Stockholders................................................... 56
Certain Relationships and Related Transactions........................... 57
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 69
Legal Matters............................................................ 72
Experts.................................................................. 72
Index to Consolidated Financial Statements............................... F-1
Report of Independent Public Accountants................................. S-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[CAIS INTERNET LOGO]
6,000,000 Shares
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company
First Union Capital Markets Corp.
Friedman Billings Ramsey
Wit Capital Corporation
as e-Manager(TM)
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the shares registered for
offer and sale hereby, other than underwriting discounts and commissions. All
amounts shown represent estimates except the Securities Act of 1933, as amended
(the "Securities Act"), registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee under the Securities Act of 1933................ $ 36,140
NASD filing fee.................................................. 13,500
Nasdaq National Market fee....................................... 1,000
Printing expenses................................................ 750,000
Registrar and Transfer Agent's fees and expenses................. 750
Accountants' fees and expenses................................... 400,000
Legal fees and expenses (not including Blue Sky)................. 500,000
Blue Sky fees and expenses....................................... 3,000
Miscellaneous.................................................... 295,610
----------
Total.......................................................... $2,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorney's fees), as well as judgement, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Company's Certificate of Incorporation and By-Laws provide that, to the
extent permitted by law, the Company shall fully indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was or has agreed to become a director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, employee benefit, plan or other enterprise, or by reason of any action
alleged to have been taken or omitted in such capacity, and may indemnify any
person who was or is a party or is threatened to be made a party to such an
action, suit or proceeding by reason of the fact that the person is or was or
has agreed to become an employee or agent of the Company, or is or was serving
or has agreed to serve at the request of the Company as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding and any appeal therefrom, if the person acted
in good faith and in a manner reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect
II-1
<PAGE>
to any criminal action or proceeding had no reasonable cause to believe the
person's conduct was unlawful; except that in the case of an action or suit by
or in the right of the Company to procure a judgment in its favor (1) such
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such person in the defense or settlement of
such proceeding, and (2) no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Company unless and only to the extent that the Delaware Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
The Certificate of Incorporation and By-Laws further provide that the
Company shall advance expenses incurred by a director or officer in defending
any such action if the director or officer undertakes to repay such amount if
it is determined that the director or officer is not entitled to
indemnification. The Company also shall purchase and maintain insurance to
protect itself and any such director, officer, or other person against any
liability asserted against him and incurred by him in respect of such service
whether or not the Company would have the power to indemnify him against such
liability by law or under the provisions of the Company's Certificate of
Incorporation or By-Laws.
Further, the Company has entered into indemnification agreements with its
directors and certain of its senior executive officers. Pursuant to the terms
of the indemnification agreements, each of the senior executive officers and
directors of the Company will be indemnified by the Company to the fullest
extent permitted by Delaware law in the event such officer is made or
threatened to be made a party to a claim arising out of such person acting in
his capacity as an officer or director of the Company.
Additionally, the Underwriting Agreement provides for indemnification by the
Underwriters of the directors, officers and controlling persons of the Company
against certain liabilities, including liabilities under the Securities Act,
under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
The following paragraphs of this Item 15 describe all sales of securities by
the Company within the past three years which were not registered under the
Securities Act.
On January 1, 1998, the Company issued:
4,214,275 shares of common stock to Ulysses G. Auger, Sr. for the
aggregate consideration of $42,142.75.
4,314,687 shares of common stock to Ulysses G. Auger, II for the
aggregate consideration of $43,146.87.
8,450 shares of common stock to The Constandinos Ulysses Francisco
Auger Economides Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Constandina Francisca Auger
Economides Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Vassiliki Illias Auger Economides
Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Annabel-Rose Auger Trust for the
aggregate consideration of $84.50.
8,450 shares of common stock to The James Frederick Auger Trust for the
aggregate consideration of $84.50.
II-2
<PAGE>
8,450 shares of common stock to The Ulysses George Hawthorne Auger, III
Trust for the aggregate consideration of $84.50;
8,450 shares of common stock to The Alexander Robert Auger Trust for
the aggregate consideration of $84.50;
8,450 shares of common stock to The Gregory Ulysses Auger, II Trust for
the aggregate consideration of $84.50;
8,450 shares of common stock to The Bridgette Kathryn Auger Trust for
the aggregate consideration of $84.50; and
8,450 shares of common stock to The Nicholas William Randolph Auger
Trust for the aggregate consideration of $84.50.
On April 22, 1998, 317,073 shares of common stock were issued to R. Theodore
Ammon at a price of $3.15378 per share for an aggregate price of $1,000,000.
On October 2, 1998, in connection with the Reorganization, the Company
exchanged 5,350 shares of common stock for each 1% limited partnership interest
in Cleartel LP, 62,938 shares of common stock for each share of Cleartel common
stock and 500 shares of common stock for each share of CAIS, Inc. common stock.
As a result, the Company issued an aggregate of 1,034,970 shares of common
stock as follows:
Ulysses G. Auger, Sr., 245,000 shares of common stock in exchange for
his shares of CAIS, Inc. and 267,483 shares of common stock in exchange
for his shares of Cleartel and limited partnership interest in Cleartel
LP;
Ulysses G. Auger, II, 250,000 shares of common stock in exchange for
his shares of CAIS, Inc. and 259,527 shares of common stock in exchange
for his shares of Cleartel and limited partnership interest in Cleartel
LP;
The Constandinos Ulysses Francisco Auger Economides Trust, 500 shares
of common stock in exchange for its shares of CAIS, Inc. and 796 shares
of common stock in exchange for its shares of Cleartel and limited
partnership interest in Cleartel LP;
The Constandina Francisca Auger Economides Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel and limited partnership
interest in Cleartel LP;
The Vassiliki Illias Auger Economides Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel and limited partnership interest
in Cleartel LP;
The Annabel-Rose Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel and limited partnership interest in Cleartel
LP;
The James Frederick Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel and limited partnership interest in Cleartel
LP;
The Ulysses George Hawthorne Auger, III Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel and limited partnership
interest in Cleartel LP;
The Alexander Robert Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP;
II-3
<PAGE>
The Gregory Ulysses Auger, II Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP;
The Bridgette Kathryn Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP; and
The Nicholas William Randolph Auger Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel and limited partnership interest
in Cleartel LP.
On October 2, 1998, the Company granted options for 97,465 shares of common
stock to William M. Caldwell, IV, at an exercise price of $.9732 per share in
exchange for Mr. Caldwell's ownership interest in CAIS, Inc.
In connection with their respective employment agreements, on October 2,
1998, Messrs. Caldwell and Anderson were issued replacement options as follows:
Options for 1,635,610 shares of common stock were granted to William M.
Caldwell, IV, at an exercise price of $.9732 per share.
Options for 301,420 shares of common stock were granted to Evans K.
Anderson, at an exercise price of $1.1942 per share.
On October 2, 1998, pursuant to the credit agreement with ING (U.S) Capital
LLC dated September 4, 1998, the Company executed a Warrant Certificate issuing
warrants to purchase an aggregate of 390,000 shares of common stock, at an
exercise price of $.01 per share, to ING (U.S.) Capital LLC, or its registered
assigns.
On January 24, 1999 pursuant to a Settlement Agreement, the Company agreed
to issue 25,000 shares of common stock to Terk Technologies Corp. ("Terk") and,
if necessary, such additional shares of common stock such that the total shares
delivered to Terk multiplied by the initial public offering price equals
$250,000. The Company also granted Terk the right to purchase up to 25,000
additional shares of common stock as part of this initial public offering in
connection with the Company's directed share program.
On February 19, 1999, pursuant to a private placement and in exchange for
approximately $4.6 million of indebtedness owed by the Company or CAIS, Inc. to
Ulysses G. Auger, Sr. and Ulysses G. Auger, II, the Company issued 1,119,679
Series B Shares to Ulysses G. Auger, Sr. and Ulysses G. Auger, II.
On February 19, 1999, pursuant to a private placement, the Company issued:
2,458,407 Series A Shares and warrants to purchase an aggregate of 2.61% of
the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B Shares), at an exercise price of the initial
public offering price per share to Chancery Lane, L.P. for the aggregate
consideration of $10,000,000; and
368,761 Series A Shares and warrants to purchase an aggregate of .39% of the
total outstanding shares of common stock upon completion of this offering on
a fully diluted basis (except for shares issued upon the conversion of the
Series B Shares), at an exercise price of the initial public offering price
per share to CAIS-Sandler Partners, L.P. for the aggregate consideration of
$1,500,000.
On April 23, 1999, pursuant to a first amendment to the master license
agreement with Hilton Hotels Corporation dated April 23, 1999, the Company
executed a Common Stock Warrant issuing warrants to purchase an aggregate of
66,667 shares of common stock, at an exercise price of $.01 per share, to
Hilton Hotels Corporation, or its registered assigns.
Amended and Restated Stock Option Plan. See "Management--Amended and
Restated Stock Option Plan," which is incorporated by reference herein from the
prospectus included in Part I of this registration statement.
II-4
<PAGE>
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
Item 16. Exhibits and Financial Statement Schedules
(A) Exhibits.
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of CAIS Internet, Inc.
*3.2 Amended and Restated By-Laws of CAIS Internet, Inc.
*4.1 Specimen Common Stock Certificate.
*4.2 Warrant Agreement, dated September 4, 1998.
*4.3 Common Stock Warrant, among CAIS Internet, Inc. and Chancery Lane,
L.P., dated February 19, 1999.
*4.4 Common Stock Warrant, among CAIS Internet, Inc. and CAIS-Sandler
Partners, L.P., dated February 19, 1999.
*4.5 Stockholders Agreement, dated February 19, 1999.
4.6 Common Stock Warrant, among CAIS Internet, Inc. and Hilton Hotels
Corporation, dated April 22, 1999.
4.7 Warrant Agreement, among CAIS Internet, Inc. and Hilton Hotels
Corporation, dated April 22, 1999.
*5.1 Opinion of Swidler Berlin Shereff Friedman, LLP.
*10.1 Investment Agreement, among the Company, CAIS, Inc. and R. Theodore
Ammon, dated April 22, 1998.
10.2 Credit Agreement by ING (U.S.) Capital LLC to the Company, CAIS, Inc.
and certain of the Company's affiliates, dated September 4, 1998.
10.2.1 Amendment No. 1 to the Credit Agreement by ING (U.S.) Capital LLC to
the Company, CAIS, Inc. and certain of the Company's affiliates for
$7,000,000, dated February 12, 1999.
*10.3 Series A Preferred Stock and Warrant Purchase Agreement, among the
Company, Chancery Lane, L.P. and CAIS-Sandler Partners, L.P., dated
February 19, 1999.
*10.4 Exchange Agreement, among the Company, the limited partners of
Cleartel LP, Cleartel, Inc. and the shareholders of Cleartel, Inc.,
dated October 2, 1998.
*10.5 Agreement of Merger among the Company, CAIS, Inc. and CGX2 Merger
Corp., dated October 2, 1998.
10.6 Amended and Restated Employment Agreement, among CAIS, Inc. and Evans
K. Anderson, dated June 3, 1997.
*10.7 Assignment and Assumption Agreement and Release, among the Company,
CAIS, Inc. and Evans K. Anderson, dated October 2, 1998.
10.8 Amendment to Amended and Restated Employment Agreement, among the
Company, CAIS, Inc. and Evans K. Anderson, dated February 22, 1999.
10.9 Amended and Restated Employment Agreement, among CAIS, Inc. and
William M. Caldwell, IV, dated September 8, 1997.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------- -----------
<C> <S>
*10.10 Assignment and Assumption Agreement and Release, among the Company,
CAIS, Inc. and William M. Caldwell, IV, dated October 2, 1998.
10.11 Amendment to Amended and Restated Employment Agreement, among the
Company, CAIS, Inc. and William M. Caldwell, IV, dated February 22,
1999.
*10.12 Employment Agreement, among the Company and Laura Neuman, dated June
29, 1998.
p*10.13 Agreement for Cooperative Use of Communication Patents, Purchase of
an Option to Obtain Intellectual Property Rights, among Inline
Connection Corporation and CAIS, Inc., dated November 5, 1996.
*10.14 Letter Agreement Extending Option Period provided in the Agreement
for Cooperative Use of Communication Patents, among Inline
Connection Corporation and CAIS, Inc., dated February 28, 1997.
*10.15 Letter Exercising Option Pursuant to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation and
CAIS, Inc., dated April 4, 1997.
*10.16 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents, among Inline Connection Corporation and CAIS,
Inc., dated August 1, 1997.
*10.17 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents, among Inline Connection Corporation and CAIS,
Inc., dated October 21, 1997.
*10.18 Application Transfer for Inline PCT Serial No. PCT/US97/12045, among
Inline Connection Corporation and CAIS, Inc., dated January 6, 1999.
*10.19 Assignment of USSN 08/893,403 and PCT/US97/12045, among Inline
Connection Corporation and CAIS, Inc., dated January 6, 1999.
*10.20 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents among Inline Connection Corporation and CAIS,
Inc., dated January 26, 1999.
*10.21 Assignment of 50% of Certain Patent Properties, among Inline
Connection Corporation and CAIS, Inc., dated January 26, 1999.
*10.22 Assignment of Certain Trademarks, among Cleartel Communications,
Inc. and CAIS, Inc., dated February 9, 1999.
*10.23 CAIS Internet Services Agreement, among CAIS, Inc. and Hongkong
Telecom, dated October 24, 1997.
*10.24 Collaboration on IPORT Market Trial Agreement, among CAIS, Inc. and
Microsoft Corporation, dated February 18, 1998.
p*10.25 CAIS IPORT Integrator License Agreement, among CAIS and ATCOM, Inc.
d/b/a ATCOM/INFO dated September 10, 1998.
p*10.26 Marketing Associate Solution Alliance Agreement, among CAIS, Inc.
and Unisys Corporation, dated November 11, 1998.
p10.27 Master License Agreement for High Speed Internet Service, among
Hilton Hotels Corporation and CAIS, Inc., dated December 23, 1998.
p10.27.1 First Amendment to Master License Agreement, among Hilton Hotels
Corporation, CAIS Internet, Inc. and CAIS, Inc., dated April 23,
1999.
p10.27.2 Marketing/Administration Fund and Incentive Agreement, among Hilton
Hotels Corporation and CAIS, Inc., dated December 23, 1998.
p10.27.3 First Amendment to Marketing/Administration Fund and Incentive
Agreement, among Hilton Hotels Corporation and CAIS, Inc., dated
April 23, 1999.
p*10.28 Agreement for High Speed Internet Access Service in Multiple
Dwelling Units, among CAIS, Inc. and OnePoint Communications Corp.,
dated February 19, 1999.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------- -----------
<C> <S>
*10.29 Deed of Lease, among Ramay Family Partnership and CAIS, Inc., dated
July 28, 1997.
*10.30 Deed of Lease, among Ramay Family Partnership and CAIS, Inc., dated
May 28, 1998.
*10.31 Office Building Lease for 1255 22nd Street, among 1255 22nd Street
Associates Limited Partnership and the Company, dated November 21,
1998.
*10.32 Settlement Agreement, among CAIS, Inc. and Terk Technologies Corp.,
dated January 24, 1999.
*10.33 The Company's Amended and Restated 1998 Equity Incentive Plan, dated
February 12, 1999.
11.1 Statement re computation of per share earnings.
*21.1 List of Subsidiaries.
*23.1 Consent of Swidler Berlin Shereff Friedman, LLP (filed as part of
Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP.
*24.1 Power of Attorney (set forth on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
p Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the SEC.
(B) Financial Statement Schedules.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Washington D.C., on
April 28, 1999.
CAIS INTERNET, INC.
/s/ Ulysses G. Auger, II
By: _________________________________
Ulysses G. Auger, II
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 28, 1999.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Ulysses G. Auger, II Chairman of the Board and Chief Executive April 28, 1999
- ----------------------------- Officer (Principal Executive Officer)
Ulysses G. Auger, II
*
- ----------------------------- President and Director April 28, 1999
William M. Caldwell, IV
* Vice President, Treasurer and Chief Financial April 28, 1999
- ----------------------------- Officer (Principal Financial and Accounting
Barton R. Groh Officer)
*
- ----------------------------- Director April 28, 1999
Ulysses G. Auger, Sr.
*
- ----------------------------- Director April 28, 1999
Richard F. Levin
*
- ----------------------------- Director April 28, 1999
Vernon L. Fotheringham
- ----------------------------- Director
R. Theodore Ammon
</TABLE>
- --------
* Ulysses G. Auger, II, by signing his name hereto, signs this document on
behalf of each of the persons so indicated above pursuant to powers of attorney
duly executed by such person and filed with the Securities and Exchange
Commission.
II-8
<PAGE>
Report of Independent Public Accountants
To CAIS Internet, Inc. and subsidiaries
(formerly CGX Communications, Inc.):
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of CAIS Internet, Inc. (a Delaware
corporation, formerly CGX Communications, Inc.) and subsidiaries, included in
this Registration Statement and have issued our report thereon dated February
19, 1999 (except with respect to the matters discussed in Note 15 to the
consolidated financial statements, as to which the date is April 23, 1999). Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II--Valuation and Qualifying Accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
S-1
<PAGE>
CAIS Internet, Inc.
(formerly CGX Communications, Inc.)
Schedule II--Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1997 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs End of
Description of Period and Expenses Deductions(a) Period
----------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Deduction on the Balance
Sheet from the asset to
which it applies:
Allowance for doubtful
accounts
Year ended December 31,
1996...................... $ 52 $173 $ (88) $137
Year ended December 31,
1997...................... 137 106 (64) 179
Year ended December 31,
1998...................... 179 80 (122) 137
</TABLE>
- --------
(a) Represents amounts written off as uncollectible.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of CAIS Internet, Inc.
*3.2 Amended and Restated By-Laws of CAIS Internet, Inc.
*4.1 Specimen Common Stock Certificate.
*4.2 Warrant Agreement, dated September 4, 1998.
*4.3 Common Stock Warrant, among CAIS Internet, Inc. and Chancery
Lane, L.P., dated February 19, 1999.
*4.4 Common Stock Warrant, among CAIS Internet, Inc. and CAIS-
Sandler Partners, L.P., dated February 19, 1999.
*4.5 Stockholders Agreement, dated February 19, 1999.
4.6 Common Stock Warrant, among CAIS Internet, Inc. and Hilton
Hotels Corporation, dated April 22, 1999.
4.7 Warrant Agreement, among CAIS Internet, Inc. and Hilton
Hotels Corporation, dated April 22, 1999.
*5.1 Opinion of Swidler Berlin Shereff Friedman, LLP.
*10.1 Investment Agreement, among the Company, CAIS, Inc. and R.
Theodore Ammon, dated April 22, 1998.
10.2 Credit Agreement by ING (U.S.) Capital LLC to the Company,
CAIS, Inc. and certain of the Company's affiliates, dated
September 4, 1998.
10.2.1 Amendment No. 1 to Credit Agreement by ING (U.S.) Capital LLC
to the Company, CAIS, Inc. and certain of the Company's
affiliates for $7,000,000, dated February 12, 1999.
*10.3 Series A Preferred Stock and Warrant Purchase Agreement,
among the Company, Chancery Lane, L.P. and CAIS-Sandler
Partners, L.P., dated February 19, 1999.
*10.4 Exchange Agreement, among the Company, the limited partners
of Cleartel LP, Cleartel, Inc. and the shareholders of
Cleartel, Inc., dated October 2, 1998.
*10.5 Agreement of Merger among the Company, CAIS, Inc. and CGX2
Merger Corp., dated October 2, 1998.
10.6 Amended and Restated Employment Agreement, among CAIS, Inc.
and Evans K. Anderson, dated June 3, 1997.
*10.7 Assignment and Assumption Agreement and Release, among the
Company, CAIS, Inc. and Evans K. Anderson, dated October 2,
1998.
10.8 Amendment to Amended and Restated Employment Agreement, among
the Company, CAIS, Inc. and Evans K. Anderson, dated February
22, 1999.
10.9 Amended and Restated Employment Agreement, among CAIS, Inc.
and William M. Caldwell, IV, dated September 8, 1997.
*10.10 Assignment and Assumption Agreement and Release, among the
Company, CAIS, Inc. and William M. Caldwell, IV, dated
October 2, 1998.
10.11 Amendment to Amended and Restated Employment Agreement, among
the Company, CAIS, Inc. and William M. Caldwell, IV, dated
February 22, 1999.
*10.12 Employment Agreement, among the Company and Laura Neuman,
dated June 29, 1998.
p*10.13 Agreement for Cooperative Use of Communication Patents,
Purchase of an Option to Obtain Intellectual Property Rights,
among Inline Connection Corporation and CAIS, Inc., dated
November 5, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
*10.14 Letter Agreement Extending Option Period provided in the
Agreement for Cooperative Use of Communication Patents, among
Inline Connection Corporation and CAIS, Inc., dated February
28, 1997.
*10.15 Letter Exercising Option Pursuant to Agreement for
Cooperative Use of Communication Patents, among Inline
Connection Corporation and CAIS, Inc., dated April 4, 1997.
*10.16 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation
and CAIS, Inc., dated August 1, 1997.
*10.17 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation
and CAIS, Inc., dated October 21, 1997.
*10.18 Application Transfer for Inline PCT Serial No.
PCT/US97/12045, among Inline Connection Corporation and CAIS,
Inc., dated January 6, 1999.
*10.19 Assignment of USSN 08/893,403 and PCT/US97/12045, among
Inline Connection Corporation and CAIS, Inc., dated January
6, 1999.
*10.20 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents among Inline Connection Corporation
and CAIS, Inc., dated January 26, 1999.
*10.21 Assignment of 50% of Certain Patent Properties, among Inline
Connection Corporation and CAIS, Inc., dated January 26,
1999.
*10.22 Assignment of Certain Trademarks, among Cleartel
Communications, Inc. and CAIS, Inc., dated February 9, 1999.
*10.23 CAIS Internet Services Agreement, among CAIS, Inc. and
Hongkong Telecom, dated October 24, 1997.
*10.24 Collaboration on IPORT Market Trial Agreement, among CAIS,
Inc. and Microsoft Corporation, dated February 18, 1998.
p*10.25 CAIS IPORT Integrator License Agreement, among CAIS and
ATCOM, Inc. d/b/a ATCOM/INFO dated September 10, 1998.
p*10.26 Marketing Associate Solution Alliance Agreement, among CAIS,
Inc. and Unisys Corporation, dated November 11, 1998.
p 10.27 Master License Agreement for High Speed Internet Service,
among Hilton Hotels Corporation and CAIS, Inc., dated
December 23, 1998.
p 10.27.1 First Amendment to Master License Agreement, among Hilton
Hotels Corporation, CAIS Internet, Inc. and CAIS, Inc. dated
April 23, 1999.
p10.27.2 Marketing/Administration Fund and Incentive Agreement, among
Hilton Hotels Corporation and CAIS, Inc., dated December 23,
1998.
p10.27.3 First Amendment to Marketing/Administration Fund and
Incentive Agreement, among Hilton Hotels Corporation and
CAIS, Inc., dated April 23, 1999.
p*10.28 Agreement for High Speed Internet Access Service in Multiple
Dwelling Units, among CAIS, Inc. and OnePoint Communications
Corp., dated February 19, 1999.
*10.29 Deed of Lease, among Ramay Family Partnership and CAIS, Inc.,
dated July 28, 1997.
*10.30 Deed of Lease, among Ramay Family Partnership and CAIS, Inc.,
dated May 28, 1998.
*10.31 Office Building Lease for 1255 22nd Street, among 1255 22nd
Street Associates Limited Partnership and the Company, dated
November 21, 1998.
*10.32 Settlement Agreement, among CAIS, Inc. and Terk Technologies
Corp., dated January 24, 1999.
*10.33 The Company's Amended and Restated 1998 Equity Incentive
Plan, dated February 12, 1999.
11.1 Statement regarding computation of per share earnings.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
*21.1 List of Subsidiaries.
*23.1 Consent of Swidler Berlin Shereff Friedman, LLP (filed as part
of Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP.
*24.1 Power of Attorney (set forth on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
p Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the SEC.
<PAGE>
Exhibit 1.1
CAIS INTERNET, INC.
6,000,000 Shares of Common Stock
(par value $.01 per share)
UNDERWRITING AGREEMENT
New York, New York
April ___, 1999
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company, LLC
First Union Capital Markets Corp.
Friedman, Billings, Ramsey & Co., Inc.
As Representatives of the several Underwriters
Wit Capital Corporation
As e-Manager
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
CAIS Internet, Inc., a corporation organized and existing under the
laws of Delaware (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters") an aggregate of 6,000,000 shares (the "Firm Shares")
of its common stock, par value $0.01 per share (the "Common Stock") and, for the
sole purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 900,000 shares
(the "Additional Shares") of Common Stock. The Firm Shares and any Additional
Shares purchased by the Underwriters are referred to herein as the "Shares".
The Shares are more fully described in the Registration Statement referred to
below.
<PAGE>
1. Representations and Warranties. The Company represents and
------------------------------
warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement and amendments thereto on Form
S-1 (No. 333-72769), for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). Such registration
statement, including the prospectus, financial statements and schedules,
exhibits and all other documents filed as a part thereof, as amended at the
time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness
pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules and
Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement" and the prospectus, in the form first
filed with the Commission pursuant to Rule 424(b) of the Regulations or
filed as part of the Registration Statement at the time of effectiveness if
no Rule 424(b) or Rule 434 filing is required, is herein called the
"Prospectus". The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration
Statement, when the Prospectus is first filed with the Commission pursuant
to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission and at the Closing
Date and the Additional Closing Date, if any, (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
do not and will not contain an untrue statement of a material fact and did
not and will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein in light of
the circumstances under which they were made not misleading. When any
related preliminary prospectus was first filed with the Commission (whether
filed as part of the registration statement for the registration of the
Shares or any amendment thereto or pursuant to Rule 424(a) of the
Regulations) and when any amendment thereof or supplement thereto was first
filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a
2
<PAGE>
material fact and did not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein in
light of the circumstances under which they were made not misleading. No
representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity
with information relating to the Underwriters furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection with the preparation thereof. If Rule 434 is used, the Company
will comply with the requirements of Rule 434.
(c) The Company has no subsidiaries other than CAIS, Inc., a Virginia
corporation (the "Subsidiary"), which is a wholly-owned subsidiary of the
Company. The Company does not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation
or have any equity interest in any firm, partnership, joint venture,
association or other entity, other than the Subsidiary. All the
outstanding shares of capital stock of the Subsidiary are duly authorized
and validly issued and are fully paid and nonassessable, are owned solely
by the Company and are free and clear of any security interest, pledge,
claim (legal or equitable), lien, charge, mortgage, encumbrance or other
restriction (each a "Lien") and of shareholders' agreements voting trusts
or defects of title.
(d) Arthur Andersen LLP, the accountants who audited the consolidated
financial statements of the Company and the Subsidiary (as defined below)
which are a part of the Registration Statement, the preliminary prospectus
and the Prospectus, are, with respect to the Company and the Subsidiary,
independent public accountants as required by the Act and the Regulations.
(e) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth
in the Registration Statement and the Prospectus, there has been no
material adverse change, or any development involving a prospective
material adverse change, in or affecting the business, properties,
management, assets, prospects, stockholders' equity, operations, condition
(financial or other), or results of operations of the Company and the
Subsidiary taken as a whole, whether or not arising from transactions in
the ordinary course of business; and since the date of the latest
3
<PAGE>
balance sheet presented in the Registration Statement and the Prospectus,
neither the Company nor the Subsidiary has incurred or undertaken any
liability or obligation, direct or contingent, which is material to the
Company and the Subsidiary taken as a whole, except for liabilities or
obligations which are reflected in the Registration Statement and the
Prospectus.
(f) The Company and the Subsidiary have been duly organized and are
validly existing as corporations in good standing under the laws of their
jurisdictions of incorporation, with full power and authority to own, lease
and operate their respective properties and engage in the business in which
they are engaged or propose to engage in as described in the Registration
Statement, the preliminary prospectus and the Prospectus. Each of the
Company and the Subsidiary is duly registered and qualified to do business
as a foreign corporation in good standing in each jurisdiction where the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such registration or qualification
necessary, except where the failure to be so qualified or in good standing,
individually or in the aggregate, would not have a material adverse effect
on the business, operations, assets, properties, condition (financial or
other), stockholders' equity, prospects or results of operations (a
"Material Adverse Effect") on the Company and the Subsidiary taken as a
whole.
(g) The Company has the authorized capital stock as set forth under
the caption "Capitalization" in the Registration Statement, the preliminary
prospectus and the Prospectus; the Common Stock, the Firm Shares, the
Additional Shares and all other shares of capital stock of the Company
conform to the descriptions thereof contained in the Registration
Statement, the preliminary prospectus and the Prospectus; the issued and
outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, free
and clear of all Liens; the Shares to be issued and sold to the
Underwriters hereunder shall conform to the description thereof and the
statements in relation thereto contained in the Registration Statement, the
preliminary prospectus and the Prospectus and will have been duly
authorized for issuance and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable, and good title to the Shares will be transferred to
the Underwriters free and clear of any Liens; the Shares will not have been
issued in violation of or subject to any preemptive or other rights to
subscribe thereto; and the certificates
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representing the Shares will be in valid and sufficient form. Except as
described in the Registration Statement, the preliminary prospectus and the
Prospectus, there are no outstanding rights (including, without limitation,
preemptive or similar rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any share of capital
stock or other equity interest or ownership interest in the Company or the
Subsidiary or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock or
other equity interest or ownership interest in the Company or the
Subsidiary or to any such convertible or exchangeable securities or
instruments or to any such rights, warrants or options. No holder of
securities of the Company has any rights to the registration of securities
of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby.
(h) Except as otherwise set forth in the Registration Statement, the
preliminary prospectus and the Prospectus, there is (i) no action, suit,
proceeding or investigation before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign, pending or, to
the best knowledge of the Company, threatened or contemplated, as to which
the Company or the Subsidiary will be, a party or as to which the business,
assets or property of the Company or the Subsidiary is or will be, subject,
(ii) no statute, rule, regulation or order that has been enacted, adopted
or issued by any governmental agency, body or official, and (iii) no
injunction, restraining order or order of any nature that has been issued
by a federal or state court or foreign court of competent jurisdiction to
which the Company or the Subsidiary is or will be subject or affecting the
business, assets or property of the Company or the Subsidiary, that could
(in the case of clauses (i), (ii) and (iii)), individually or in the
aggregate, result in a Material Adverse Effect on the Company and the
Subsidiary taken as a whole, be required to be disclosed in the
Registration Statement, the preliminary prospectus or the Prospectus or be
otherwise material in the context of the sale of the Shares. There are no
legal or administrative proceedings, statutes, contracts or documents
concerning the Company or the Subsidiary of a character that would be
required to be described in or filed as an exhibit to a registration
statement on Form S-1 under the Securities Act that is not described or
filed, as required, in the Registration Statement, the preliminary
prospectus and the Prospectus.
(i) The consolidated financial statements of the Company and the
Subsidiary, and of a predecessor company, Capital Area Internet Service,
Inc., together with the related notes thereto, which are a part of
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the Registration Statement, the preliminary prospectus and the Prospectus,
present fairly the consolidated financial position and the consolidated
results of operations, changes in stockholders' equity and changes in cash
flows of the Company and the Subsidiary and Capital Area Internet Service,
Inc. as of the respective dates and for the respective periods specified
therein. All of such financial statements and related notes have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved and comply in
form with the applicable accounting requirements included in Regulation S-X
under the Act. The supporting schedules, the Selected Consolidated
Financial and Other Data and the tables included in the Registration
Statement, the preliminary prospectus and the Prospectus fairly present the
information purported to be shown thereby at the respective dates thereof
and for the respective periods covered thereby and have been presented on a
basis consistent with the financial statements therein. No other financial
statements or schedules are required by the Act or Regulation S-X to be
included therein.
(j) (A) The Company and the Subsidiary have good and marketable title
to all properties and assets described in the Registration Statement, the
preliminary prospectus and the Prospectus as being owned by them, free and
clear of Liens, except, individually and in the aggregate, Liens for taxes
not yet due and payable, (B) the Contracts (as defined below) to which the
Company or the Subsidiary are a party are valid and binding agreements,
enforceable against the Company or the Subsidiary, as applicable, in
accordance with their terms, and, to the best of the Company's knowledge,
the other contracting party or parties thereto are not in material breach
or default under any of such agreements, (C) the Company and the Subsidiary
have valid and enforceable leases for the properties leased by them, and
the Company and the Subsidiary enjoy peaceful and undisturbed possession
under all such leases, and such leases conform in all material respects to
the descriptions thereof, if any, set forth in the Registration Statement,
the preliminary prospectus and the Prospectus, and (D) the Company and the
Subsidiary, own, lease or otherwise have rights to use all such properties
and assets as are important to their respective operations as now conducted
and as proposed to be conducted.
(k) The Company and the Subsidiary have all requisite power and
authority (corporate and other), and all licenses, certificates, approvals,
consents, concessions, qualifications, orders, registrations,
authorizations and permits from all state, United States, foreign and other
6
<PAGE>
governmental and regulatory agencies, bodies and authorities ("Permits")
that are material to the conduct of the business of the Company and the
Subsidiary as such business is currently conducted, all of which are valid
and in full force and effect (and there is no proceeding pending or, to the
best knowledge of the Company, threatened which may cause any such Permit
to be withdrawn, canceled, suspended or not renewed). The Company and the
Subsidiary are not in violation of, or in default under, and have fulfilled
and performed all their obligations with respect to such Permits. No event
has occurred which allows or would allow revocation or termination thereof
or result in any material impairment of the rights of the holder of any
such Permit. The Company reasonably believes that it will be able to obtain
such Permits that are material to the conduct of the business of the
Company and the Subsidiary as such business is proposed to be conducted as
described in the Registration Statement, the preliminary prospectus and the
Prospectus.
(l) The Company and the Subsidiary are not (i) in violation of their
respective certificates of incorporation, as amended, or bylaws, as
amended, (ii) in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, franchise, joint venture, deed of
trust, bond, note, lease, Permit or other agreement or instrument to which
the Company or the Subsidiary is a party or by which the Company or the
Subsidiary may be bound or to which any of the property or assets of the
Company or the Subsidiary may be bound (each a "Contract"), or (iii) in
violation of any law, order, rule or regulation or writ, injunction or
decree of any court or governmental agency, body or authority. No other
party to any material Contract to which the Company or the Subsidiary is a
party is in default in any respect thereunder.
(m) Except as otherwise set forth in the Registration Statement, the
preliminary prospectus and the Prospectus, the Company and the Subsidiary
own or possess adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service
mark applications, tradenames, inventions, copyrights, manufacturing
processes, formulae, trade secrets, know-how, franchises, unpatented and/or
unpatentable proprietary or confidential information, systems or procedures
and material intangible property and assets (collectively, "Intellectual
Property") necessary to the conduct of their business as currently
conducted and as proposed to be conducted. The Company reasonably believes
that the Company and the Subsidiary will be able to own or possess adequate
licenses or other rights to use all
7
<PAGE>
Intellectual Property necessary to the conduct of their business as
proposed to be conducted as described in the Registration Statement, the
preliminary prospectus and the Prospectus. The Company has no knowledge
that it lacks or will be unable to obtain any rights or licenses to use any
of such Intellectual Property. The Registration Statement, the preliminary
prospectus and the Prospectus fairly and accurately describe the Company's
rights with respect to all such Intellectual Property. The Company is not
aware of any claim to the contrary and neither the Company nor the
Subsidiary have received any written notice of infringement or of conflict
with asserted rights or claims of others with respect to any Intellectual
Property. Specifically, and without limitation, the Company is the sole
owner of patent applications filed in Canada, Europe, Mexico, Australia,
and New Zealand (collectively, "Patent Applications"); the Company is a
joint owner and exclusive licensee of U.S. Patent No. 5,010,399, U.S.
Patent No. 5,844,596, nine (9) pending U.S. applications, a Canadian
patent, a European patent, a Korean patent, and a pending PCT application
(collectively, "Patent Rights"), subject only a non-exclusive license of
Terk Technologies, Inc. ("Terk") to use the Patent Rights for single family
residential units, bars, restaurants, coffee shops and other business
establishments earning at least ninety percent of their revenues from the
sale of food and beverages consumed on premises; rights that Terk has in
the Patent Rights will not have a Material Adverse Effect on the Company
and the Subsidiary taken as a whole or adversely affect the ability of the
Company to perform its obligations hereunder or be otherwise material in
the context of the sale of the Shares; the Company had the requisite power
and authority to enter into the Agreement for Cooperative Use of
Communication Patents ("Inline License Agreement") with Inline, Inc.
("Inline") and to exercise the options available to the Company under the
Inline License Agreement; the Company has the right to use of the Patent
Rights worldwide, with the exception of Israel.
(n) Except for the terms of the Inline License Agreement and a
Settlement Agreement signed on January 24, 1999, there are no outstanding
licenses or other agreements that relate to or restrict the Company's use
of the Patent Rights.
(o) With regard to the Inline Patent Rights, the Company has no
knowledge of unpaid maintenance fees, patents that have lapsed, or
abandonment of applications, and knows of no reason why any patent
applications should not be allowed. The Company has no knowledge of
claims, actions, or proceedings, pending or threatened, challenging the
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<PAGE>
validity of any of the claims in any of the Patent Rights. The commercial
embodiments of "Overvoice" as currently marketed and as proposed to be
marketed are covered by the Patent Rights.
(p) The Company has no knowledge of the existence of patents or patent
applications owned by third parties that may have a Material Adverse Effect
on the Company and the Subsidiary taken as a whole or adversely affect the
ability of the Company to perform its obligations hereunder or be otherwise
material in the context of the sale of the Shares.
(q) The Company is the sole and exclusive owner of all right, title
and interest in the United States registered trademarks and service marks
CAIS, CAPITAL AREA INTERNET SERVICE, CAIS INTERNET & design, INTERNET
SERVICE FOR THE 21ST CENTURY, OVERVOICE, THE WAIT IS OVER, and WHERE THE
CLUEFUL CONNECT (collectively, "Registered Marks"). The Company has
applied for United States trademarks and service marks for CAIS INTERNET,
LANJACK, and DESKJACK (collectively, "Applied Marks").
(r) The Company has not allowed any Applied Marks or Registered Marks
to be abandoned, canceled, or to lapse. The Company has no knowledge of
claims, actions, or proceedings, pending or threatened, challenging the
validity of any of the Registered Marks or the registration of any Applied
Marks.
(s) The Company has no knowledge of the existence of trademarks or
service marks, or trademark or service mark applications, owned by third
parties that may have a Material Adverse Effect on the Company and the
Subsidiary taken as a whole or adversely affect the ability of the Company
to perform its obligations hereunder or otherwise be material in the
context of the sale of the Shares.
(t) The Company has registered with Network Solutions, Inc. the
Internet domain names "OVERVOICE.NET" and "OVERVOICE.ORG", and has
administrative control over "OVERVOICE.COM". The Company has no knowledge
of a registered trademark held by a third party that may be used to prevent
the Company from using this domain name.
(u) The Company has taken all economically reasonable steps to secure,
protect, and maintain Registered Marks, Applied Marks, and the
"OVERVOICE.NET" and "OVERVOICE.ORG" Internet domain names.
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<PAGE>
(v) The Company and the Subsidiary have filed on a timely basis with
the appropriate taxing authorities (or have received an extension for
filing with respect to) all tax returns, reports and other information
required to be filed by it, and each such tax return, report or other
information was, when filed, accurate and complete; and, except as
described in the Registration Statement, the preliminary prospectus and the
Prospectus, the Company and the Subsidiary have duly paid, or has made
adequate provision in the financial statements for, all taxes required to
be paid by it and any other assessment, fine or penalty levied against it;
and no tax deficiency has been or to the best of the Company's knowledge,
might be asserted against the Company or the Subsidiary.
(w) The Company and the Subsidiary maintain insurance of the types and
in the amounts adequate for their business as presently conducted and
consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering
product liability and real and personal property owned or leased against
theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect.
(x) Neither the Company nor the Subsidiary is involved in any labor
dispute, disturbance, lockout, slowdown or stoppage of employees, and, to
the best knowledge of the Company, no such dispute or disturbance is
threatened or imminent.
(y) The Company and the Subsidiary (i) are in compliance with any and
all applicable United States, state and local environmental laws, rules,
regulations, treaties, statutes and codes promulgated by any and all
governmental bodies and authorities relating to the protection of human
health and safety, the environment or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct their businesses as currently conducted, and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental
Laws or to the Company's or the Subsidiary's activities involving Hazardous
Materials. "Hazardous Materials" means any material or substance (i) that
is prohibited or regulated by any Environmental Law or (ii) that has been
designated or regulated by any
10
<PAGE>
governmental body or authority as radioactive, toxic, hazardous or
otherwise a danger to health, reproduction or the environment.
(z) Neither the Company nor the Subsidiary has engaged in the
generation, use, manufacture, transportation or storage of any Hazardous
Materials on any of the Company's or the Subsidiary's properties or former
properties. No Hazardous Materials have been treated or disposed of on any
of the Company's or the Subsidiary's properties or on properties formerly
owned or leased by the Company or the Subsidiary during the time of such
ownership or lease, except in compliance with Environmental Laws.
(aa) No payments or inducements have been made or given, directly or
indirectly, to any federal or local officials in any jurisdiction by the
Company or the Subsidiary, by any of their officers, directors, employees
or agents or, to the best knowledge of the Company, by any other person in
connection with any opportunity, Contract, Permit, license, certificate,
consent, order, approval, waiver or other authorization relating to the
business of the Company or the Subsidiary, except for such payments or
inducements as were lawful under applicable written laws, rules and
regulations. Neither the Company nor the Subsidiary, nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or the Subsidiary, (i) has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; (ii) made any direct or indirect
unlawful payment to any government official or employee from corporate
funds; (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or (iv) made any bribe, unlawful rebate,
payoff, influence payment, kickback or other unlawful payment in connection
with the business of the Company or the Subsidiary.
(bb) Neither the Company nor the Subsidiary has any liability for any
prohibited transaction (within the meaning of Section 4975(c) of the
Internal Revenue Code of 1986, as amended (the "Code") or Part 4 of Title I
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (or an accumulated funding deficiency within the meaning of
Section 412 of the Code or Section 302 of ERISA) or any complete or partial
withdrawal liability (within the meaning of Section 4201 of ERISA), with
respect to any pension, profit sharing or other plan which is subject to
ERISA, to which the Company and the Subsidiary make or ever have made a
contribution and in which any employee of the Company and Subsidiary are or
have ever been a participant. With
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<PAGE>
respect to such plans, the Company and the Subsidiary are in compliance in
all material respects with all applicable provisions of ERISA.
(cc) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are appropriately recorded to permit
preparation of financial statements that are in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences, and (v) assets
are properly accounted for and safeguarded against loss from unauthorized
use. The Company has not received a "material deficiency" letter from its
independent public accountants in connection with their audit of the
Company's financial statements included in the Registration Statement.
(dd) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company or the Subsidiary to or for the benefit of any
of the officers, directors or shareholders of the Company or the Subsidiary
or any of the members of the families of any of them, except as disclosed
in the Registration Statement, the preliminary prospectus and the
Prospectus.
(ee) Neither the issuance, offer, sale or delivery of the Shares, the
execution, delivery and performance by the Company of this Agreement nor
the compliance by the Company with all the provisions hereof nor the
consummation of the transactions contemplated hereby (i) conflicts with or
will conflict with, or constitutes or will constitute a breach or violation
of or a default (or an event that, with notice or lapse of time or both,
would constitute a default), under, any of the terms or provisions of the
certificate of incorporation or by-laws or other organizational or
constitutive documents of the Company or the Subsidiary, nor (ii) conflicts
with or will conflict with or constitutes or will constitute a breach or
violation of, or a default under (or an event that with notice or the lapse
of time or both would constitute a default) or the loss of any material
benefit under, or the termination of, or will result in the creation or
imposition of any Lien upon any property or assets of the Company or the
Subsidiary pursuant to, any Contract or Permit, nor
12
<PAGE>
(iii) violates or conflicts with or will violate or conflict with any law,
statute, rule or regulation applicable to the Company or the Subsidiary or
any judgment, decree or order applicable to the Company or the Subsidiary
of any court or supervisory, regulatory, administrative or governmental
agency, body or authority, or arbitrator having jurisdiction over the
Company or the Subsidiary or any of their respective properties or assets.
No consent, approval, registration, authorization, filing, qualification,
Permit or order of or with any court or supervisory, regulatory,
administrative or governmental agency, body or authority, arbitrator or
others (including securityholders) is required in connection with the
execution and delivery of this Agreement, the issuance, sale or delivery of
the Shares to be issued, sold and delivered by the Company hereunder, or
the consummation of any other of the transactions contemplated herein or
the fulfillment of the terms hereof, except the registration under the Act
of the Shares and such consents, approvals, authorizations, Permits,
registrations, filings or qualifications as may be required under the state
securities or "blue sky" laws in connection with the offer, purchase and
distribution of the Shares by the Underwriters.
(ff) The Company has full power and authority (corporate and other) to
enter into this Agreement and to perform the transactions contemplated
hereby. This Agreement and the transactions contemplated herein have been
duly and validly authorized, executed and delivered by the Company and this
Agreement constitutes the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(gg) The Company is not now, and as a result of the offer and sale of
the Securities in the manner contemplated in this Agreement, the
Registration Statement, the preliminary prospectus and the Prospectus and
the application of the net proceeds of such sale as described in the
Registration Statement, the preliminary prospectus and the Prospectus, will
not be, an "investment company" or an "affiliated person" of, or "promoter"
or "principal underwriter" for, an "investment company" within the meaning
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), without taking account of any exemption arising out of the number or
type of holders of the Company's securities.
(hh) The Company has not incurred any liability for a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than
the discount contemplated hereby.
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(ii) Neither of the Company nor the Subsidiary or to the Company's
knowledge, any of its or their officers, directors or affiliates (as
defined under the Act) has taken or will take, directly or indirectly, any
action designed to cause or to result in or that has constituted, or might
reasonably be expected to cause or result in or constitute, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise, the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Shares.
(jj) The Company has not distributed and will not distribute prior to
the later of (A) the Closing Date and (B) completion of the distribution of
the Shares, any offering material in connection with the offering and sale
of the Shares other than the preliminary prospectus and the Prospectus.
(kk) Other than as described in the Registration Statement, the
preliminary prospectus and the Prospectus, there is no tax, duty, levy,
impost, deduction, charge or withholding imposed by any political
subdivision or taxing authority by virtue of the execution, delivery,
performance or enforcement, or to ensure the legality, validity or
admissibility into evidence, of this Agreement and neither is it necessary
that the Shares be submitted to, or filed or recorded with, any court or
other authority to ensure such legality, validity, enforceability or
admissibility into evidence.
(ll) All necessary actions, authorizations, conditions and things
required to be taken, given, fulfilled and done by the Company and the
Subsidiary on or prior to the date of this Agreement, have been, or on the
Closing Date, will have been taken, given, fulfilled and done in connection
with (i) the issue of the Prospectus; (ii) the execution and delivery of
this Agreement; (iii) the execution, delivery and issuance of the Shares,
(iv) the compliance with all provisions of the Shares and this Agreement to
be performed or complied with by such date.
(mm) Each of the Company and the Subsidiary has (i) initiated a review
and assessment of all areas within its business and operations (including
those affected by suppliers, vendors and customers) that could be adversely
affected by the "Year 2000 Problem" (that is, the risk that computer
-----------------
applications used by the Company or the Subsidiary (or suppliers, vendors
and customers thereof) may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing
the Year 2000 Problem on a timely basis, and
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(iii) to date, implemented that plan in accordance with that timetable.
Based on the foregoing, each of the Company and the Subsidiary believes
that all computer applications (including those of its suppliers, vendors
and customers) that are material to its business and operations are
reasonably expected on a timely basis to be able on or prior to August 31,
1999 to perform date-sensitive functions for all dates before and after
December 31, 1999.
(nn) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required
by this Agreement to be delivered to you was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
(oo) The Company has taken such action as is necessary to have the
Shares authorized for trading on the Nasdaq National Market System.
(pp) Except as described in the Registration Statement, the
preliminary prospectus and the Prospectus, the Company has not sold or
issued any shares of capital stock within the six month period preceding
the date of the Prospectus, all of which sales and issuances were made in
compliance with the Act and the Regulations.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $____________, the number of Firm Shares set forth opposite
the respective names of the Underwriters in Schedule I hereto plus an additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the office of Chadbourne & Parke LLP, 30
Rockefeller Plaza, New York, New York, or at such other place as shall be agreed
upon by you and the Company, at 10:00 A.M. on the third or fourth business day
(as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business
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<PAGE>
day (as permitted under Rule 15c6-1 under the Exchange Act) after the
determination of the initial public offering price of the Shares), or such other
time not later than ten business days after such date as shall be agreed upon by
you and the Company (such time and date of payment and delivery being herein
called the "Closing Date"). Payment shall be made to the Company by certified or
official bank check or checks drawn in federal funds or similar same day funds
payable to the order of the Company, against delivery to you for the respective
accounts of the Underwriters of certificates for the Shares to be purchased by
them. Certificates for the Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two full
business days prior to the Closing Date. The Company will permit you to examine
and package such certificates for delivery at least one full business day prior
to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 900,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised from
time to time and at any time, in whole or in part, on or before the thirtieth
day following the date of the Prospectus, by written notice by you to the
Company. Such notice shall set forth the aggregate number of Additional Shares
as to which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
- -------- -------
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total number of Firm Shares being purchased
from the Company, subject, however, to such
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<PAGE>
adjustments to eliminate any fractional shares as you in your sole discretion
shall make.
Payment for the Additional Shares shall be made by certified or
official bank check or checks drawn in federal funds or similar same day funds,
payable to the order of the Company as noted above, at the offices or such other
location as may be mutually acceptable, upon delivery of the certificates for
the Additional Shares to you for the respective accounts of the Underwriters
3. Offering. It is understood that the several Underwriters propose
--------
to offer the Shares for sale to the public upon the terms set forth in the
Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement
and any amendments thereto to become effective as promptly as possible, and
if Rule 430A is used or the filing of the Prospectus is otherwise required
under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to rule 424(b) or
Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely
on Rule 434, the Company will prepare and file a term sheet that complies
with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration
Statement and any amendments thereto become effective, (ii) of any request
by the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commision of any
stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the
threatening, of any proceedings therefor, (v) of the receipt of any
comments from the Commission, and (vi) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for that purpose. If the Commission shall propose or enter a
stop order at any time, the Company will make every
17
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reasonable effort to prevent the issuance of any such stop order and, if
issued, to obtain the lifting of such order as soon as possible. The
Company will not file any amendment to the Registration Statement or any
amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs from
the prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement
to which you shall reasonable object in writing after being timely
furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company include an untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it shall be
necessary at any time to amend or supplement the Prospectus or Registration
Statement to comply with the Act or the Regulations, the Company will
notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to you) which
will correct such statement or omission and will use its best efforts to
have any amendment to the Registration Statement declared effective as soon
as possible.
(c) As soon as practicable, but not later than 45 days after the end
of its fiscal quarter in which the first anniversary date or the effective
date of the Registration Statement occurs, the Company will make generally
available (within the meaning of Section 11(a) of the Act) to its security
holders and to you an earnings statement or statements of the Company which
will satisfy the provisions of Section 11(a) of the Act and Rule 158 of the
Regulations, covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement; and will,
during the period of five years from the date of the Prospectus, make
generally available (within the meaning of Section 11(a) of the Act) to its
security holders as soon as practicable after the end of each fiscal year,
an annual report (including a balance sheet and statements of financial
condition, operations, cash flows and changes in stockholders' equity of
the Company, certified by the Company's independent public accountants)
and, as soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration
18
<PAGE>
Statement), consolidated summary financial information of the Company for
such quarter in reasonable detail.
(d) The Company will furnish without charge to you and counsel for the
Underwriters signed copies of the Registration Statement (including
exhibits thereto), and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each preliminary prospectus and the Prospectus and any supplement
thereto as you may reasonably request. The Company will furnish or cause
to be furnished to you copies of all reports on Form SR as may be required
by Rule 463 under the Act.
(e) The Company will arrange for the qualification of the Shares for
sale under the laws of such jurisdictions as you may designate and will
maintain such qualifications in effect for so long as required for the
distribution of the Shares, provided, however, that in no event shall the
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Company be required to qualify to do business in any such jurisdiction in
which it is not already qualified or to file a general consent to service
of process in any jurisdiction. The Company will cooperate with you and
counsel for the Underwriters in connection with the filings required to be
made by you with the NASD and will pay the fee of the NASD in connection
with its review of the offering of the Shares and will use its best efforts
to cause the Shares to be quoted on the Nasdaq National Market System.
(f) During the period of five years from the effective date of the
Registration Statement, the Company will promptly furnish to you and, upon
request, to each of the several Underwriters, without charge, copies, in
such quantities as you or the Underwriters may reasonably request from time
to time, of (i) all reports or other communications (financial or other)
furnished generally by the Company to its securityholders, and (ii) reports
furnished to or filed by the Company with the Commission or any other
supervisory, regulatory, administrative or governmental agency, body or
authority whether pursuant to the Exchange Act or otherwise or any national
securities exchange or system on which any class of securities of the
Company is listed or quoted.
(g) For a period of 180 days from the date of the Prospectus,
without your prior written consent, each of the Company and its executive
officers, directors and stockholders shall not, directly or indirectly:
(1) issue, offer for sale, contract to sell, sell, pledge or otherwise
dispose
19
<PAGE>
of (or enter into any transaction or device which is designed to, or could
be expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or securities convertible into,
exercisable or exchangeable for, or represent the right to receive, Common
Stock or sell or grant options, rights or warrants with respect to any
shares of Common Stock or any of the foregoing or register for sale any of
the foregoing or any outstanding shares of Common Stock except that the
Company may grant options and issue and sell Common Stock pursuant to the
Company's employee stock plan and dividend reinvestment plan; or (2) enter
into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of
such shares of Common Stock or securities, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise. In addition, during such
period, the Company and the Subsidiary also agree not to file any
registration statement (other than a Form S-8 registration statement filed
in connection with shares of Common Stock received under a Company employee
stock plan, stock ownership plan, employment agreement or dividend
reinvestment plan) with respect to, and each of the executive officers,
directors and stockholders of the Company and the Subsidiary has agreed not
to make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock without your prior
written consent.
(h) During the period when the delivery of a prospectus by an
Underwriter or dealer may be required by the Act, the Company will comply,
at its own expense, with all requirements imposed upon it by the
Commission, the Act and the Exchange Act, and the rules and regulations of
the Commission promulgated thereunder, so far as necessary to permit the
continuance of sales of or dealing in the Shares during such period in
accordance with the provisions hereof and the Prospectus.
(i) The Company will conduct its business in compliance in all
material respects with all applicable laws, rules, regulations, decisions,
directives and orders. The Company will do and perform all things required
or necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or settlement date, as applicable, and to comply
or cause to be satisfied, to the extent such are within their control, the
conditions precedent to the several obligations of the Underwriters
specified in Section 8 hereof.
20
<PAGE>
(j) Neither the Company nor any of its affiliates (as defined in
Regulation D under the Act), will take, directly or indirectly, any action
designed to cause or result in, or which constitutes or which might
reasonably be expected to cause, result in, or constitute under the
Exchange Act, or otherwise, stabilization or manipulation of the price of
the shares of Common Stock of the Company to facilitate the offering and
distribution of the Securities or any other action prohibited by Regulation
M under the Exchange Act.
(k) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(l) The Company shall take all economically reasonable steps to
enforce the Patent Rights and all other Intellectual Property against
potential infringers.
(m) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the date hereof to the Underwriters
an "electronic Prospectus" to be used by the Underwriters in connection
with the offering and sale of the Shares . As used herein, the term
"electronic Prospectus" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it
shall be encoded in an electronic format, satisfactory to you, that may be
transmitted electronically by the Underwriters to offerees and purchasers
of the Shares for at least during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act (the "Prospectus
Delivery Period"); (ii) it shall disclose the same information as the paper
Prospectus and Prospectus filed pursuant to EDGAR, except to the extent
that graphic and image material cannot be disseminated electronically, in
which case such graphic and image material shall be replaced in the
electronic Prospectus with a fair and accurate narrative description or
tabular representation of such material, as appropriate; and (iii) it shall
be in or convertible into a paper format or an electronic format,
satisfactory to you, that will allow investors to store and have
continuously ready access to the Prospectus at any future time, without
charge to investors (other than any fee charged for subscription to the
system as a whole and for on-line time). The Company hereby confirms that
it has included or will include in the Prospectus filed pursuant to EDGAR
or otherwise with the Commission and in the Registration Statement at the
effective date of the Registration Statement an undertaking that, upon
receipt of a request by an investor or his or her
21
<PAGE>
representative within the Prospectus Delivery Period, the Company shall
transmit or cause to be transmitted promptly, without charge, a paper copy
of the Prospectus.
5. Payment of Expenses. (a) Whether or not the transactions
-------------------
contemplated by this Agreement are consummated or this Agreement is terminated,
the Company will pay, or reimburse if paid by the Underwriters, all costs and
expenses incident to the performance of the obligations of the Company under
this Agreement, including but not limited to costs and expenses of or relating
to (i) the preparation by the Company, printing and filing of the Registration
Statement and exhibits to it, each preliminary prospectus, the Prospectus and
any amendment or supplement to the Registration Statement or the Prospectus
(including, without limitation, the fees and expenses of the Company's counsel
and accountants), (ii) the preparation and delivery of certificates representing
the Shares, (iii) the printing of this Agreement and Underwriter's
Questionnaires, Underwriter's Powers of Attorney, Blue Sky Memorandum, Master
Agreements Among Underwriters and Master Selling Agreements, and all other
documents relating to the public offering of the Shares (including those
documents supplied to the Underwriters in quantities as hereinabove stated) and
furnishing (including costs of shipping and mailing) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be reasonably requested for use in
connection with the offering and sale of the Shares by the Underwriters or by
dealers to whom Shares may be sold, (iv) the quotation of the Shares on the
Nasdaq National Market, (v) any filings required to be made with the NASD and
with the Nasdaq National Market, and the fees, disbursements and other charges
of the Underwriters' counsel in connection therewith, (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 4(e), including the
fees, disbursements and other charges of the Underwriters' counsel in connection
therewith, and the preparation and printing of preliminary, supplemental and
final Blue Sky memoranda, (vii) the issuance, transfer and delivery of the
Shares to the Underwriters, including any transfer or other taxes payable
thereon and (viii) the transfer agent or registrar for the Shares.
(b) If this Agreement shall be terminated by the Company or if for any
reason the Company shall fail to perform its obligations hereunder or if any
condition to the obligations of the Underwriters set forth in Section 8 hereof
is not satisfied, the Company will reimburse the Representative for all out-of-
pocket expenses (including the fees, disbursements and other charges of the
Underwriters' counsel) incurred by them in connection herewith.
22
<PAGE>
6. Indemnification. (a) The Company agrees to indemnify and hold
---------------
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Company will not be liable in any
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such case to the extent but only to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information relating to
an Underwriter furnished to the Company by or on behalf of any Underwriter
through you expressly for use therein. This indemnity agreement will be in
addition to any liability which the Company may otherwise have including under
this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the
23
<PAGE>
Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information relating to an Underwriter furnished
to the Company by or on behalf of any Underwriter through you expressly for use
therein; provided, however, that in no case shall any Underwriter be liable or
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responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter hereunder. This indemnity will be in
addition to any liability which any Underwriter may otherwise have including
under this Agreement. The Company acknowledges that the statements set forth in
the first and thirteenth paragraphs under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing relating to an
Underwriter by or on behalf of any Underwriter expressly for use in the
registration statement relating to the Shares as originally filed or in any
amendment thereof, any related preliminary prospectus or the Prospectus or in
any amendment thereof or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 6). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of
24
<PAGE>
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
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that such consent was not unreasonably withheld.
7. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 6 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 6 hereof, in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company and (y) the underwriting discounts and commissions
received by the Underwriters, respectively, in each case as set forth on the
cover page of the Prospectus. The relative fault of the Company and of the
Underwriters shall be determined by
25
<PAGE>
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 7, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 7 and the preceding sentence, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 7, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 7. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 7 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent,
provided that such consent was not unreasonably withheld.
8. Conditions to Obligation of the Underwriters. The several
--------------------------------------------
obligations of the Underwriters to purchase and pay for the Firm Shares and the
Additional Shares, as provided herein, shall be subject to the accuracy of the
26
<PAGE>
representations and warranties on the part of the Company contained herein as of
the date hereof, the Closing Date and any Additional Closing Date pursuant to
Section 2 hereof, to the absence from any certificates, opinions, written
statements or letters furnished to you or to Underwriters' counsel pursuant to
this Section 8 of any misstatement or omission, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than, if pricing pursuant to Rule 430A, 5:30 P.M., New York time on the
date of this Agreement, and if pricing pursuant to a pricing amendment,
12:00 P.M., New York time on the date an amendment to the Registration
Statement containing the public offering price has been filed with the
Commission, or at such later time and date as shall have been consented to
in writing by you; if the Company shall have elected to rely upon Rule 430A
or Rule 434 of the Regulations, the Prospectus shall have been filed with
the Commission in a timely fashion in accordance with Section 4(a) hereof;
and, at or prior to the Closing Date no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof shall have been issued and no proceedings therefor shall have been
initiated or threatened by the Commission; no order suspending the
qualification or registration of the Shares under the securities or blue
sky laws of any jurisdiction shall be in effect and no proceeding for such
purpose shall be pending before or threatened or contemplated by the
Commission or the authorities of any such jurisdiction; any request for
additional information on the part of the staff of the Commission or any
such authorities shall have been complied with to the satisfaction of the
staff of the Commission or such authorities and to your reasonable
satisfaction; after the date hereof no amendment or supplement to the
Registration Statement or the Prospectus shall have been filed unless a
copy thereof was first submitted to you and you did not reasonably object
thereto; the NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or the
Underwriters' participation in the same.
(b) The Company shall have furnished to you the opinion of Swidler
Berlin Shereff Friedman, LLP, counsel for the Company, dated the Closing
Date, addressed to the Underwriters and in form and substance satisfactory
to Chadbourne & Parke LLP, Underwriters' counsel, to the effect that:
(i) Each of the Company and the Subsidiary has been duly
incorporated and is validly existing as a corporation in good
27
<PAGE>
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to own, lease and operate its
properties and engage in the business in which it is engaged or
proposes to engage in as described in the Registration Statement, the
preliminary prospectus and the Prospectus. Each of the Company and the
Subsidiary is duly registered and qualified to do business as a
foreign corporation in good standing in each jurisdiction set forth on
Exhibit A hereto, which, to such counsel's knowledge, are the only
jurisdictions where the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business
requires such registration or qualification, except where the failure
to so register or qualify, individually or in the aggregate, would not
have a Material Adverse Effect on the Company and the Subsidiary taken
as a whole. To such counsel's knowledge, except as set forth in the
Registration Statement, the preliminary prospectus and the Prospectus,
the Company does not own or control, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of
any corporation or have an equity interest in any firm, partnership,
association, joint venture or other entity, other than the Subsidiary.
(ii) All the outstanding shares of capital stock of the
Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable and were not issued in violation of statutory
or to such counsel's knowledge, other preemptive rights, and, to our
knowledge except as otherwise set forth in the Registration Statement,
the preliminary prospectus and the Prospectus, all outstanding shares
of capital stock of the Subsidiary are directly owned by the Company,
free and clear of any Liens, shareholders' agreements, voting trusts
or defects of title.
(iii) The Company's authorized equity capitalization is as set
forth in the Registration Statement, the preliminary prospectus and
the Prospectus; the Common Stock, the Firm Shares, the Additional
Shares and all others shares of capital stock of the Company conform,
in all material respects, to the description thereof contained in the
Registration Statement, the preliminary prospectus and the Prospectus.
The outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Shares to be issued and sold to the Underwriters pursuant to the
Underwriting
28
<PAGE>
Agreement have been duly authorized, and when issued and delivered to
and paid for by the Underwriters pursuant to the Underwriting
Agreement, will be validly issued and fully paid and nonassessable,
and delivered to the Underwriters free and clear of all Liens and will
not have been issued in violation of or subject to any statutory or to
such counsel's knowledge, any other preemptive rights. The
certificates for the Shares are in valid and sufficient form. The
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive, co-sale, registration, right of first refusal
or other rights in respect of the Shares. Except as described in the
Registration Statement, the preliminary prospectus and the Prospectus,
to such counsel's knowledge, (1) there are no outstanding rights
(including, without limitation, preemptive or similar rights),
warrants or options to acquire, or instruments convertible into or
exchangeable for, any share of capital stock or other equity interest
or ownership interest in the Company or the Subsidiary or any
contract, commitment, agreement, understanding or arrangement of any
kind relating to the issuance of any capital stock or other equity
interest or ownership interest in the Company or the Subsidiary or any
such convertible or exchangeable securities or instruments or any such
rights, warrants or options and (2) no holder of securities of the
Company has any rights to the registration of securities of the
Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated by
the Underwriting Agreement.
(iv) To the knowledge of such counsel, there is (A) no action,
suit, proceeding or investigation before or by any court, arbitrator
or governmental agency, body or official, domestic or foreign,
pending, threatened or contemplated, as to which the Company or the
Subsidiary will be, a party or as to which the business, assets or
property of the Company or the Subsidiary is or will be, subject, (B)
no statute, rule, regulation or order that has been enacted, adopted
or issued by any governmental agency, body or official, and (C) no
injunction, restraining order or order of any nature that has been
issued by a federal or state court or foreign court of competent
jurisdiction to which the Company or the Subsidiary is or will be
subject or affecting the business, assets or property of the Company
or the Subsidiary, in each case that is of a character required to be
disclosed in the Registration Statement, the preliminary prospectus or
the Prospectus which has not been
29
<PAGE>
properly disclosed therein or that might, in the case of clauses (A),
(B) and (C), individually or in the aggregate, result in a Material
Adverse Effect on the Company and the Subsidiary taken as a whole, or
be otherwise material in the context of the sale of the Shares. To
such counsel's knowledge, there are no legal or administrative
proceedings, actions, suits, investigations pending or threatened, or
statutes, or franchises, Contracts, Permits or other documents
concerning the Company or the Subsidiary, of a character that would be
required to be described in or filed as an exhibit to a registration
statement on Form S-1 under the Act that are not described in the
Registration Statement, the preliminary prospectus and the Prospectus
or so filed as required. The statements in the Registration Statement,
the preliminary prospectus and the Prospectus relating to pending
litigation or actions taken by the courts or taken or requested by
regulatory bodies fairly summarize, in all material respects, the
matters referred to therein.
(v) The Registration Statement has become effective under the
Act; all filings required by Rule 424(b) of the Regulations have been
made in the manner and within the time period required by Rule 424(b).
To the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or threatened. The
Registration Statement, the preliminary prospectus and the Prospectus
and each supplement thereto comply as to form in all material respects
with the applicable requirements of the Act and the Regulations.
(vi) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company and is enforceable against the
Company in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, or similar laws affecting rights of creditors
and other obligees in general or by general principles of equity and
except that rights to indemnification may be limited by public policy
considerations.
(vii) The Company and the Subsidiary have all requisite
corporate power and authority, and all Permits that are material to
the conduct of the business of the Company and the Subsidiary as such
business is currently conducted as described in the
30
<PAGE>
Registration Statement, the preliminary prospectus or the Prospectus.
To the knowledge of such counsel, (a) the Company and the Subsidiary
are not in violation of, or in default under, and have fulfilled and
performed all their obligations with respect to such Permits, other
than those obligations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and the
Subsidiary taken as a whole and (b) no event has occurred which allows
or would allow revocation or, termination thereof or result in any
material impairment of the rights of the holder of any such Permit.
(viii) To the knowledge of such counsel, the Company and the
Subsidiary are not (i) in violation of their respective certificates
of incorporation, as amended, or bylaws, as amended or (ii) in breach
or default (or an event has occurred that with notice or the lapse of
time or both would constitute a default) in the performance or
observance of any Contract or Permit or in violation of any law,
order, rule, regulation or writ, injunction or decree of any court or
governmental agency, body or authority, except in the case of this
clause (ii) for such breaches, defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on
the Company and the Subsidiary taken as a whole or be otherwise
material in the context of the sale of the Shares.
(ix) Neither the issuance, offer, sale or delivery of the
Shares, the execution, delivery and performance by the Company of the
Underwriting Agreement nor the compliance by the Company with all the
provisions thereof nor the consummation of the transactions
contemplated thereby, (i) conflicts with or will conflict with, or
constitutes or will constitute a breach or violation of or a default
(or an event that with notice or the lapse of time or both would
constitute a default) under, any of the terms or provisions of the
certificate of incorporation or by-laws or other organizational or
constitutive documents of the Company or the Subsidiary, nor (ii)
conflicts with or will conflict with or constitutes or will constitute
a breach or violation of, or a default (or an event that with notice
or the lapse of time or both would constitute a default) or the loss
of any material benefit under, or the termination of, or will result
in the creation or imposition of any Lien upon any property or assets
of the Company or the Subsidiary pursuant to, any Contract or Permit,
nor (iii) violates or conflicts with or will violate or conflict with
any law, statute, rule or regulation applicable to the Company or the
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Subsidiary or any judgment, decree or order known to such counsel and
applicable to the Company or the Subsidiary of any court or
supervisory, regulatory, administrative or governmental agency, body
or authority, or arbitrator having jurisdiction over the Company or
the Subsidiary or any of their property or assets, the default under
or the breach or violation of which, in the case of clauses (ii) and
(iii) above, individually or in the aggregate, could have a Material
Adverse Effect on the Company and the Subsidiary taken as a whole or
an adverse effect on the issuance and sale of the Shares.
(x) To the knowledge of such counsel, (a) the Company and the
Subsidiary have conducted and are conducting their businesses in
compliance in all material respects with all applicable laws, rules or
regulations and all decisions, directives and orders to which the
Company and the Subsidiary is a party or by which, to such counsel's
knowledge, any of them or their property is bound or affected, the
failure to comply with, individually or in the aggregate, could have a
Material Adverse Effect on the Company and the Subsidiary taken as a
whole or an adverse effect on the issuance or sale of the Shares, and
(b) are not subject to any directive or order from any agency, body,
authority, court or arbitrator or competent jurisdiction to make any
material change in the method of conducting their businesses.
(xi) The descriptions in the Registration Statement, the
preliminary prospectus and the Prospectus which purport to summarize
the provisions of statutes, regulations, contracts and other documents
are accurate summaries in all material respects and such descriptions
fully and fairly present in all material respects the information
shown. To the knowledge of such counsel, there is no law, statute,
regulation, contract or other document applicable to the Company or
the Subsidiary of a character required to be described in the
Registration Statement, the preliminary prospectus or the Prospectus
or required to be filed as an exhibit to the Registration Statement
which is not described or filed as required. The descriptions in the
Registration Statement, the preliminary prospectus and the Prospectus
that concern matters of law or legal conclusions that have been
prepared or reviewed by such counsel are in all material respects
accurate and fully and fairly summarize the matters therein described.
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<PAGE>
(xii) The Company is not now, and as a result of the offer and
sale of the Shares in the manner contemplated in the Underwriting
Agreement, the Registration Statement, the preliminary prospectus and
the Prospectus and the application of the net proceeds of such sale as
described in the Registration Statement, the preliminary prospectus
and the Prospectus, will not be, an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for,
an "investment company" within the meaning of the Investment Company
Act, without taking account of any exemption arising out of the number
or type of holders of the Company's securities.
(xiii) No consent, approval, authorization, filing,
qualification, Permit or order of any court or governmental agency or
body is required for the Company's execution, delivery and performance
of the Underwriting Agreement or the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters and such other
approvals (specified in such opinion) as have been obtained.
(xiv) The Shares to be sold under the Underwriting Agreement to
the Underwriters are duly authorized for quotation on the National
Association of Securities Dealers Automated Quotation National Market
System.
(xv) The securities of the Company issued or sold within the
period of one year prior to the date of the Underwriting Agreement
were issued and sold in compliance with the registration requirements
of the Act and the Regulations.
(xvi) In addition, such opinion shall also contain a statement
that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent
public accountants for the Company and the Underwriters at which the
contents of the Prospectus and related matters were discussed and no
facts have come to the attention of such counsel which would lead such
counsel to believe that either the Registration Statement at the time
it became effective (including the information deemed to be part of
the Registration
33
<PAGE>
Statement at the time of effectiveness pursuant to Rule 430A(b) or
Rule 434, if applicable), or any amendment thereof made prior to the
Closing Date as of the date of such amendment, contained an untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing
Date contained or contains an untrue statement of a material fact or
omitted or omits to state any 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 (it being
understood that such counsel need express no belief or opinion with
respect to the financial statements and schedules and other financial
data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the States
of Delaware and Virginia, the District of Columbia, or the United States,
to the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be reliable
and who are satisfactory to counsel for the Underwriters and (B) as to
matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company and the Subsidiary, provided that copies of any such statements
or certificates shall be delivered to Underwriters' counsel. The opinion
of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.
(c) The Company shall have furnished to the Underwriters the opinions
of Jacobson, Price, Holman & Stern, Intellectual Property counsel for the
Company, and Fish & Richardson, P.C., Intellectual Property counsel for
Inline Connection corporation, each dated the Closing Date, in form and
substance satisfactory to Chadbourne & Parke LLP, counsel to the
Underwriters.
(d) All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be satisfactory in form and
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<PAGE>
substance to you and to Underwriters' counsel. The Underwriters shall have
received from Chadbourne & Parke, LLP, Underwriters' counsel, a favorable
opinion, dated the Closing Date, with respect to the issuance and sale of
the Shares, the Registration Statement, the Prospectus and other related
matters as you may reasonably require, and the Company and the Subsidiary
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(e) At the Closing Date (and the Additional Closing Date, if
applicable) you shall have received a certificate of the Chief Executive
Officer and Chief Financial Officer of the Company, dated the Closing Date
to the effect that (i) the condition set forth in subsection (a) of this
Section has been satisfied, (ii) as of the date hereof and as of the
Closing Date (and the Additional Closing Date, if applicable) the
representations and warranties of the Company set forth in Section 1 hereof
are accurate, (iii) as of the Closing Date (and the Additional Closing
Date, if applicable) the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed and (iv) subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company and the Subsidiary
have not sustained any material loss or interference with their respective
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a material adverse change, in
the business prospects, management, properties, operations, condition
(financial or otherwise), or results of operations of the Company and the
Subsidiary taken as a whole, except in each case as described in or
contemplated by the preliminary prospectus and the Prospectus.
(f) At the time this Agreement is executed and at the Closing Date
(and the Additional Closing Date, if applicable), Arthur Andersen, LLP
shall have furnished to you a letter or letters, dated respectively as of
the time this Agreement is executed and as of the Closing Date, in form and
substance satisfactory to you to the effect that they are independent
public accountants with respect to the Company within the meaning of the
Act and Regulation S-X, stating that the answer to item 10 of the
Registration Statement is correct as it relates to them and that:
(i) in their opinion the audited consolidated financial
statements, the audited consolidated financial statement schedule
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<PAGE>
and the audited financial statements of Capital Area Internet Service,
Inc. included in the Registration Statement and the Prospectus and
reported on by them comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and the Subsidiary; carrying
out certain specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of the
meetings of the stockholders and the board of directors of the Company
and the Subsidiary; and inquiries of certain officials of the Company
and the Subsidiary who have responsibility for financial and
accounting matters of the Company and the Subsidiary as to
transactions and events subsequent to December 31, 1998, nothing came
to their attention which caused them to believe that:
(1) at April ____, 1999, there was any change in the capital
stock, increase in long-term debt, decrease in consolidated net
current assets, or an increase greater than $15,500,000 in total
stockholders' deficit of the consolidated companies as compared
with amounts shown in the December 31, 1998, audited consolidated
balance sheet included in the Registration Statement and the
Prospectus, or
(2) for the period from January 1, 1999, to April ___, 1999,
there were, as compared to the corresponding period in the
preceding year, any decreases in consolidated net revenues or
increases in the total amount of loss from continuing operations
in excess of $4,000,000 and total net loss in excess of
$5,000,000, except in all instances for changes, increases, or
decreases that the Registration Statement and the Prospectus
discloses have occurred or may occur.
(iii) they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
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<PAGE>
accounting, financial or statistical information derived from the
general accounting records of the Company and the Subsidiary) set
forth in the Registration Statement and the Prospectus, which have
been specified by you prior to the date of such letter, agrees with
the accounting records of the Company and its subsidiaries, excluding
any questions of legal interpretation.
(iv) they have performed an SSAE 8 examination of the
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Registration Statement and the
Prospectus and have determined that:
(1) the presentation includes, in all material respects,
the required elements of the applicable rules and regulations
under the Act;
(2) the historical financial amounts have been accurately
derived in all material respects from the Company's audited
financial statements; and
(3) the underlying information, determinations, estimates
and assumptions of the Company provide a reasonable basis for the
disclosures contained therein.
In the event that the letters to be delivered referred to above set
forth notes any changes, decreases or increases in the financial
information included in the Registration Statement and the Prospectus, it
shall be a further condition to the obligations of the Underwriters that
the Underwriters shall have reasonably determined, after discussions with
officers of the Company responsible for financial and accounting matters
and with the Accountants, that such changes, decreases or increases as are
set forth in such letters do not reflect a material adverse change in the
stockholders' equity or long-term debt of the Company as compared with the
amounts shown in the latest balance sheet of the Company included in the
Prospectus, or a material adverse change in total net revenues or net
income of the Company, in each case as compared with the corresponding
period of the prior year.
(g) Subsequent to the date this Agreement is executed or, if earlier,
the dates as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto), there shall not have been (i) any
37
<PAGE>
change or decrease specified in the letter or letters referred to in
paragraph (f) of this Section or (ii) any change, or any development
involving a prospective change, in or affecting the business or properties
of the Company and the Subsidiary the effect of which, in any case referred
to in clause (i) or (ii) above, is, in your judgment, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(h) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change, or any development involving a prospective
material adverse change, in the general affairs, business, prospects,
properties, management, key personnel, condition (financial or other) or
results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, in each case other than as
set forth in the Registration Statement and the Prospectus (or, in the case
of a prospective change, other than as contemplated by the Registration
Statement and the Prospectus), and (ii) the Company shall not have
sustained any material loss or interference with its business or properties
from fire, explosion, flood, hurricane or other casualty or calamity,
whether or not covered by insurance, or from any labor dispute or any court
or legislative or other governmental action, order or decree, which is not
set forth in the Registration Statement and the Prospectus, if in your
judgment any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Securities at the public offering
price.
(i) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
officers or directors in their capacities as such, before or by any
federal, state, or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation
or proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect on the Company and the Subsidiary taken as a whole.
(j) At the time of execution of this Agreement, the Company shall have
furnished to you a letter addressed to you from each officer and director
of the Company and each shareholder or other person heretofore
38
<PAGE>
designated by you, in which each such person agrees not to (1) offer for
sale, contract to sell, sell, pledge or otherwise dispose of (or enter into
any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any
shares of Common Stock or securities convertible into, exercisable or
exchangeable for, or represent the right to receive, Common Stock or sell
or grant options, rights or warrants with respect to any shares of Common
Stock or register for sale any outstanding shares of Common Stock; or (2)
enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of such shares of Common Stock or securities, whether any such
transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or other securities, in cash or otherwise for a
period of 180 days following the time of execution of this Agreement
without your prior written consent, other than shares of Common Stock
disposed of as bona fide gifts.
(k) The Securities shall be qualified for sale in such states as you
shall have requested, each such qualification shall be in effect and not
subject to any stop order or other proceeding on the Closing Date and the
Additional Closing Date, if applicable.
(l) The Shares shall have been authorized for quotation on the Nasdaq
National Market upon official notice of issuance.
(m) You shall not have advised the Company that the Registration
Statement or the Prospectus, or any amendment or any supplement thereto,
contains an untrue statement of fact which, in your judgment, is material,
or omits to state a fact which, in your judgment, is material and is
required to be stated therein or necessary to make the statements therein
not misleading and the Company shall not have cured such untrue statement
of fact or omission of such statement of fact.
(n) The Company shall have furnished to you such certificates, in
addition to those specifically mentioned herein, as you may have requested
as to the accuracy and completeness at the Closing Date and the Additional
Closing Date, if applicable, of any statement in the Registration Statement
or the Prospectus, as to the accuracy at the Closing Date and the
Additional Closing Date, if applicable, of the representations, warranties
and covenants of the Company herein, as to the performance by the Company
of its obligations hereunder, or as to the
39
<PAGE>
fulfillment of the conditions concurrent and precedent to your obligations
hereunder.
(o) Prior to the Closing Date and the Additional Closing Date, if
applicable, the Company shall have furnished to the Underwriters such
further information, certificates and documents as you may reasonably
request.
If any of the conditions specified in this Section shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to you and counsel for the Underwriters, this Agreement and all
obligations of the Underwriters hereunder may be canceled at, or at any time
prior to, the Closing Date by you. Notice of such cancellation shall be given
to the Company in writing or by telephone or telegraph confirmed in writing.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligations to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number
of Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the
respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of
Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase
such Firm Shares or Additional Shares, as the case may be, to which such
default relates on the terms contained herein. In the event that within 5
calendar days after such a default you do not arrange for the purchase of
the Firm Shares or Additional Shares, as the case may be, to which such
default relates as provided in this Section, this Agreement or, in the case
of a default with respect to the Additional Shares, the obligations of the
Underwriters to purchase and of the Company to sell the
40
<PAGE>
Additional Shares shall thereupon terminate, without liability on the part
of the Company with respect thereto (except in each case as provided in
Section 5, 6(a) and 7 hereof) or the Underwriters, but nothing in this
Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for
damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, you or the
Company shall have the right to postpone the Closing Date or Additional
Closing Date, as the case may be for a period, not exceeding five business
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the
opinion of Underwriters' counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include
any party substituted under this Section with like effect as if it had
originally been a party to this Agreement with respect to such Firm Shares
and Additional Shares.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 4,
the indemnity agreements contained in Section 6 and the contribution agreements
contained in Section 7, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 6, 7 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness
of the Registration Statement or (ii) the execution of this Agreement. If
either the initial public offering price or the purchase price
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<PAGE>
per Share has not been agreed upon prior to 5:00 P.M., New York time, on
the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without
liability to the Company or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you or by you notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of
Sections 1, 5, 6 and 7 hereof shall at all times be in full force and
effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing
Date, as the case may be, if (A) any domestic or international event or act
or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, the market for the Company's
securities or securities in general; or (B) if trading on the New York or
American Stock Exchanges or NASDAQ National Market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges or the NASDAQ National Market by
the New York or American Stock Exchanges, by NASDAQ or by order of the
Commission or any other governmental authority having jurisdiction; or (C)
if a banking moratorium has been declared by a state or federal authority
or if any new restriction materially adversely affecting the distribution
of the Firm Shares or the Additional Shares, as the case may be, shall have
become effective; or (D)(i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the
United States or (ii) if there shall have been such change in political,
financial or economic conditions if the effect of any such event in (i) or
(ii) as in your judgment makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or
if
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the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of
the Company to perform any agreement herein or comply with any provision
hereof, the Company will, subject to demand by you, reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
expenses of their counsel), incurred by the Underwriters in connection
herewith.
12. Notices. Any notice or notification in any form to be given
-------
hereunder shall be in writing and shall be delivered in person or sent by
telephone or facsimile transmission (but in the case of a notification by
telephone, with subsequent confirmation by letter or facsimile transmission).
Any notice or notification to you shall be addressed to:
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Attention:
Any notice or notification to the Company shall be addressed to the
Company at:
CAIS Internet Inc.
1255 22 Street N.W.
Washington, D.C. 20037
Attention: Vice President General Counsel
Any notice or notification shall (subject to confirmation when
required) take effect at the time of receipt.
13. Parties. This Agreement shall insure solely to the benefit of,
-------
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 6 and
7, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
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14. Miscellaneous. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of New York. This Agreement
may be executed in one or more counterparts, and if executed in more than one
counterpart, the executed counterparts shall together constitute a single
instrument. The descriptive headings in this Agreement are for convenience of
reference only and shall not define or limit the provisions hereof. Time shall
be of the essence of this Agreement.
If any provision or portion of any provision of the Agreement, or the
application of any such provision or any portion thereof to any party or
circumstances, shall be held invalid or unenforceable, the remaining portion of
such provision and the remaining portion of such provision and the remaining
provisions of this agreement, and the application of such provision or portion
of such provision as is held invalid or unenforceable to any parties or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby and such remaining portion of such provision and
the remaining provisions of this Agreement shall continue to be valid and in
full force and effect.
44
<PAGE>
If the foregoing is in accordance with the Underwriters' understanding
of our agreement, kindly sign and return to us one of the counterparts hereof,
whereupon it will become a binding agreement between the Company and the
Underwriters in accordance with its terms.
This Agreement may be signed in counterparts which together shall
constitute one and the same instrument.
Very truly yours,
CAIS INTERNET, INC.
By: ___________________________________
Name: Ulysses G. Auger, II
Title: President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
BEAR, STEARNS & CO. INC.
By: _____________________________________________,
On behalf of themselves and the other
Underwriters named in Schedule I hereto
45
<PAGE>
SCHEDULE I
Name of Underwriter Number of Shares
- ------------------- ----------------
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company, LLC
First Union Capital Markets Corp.
Friedman, Billings, Ramsey & Co., Inc.
Wit Capital Corporation
As e-Manager
Total:
46
<PAGE>
EXHIBIT 4.6
The securities represented by this certificate have not been registered
under the Securities Act of 1933. Such securities may not be sold or
transferred in the absence of such registration unless the company receives an
opinion of counsel reasonably acceptable to it stating that such sale or
transfer is exempt from the registration requirements of said Act.
COMMON STOCK WARRANT
OF
CAIS INTERNET, INC.
THIS CERTIFIES THAT, subject to the terms of this Warrant, for value
received, Hilton Hotels Corporation ("Hilton"), or its successors and permitted
------
assigns (the "Warrantholder"), is entitled to purchase 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 determined in accordance with this Warrant.
This Warrant is issued pursuant to a First Amendment to Master License
Agreement, dated as of April 23, 1999, by and between the Company, CAIS, Inc.
and the Warrantholder (the "Amendment").
---------
Upon delivery of this Warrant (with the Notice of Exercise in the form
attached hereto as Exhibit B-1), 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 Warrantholder shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. All shares of Common
Stock which 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 on or after the date hereof; provided, however, that this Warrant shall
expire to the extent then unexercised as of 5:00 p.m., eastern time, on April
23, 2004.
2. Number of Warrant Shares. Subject to adjustment from time to time
------------------------
pursuant to Section 4 hereof, the Warrantholder may exercise this Warrant with
respect to 66,667 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"); provided, that if the initial public
------
offering price per share of Common Stock (the "IPO Price") is less than $15, the
number of
<PAGE>
Shares for which this Warrant is exercisable shall be increased to the
number of Shares equal to $1.0 million divided by the IPO Price.
3. Warrant Price. The exercise price of this Warrant (the "Warrant
-------------
Price") shall equal $.01 per share, subject to adjustment from time to time
pursuant to Section 4 hereof.
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) 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 new Warrants, with
substantially the same terms as this Warrant, or amend this Warrant, to provide
that the holder of this Warrant 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
Warrantholder 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.
(b) Subdivision or Combination of Shares. If at any time while this
------------------------------------
Warrant remains outstanding and unexpired, the Company shall subdivide, split or
combine its Common Stock (or declare a dividend or make a distribution payable
in shares of Common Stock or other capital stock), the number of Shares into
which the Warrants are exercisable immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which the holder would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action and the Warrant
Price shall be proportionately adjusted.
5. Payment by Warrant Conversion. The Warrantholder 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 B-
1. In such event, the Company shall deliver to the Warrantholder (without
payment by the Warrantholder 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
2
<PAGE>
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:
(i) to register their transfer; or
(ii) 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 Warrantholder thereof or by his attorney-in-fact, duly authorized in
writing; and
(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:
(A) 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;
(B) 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
(C) 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.
3
<PAGE>
8. Representations and Warranties. The Company represents and warrants to
------------------------------
the Warrantholder 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 and the Warrant Agreement dated as of the date
hereof, between the Company and Hilton Hotels Corporation (the "Warrant
-------
Agreement").
- ---------
(b) Authorization; No Conflict. The offer and sale of the Warrants
--------------------------
and the Common Stock underlying the Warrants, and the execution, delivery and
performance by the Company of the Warrant and the Warrant Agreement 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 and Warrant Agreement
-------------------
constitute, or will constitute, legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
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.
(e) No Registration. The offer and sale of the Warrants and the
---------------
underlying Shares of Common Stock are exempt from the registration and
prospectus delivery requirements of the Securities Act.
9. Miscellaneous.
-------------
(a) The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or permitted 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 Warrantholder, 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
Warrantholder, 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)
4
<PAGE>
as imposing any obligation on the Warrantholder 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 Warrantholder 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 Warrantholder 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.
(f) Any provision of this Warrant may be amended, waived or modified
upon the written consent of the Company and the Warrantholders.
(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 Delaware without regard to the conflicts of laws
provisions thereof.
[This space intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Dated: April 23, 1999
CAIS INTERNET, INC.
/s/ William M. Caldwell, IV
--------------------------------
William M. Caldwell, IV
President
6
<PAGE>
EXHIBIT B-1
- -----------
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 Warrantholder:
-----------------------------------
By:
--------------------------------
Title
------------------------------
Date:
------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 4.7
WARRANT AGREEMENT
Dated as of April 23, 1999
by and between
CAIS Internet, Inc.
and
Hilton Hotels Corporation
THIS WARRANT AGREEMENT (this "Agreement") is made and entered into as of
---------
April 23, 1999, by and between CAIS Internet, Inc., a Delaware corporation (the
"Company"), and Hilton Hotels Corporation, a Delaware corporation ("Hilton" or
-------
"Initiating Holder"). Certain capitalized terms used herein are defined in
Section 2.11.
RECITALS
--------
This Agreement is made pursuant to the First Amendment to the Master
License Agreement (the "Amendment"), dated April 23, 1999, by and between the
---------
Company, CAIS, Inc. and Hilton, relating to, among other things, the issuance by
the Company of a Common Stock warrant (the "Warrant") to Hilton, representing
-------
the right to purchase 66,667 shares of Common Stock, par value $.01 per share
(the "Common Stock"), as such number may be adjusted pursuant to the terms of
------------
the Warrant.
As a further inducement to and a condition of the Amendment, the Company
and Hilton have agreed to enter into this Agreement to grant Hilton the rights
provided herein.
NOW, THEREFORE, in consideration of the promises of the parties set forth
herein, the parties hereby covenant and agree as follows:
1
<PAGE>
SECTION 1
Registration Rights
-------------------
1.1 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holder a written request that the Company effect any registration,
qualification or compliance with respect to all, but not less than all, of
Initiating Holder's Registrable Securities, the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its commercially reasonable
efforts to effect such registration, qualification or compliance (including,
without limitation, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act and any other governmental requirements or
regulations) as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within 20 days after receipt of such
written notice from the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 1.1:
(A) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) prior to six months after the closing date for the
Company's initial public offering of its Common Stock;
(C) during the period starting with the date which is 30
days prior to the Company's estimated date of filing of, and ending on the date
60 days immediately following the effective date of, any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Commission Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
provided, however, that the Company may not exercise this deferral right more
than once per 12-month period;
2
<PAGE>
(D) after the Company has effected one such registration
pursuant to this Section 1.1(a), and such registration has been declared or
ordered effective; or
(E) if the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its stockholders for a registration statement to be filed in the
near future (in which case the Company's obligation to use its best efforts to
register, qualify or comply under this Section 1.1 shall be deferred for a
period not to exceed 90 days from the date of receipt of written request from
Initiating Holder; provided, however, that the Company may not exercise this
deferral right more than once per 12-month period).
(b) Underwriting. In the event that a registration pursuant to this
------------
Section 1.1 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.1(a)(i). In such event, the right of any Holder to registration
pursuant to Section 1.1(b) shall be conditioned upon such Holder's participation
in the underwriting arrangements required by this Section 1.1, and the inclusion
of such Holder's Registrable Securities in the underwriting to the extent
requested shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Initiating Holder, but subject to the Company's reasonable approval.
Notwithstanding any other provision of this Section 1.1, if the managing
underwriter advises the Initiating Holder in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall so advise all holders of Registrable Securities and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares. Prior to excluding any Registrable Securities from any
underwriting pursuant to this paragraph, the Company shall exclude from such
underwriting all securities that are not Registrable Securities.
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the managing underwriter and the Initiating Holder. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to 90 days after the effective date
of such registration, or such other shorter period of time as the underwriters
may require.
3
<PAGE>
1.2 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time the
----------------------
Company shall determine to register any of its securities following the initial
public offering of the Company's Common Stock, either for its own account or for
the account of a security holder or holders, other than (i) a registration
relating solely to employee benefit plans or other compensatory plans or
arrangements, or (ii) a registration relating solely to a Commission Rule 145
transaction, the Company will:
(i) promptly give to each Holder written notice thereof, and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 1.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Piggyback Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter and the
Company may reduce the Registrable Securities to be included in such
registration to the extent the underwriters deem necessary; provided, however,
that any Registrable Securities held by the Piggyback Holders proposed to be
included in the registration and underwriting shall be reduced to zero prior to
any reductions with respect to Registrable Securities held by any other holders.
The Company shall so advise all Holders and other holders distributing their
securities through such underwriting that the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all the Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holder at the time of
filing the Registration Statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company may round the number of shares
allocated to any Holder or holder to the nearest 100 shares. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall not be transferred in a public distribution prior
to 90 days after the effective date of the registration statement relating
thereto, or such other shorter period of time as the underwriters may require.
4
<PAGE>
(c) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 1.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
1.3 Registration on Form S-3.
------------------------
(a) If any Holder or Holders request that the Company file a shelf
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of Registrable Securities, and the Company is a registrant
entitled to use Form S-3 to register the Registrable Securities for such an
offering, the Company shall use its best efforts to cause such Registrable
Securities to be registered for the offering on such form and to cause such
Registrable Securities to be qualified in such jurisdictions as such Holder or
Holders may reasonably request; provided, however, that the Company shall not be
required to effect more than one registration pursuant to this Section 1.3. The
Company shall inform other Holders of the proposed registration and offer them
the opportunity to participate. The substantive provisions of Section 1.3(b)
shall be applicable to each registration initiated under this Section 1.3.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 1.3 (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) prior to the Company's
first registered public offering of its stock; (iii) during the period starting
with the date 30 days prior to the Company's estimated date of filing of, and
ending on the date 60 days immediately following, the effective date of any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Commission Rule 145 transaction or with respect
to an employee benefit plan), provided that the Company is actively employing in
good faith all reasonable efforts to cause such registration statement to become
effective; provided, however, that the Company may not exercise this deferral
right more than once in any 12-month period; or (iv) if the Company shall
furnish to such Holder a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its stockholders for registration
statements to be filed in the near future, then, in each case, the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed 90 days from the receipt of the request to
file such registration by such Holder; provided, however, that the Company may
not exercise this deferral right more than once in any 12-month period.
1.4 Relationship to Other Registration Rights. The registration rights
-----------------------------------------
granted pursuant to Section 1.2 are subordinate to the registration rights
granted by the Company to the extent provided in that certain Warrant
Registration Rights Agreement, dated as of September 4, 1998, by and among the
Company, Cleartel Communications, Inc., CAIS, Inc. and ING (U.S.) Capital
Corporation.
5
<PAGE>
1.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with (i) one registration pursuant to Section 1.1 and (ii) all
registrations pursuant to Section 1.2 and 1.3 shall be borne by the Company.
Unless otherwise stated, all Selling Expenses relating to securities registered
on behalf of the Holders and all other Registration Expenses shall be borne by
the Holders of such securities pro rata on the basis of the number of shares so
registered.
1.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least 180 days or
until the distribution described in the Registration Statement has been
completed;
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(c) Furnish to the Holders (i) an opinion of counsel for the Company,
dated the effective date of the registration statement, and (ii) subject to the
accountants obtaining the necessary representations as specified in Statement on
Auditing Standards No. 72, a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements included in
the registration statement, covering substantially the same matters with respect
to the registration statement (and the prospectus included therein) and, in the
case of such accountants' letter, with respect to changes subsequent to the date
of such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities.
(d) From time to time take all action which may be necessary so that
the Warrant Shares, immediately upon their issuance upon the exercise of the
Warrant, will be listed on the principal securities exchanges and markets within
the United States (including The Nasdaq National Market), if any, on which other
shares of the Company's Common Stock are then listed, if any; and
(e) Notify the Holders of Registrable Securities to be sold and the
managing underwriters, if any, promptly, and (if requested by any such person)
confirm such notice in writing, (i)(A) when a prospectus or any prospectus
supplement or post-effective amendment is proposed to be filed, and (B) with
respect to a registration statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to a
registration statement or related prospectus or for additional information,
(iii) of the issuance by the Commission, any state securities commission, any
other governmental
6
<PAGE>
agency or any court of any stop order suspending the effectiveness of such
registration statement or of any order or injunction suspending or enjoining the
use of a prospectus or the effectiveness of a registration statement or the
initiation of any proceedings for that purpose, (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any proceeding for such
purpose, and (v) of the happening of any event, the existence of any information
becoming known that makes any statement made in a registration statement or
related prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, not misleading. The Company represents and warrants to, and agrees
with, Hilton that each registration statement and prospectus relating to
Registrable Securities will not contain any untrue statement of a material fact
or omit to state any 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; provided, that such representation and warranty shall not
extend to any written information furnished by or on behalf of any Holder for
inclusion in any such registration statement or prospectus.
1.7 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of the
Securities Act, the Exchange Act, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and within a reasonable period
the Company will reimburse each such Holder, each of its officers and directors,
and each person controlling such Holder, each such underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending any
such claim, loss, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
7
<PAGE>
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and within a reasonable
period will reimburse the Company, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
Notwithstanding the foregoing, the liability of each Holder under this
subsection (b) shall be limited in an amount equal to the gross proceeds before
expenses and commissions to each Holder received for the shares sold by such
Holder.
(c) Each party entitled to indemnification under this Section 1.6
(the "Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. Rather, where such a conflict of interest or separate and
different defenses shall exist, the Indemnified Party may appoint its own
counsel; provided, however, that in no event shall the Indemnifying Party be
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for the Indemnified Party in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
8
<PAGE>
1.8 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.9 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Commission Rule 144 under the Securities Act, at all
times after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) furnish to the Holder or beneficial owner of Registrable
Securities forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Commission Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements), a copy of the most recent annual or quarterly
report of the Company and such other reports and documents of the Company and
other information in the possession of or reasonably obtainable by the Company
as such Holder of Registrable Securities may reasonably request in availing
itself of any rule or regulation of the Commission allowing such Holder of
Registrable Securities to sell any such securities without registration.
1.10 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted under Sections 1.1, 1.2 and 1.3 may be assigned to
any permitted transferee or assignee of Registrable Securities.
1.11 Termination of Registration Rights. The registration rights granted
----------------------------------
shall terminate as to the Holder at such time as the Company's Common Stock is
listed on a national securities exchange or quoted on an automated quotation
system and all Registrable Securities held by such Holder may, in the opinion of
counsel to the Company (which opinion shall be addressed and rendered to such
Holder), be sold within a given three-month period pursuant to Commission Rule
144.
9
<PAGE>
SECTION 2
"Put" Option
------------
2.1 "Put" Option. Commencing upon the effective date of the registration
------------
statement for the initial public offering of the Company's Common Stock, Hilton
shall have a "put" option to sell the Warrant, or if exercised, Warrant Shares,
to the Company or CAIS, Inc., and, in such event, the Company and/or CAIS, Inc.
shall be required to purchase such securities from Hilton. The option exercise
price payable to Hilton in such event shall equal the product of (1) the initial
public offering price for the Company's Common Stock times (2) the Warrant
Shares subject to such option. The "put" option shall expire ninety (90) days
following the earlier of: (1) the effective date of the first registration
statement that includes any Registrable Securities for resale and (2) the date
on which Hilton may sell all of the Warrant Shares within a three-month period
pursuant to Commission Rule 144.
SECTION 3
Opinions
--------
3.1 Opinions. Upon the effectiveness of the Company's registration
--------
statement with respect the initial public offering of its Common Stock, the
Company shall cause outside counsel to the Company to deliver to Hilton an
opinion, addressed to Hilton, in form and substance reasonably satisfactory to
Hilton, covering such matters as are customary in transactions of this nature,
including, without limitation, opinions to the effect that the grant of the
Warrant and the issuance of the Warrant Shares upon the exercise thereof (1) do
not require registration under the Securities Act and (2) will not be integrated
with the Company's initial public offering. Notwithstanding any other provision
of this Agreement or of the Warrant, in the event that the opinion contemplated
by this Section 3 shall not be delivered as of the date required by this
Section 3, the Initiating Holder's sole remedy shall be the right to exercise
the put option pursuant to Section 2.1 above.
SECTION 4
Miscellaneous
-------------
4.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the internal laws of the State of Delaware, excluding the conflicts of law
provisions thereof.
4.2 Jurisdiction; Jury Trial Waiver. 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.
10
<PAGE>
4.3 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by the Holders of Registrable
Securities and the closing of the transactions contemplated hereby.
4.4 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.
4.5 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and 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.
4.6 Notices, etc. All notices and other communications required or
-------------
permitted 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 a Holder, at such Holder's address, as shown on the stock
records of the Company, or at such other address as such Holder shall have
furnished to the Company in writing, or (b) if to the Company, at such address
as the Company shall have furnished to the Holders in writing, and addressed to
the attention of the President. 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 72 hours after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid.
4.7 Delays or Omissions. Except as expressly provided herein, no delay
-------------------
or omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of any 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 any
party of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
4.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
11
<PAGE>
4.9 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 any
party.
4.10 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.
4.11 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Board of Directors" means the Board of Directors of the Company in
------------------
office at the applicable time.
"Closing Date" means the date of the issue of the Warrant.
------------
"Common Stock" has the meaning ascribed to such term in the preamble
------------
hereof.
"Commission" means the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Holder" means (i) any Person holding Registrable Securities and (ii)
------
any Person holding Registrable Securities to whom the rights under Section 1
have been transferred in accordance with Section 1.10 hereof.
"Initiating Holder" means Hilton Hotels Corporation and its permitted
-----------------
successors and assigns as Holders of Registrable Securities requesting that
Registrable Securities owned thereby be included in a registration statement
pursuant to Section 1.1.
"Person" means an individual, corporation, partnership, trust,
------
limited liability company or other entity, or a government or any agency or
political subdivision thereof.
"Piggyback Holders" means any Holders requesting that Registrable
-----------------
Securities owned thereby be included in a registration statement pursuant to
Section 1.2.
"Registrable Securities" means the Warrant Shares and any other
----------------------
securities issued or issuable in respect to any Warrant Shares by way of a stock
split, stock dividend, or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise;
provided, however, that such Warrant Shares or other securities
12
<PAGE>
shall only be treated as Registrable Securities until (i) they have been
effectively registered under the Securities Act and disposed of pursuant to an
effective registration statement, or (ii) they are sold under circumstances in
which all of the applicable conditions under Rule 144 (or any similar provisions
then in force) under the Securities Act are met, including a sale pursuant to
the provisions of Rule 144(k).
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration by the Commission of the
effectiveness of such registration statement.
"Registration Expenses" means all expenses, except as otherwise stated
---------------------
below, incurred by the Company in complying with Sections 1.1, 1.2 and 1.3
hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
or "comfort letters" incident to or required by any such registration (but
excluding the compensation of regular employees of the Company which shall be
paid in any event by the Company) and the reasonable fees and disbursements of
one counsel for all Holders.
"Restricted Securities" means the securities of the Company required
---------------------
to bear certain legends.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" means all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders.
"Warrant Shares" means the shares of Common Stock delivered or
--------------
deliverable upon exercise of the Warrants.
"Warrant" has the meaning ascribed to such term in the preamble
-------
hereof.
[This space intentionally left blank]
13
<PAGE>
The foregoing Agreement is hereby executed as of the date first above
written.
"COMPANY"
CAIS INTERNET, INC.,
a Delaware corporation
By: /s/ William M. Caldwell, IV
------------------------------------
William M. Caldwell, IV
President
"INITIATING HOLDER"
HILTON HOTELS CORPORATION,
a Delaware corporation
By: /s/ Dennis Koci
------------------------------------
Name: Dennis Koci
Title: Senior Vice President
14
<PAGE>
EXHIBIT 10.2
CREDIT AGREEMENT
This CREDIT AGREEMENT (the "Credit Agreement") is entered into as of
September 4, 1998, by and among, jointly and severally and together with their
successors and assigns, CGX Communications, Inc., a Delaware corporation
("CGX"), CAIS, Inc., a Virginia corporation ("CAIS"), Cleartel Communications,
Inc., a District of Columbia corporation ("Cleartel"), Cleartel Communications
Limited Partnership, a District of Columbia limited partnership ("Cleartel LP"),
CAIS Limited Partnership, a Virginia limited partnership ("CAIS LP"), (CGX,
CAIS, Cleartel, Cleartel LP and CAIS LP being jointly and severally and together
with their successors and assigns, the "Borrowers") and the shareholders,
partners and other owners thereof, as applicable, listed in Schedule A hereto
(the "Owners"), the lenders named on the signature pages to this Agreement (the
"Lenders"), and ING (U.S.) Capital Corporation, New York, New York, as agent for
the Lenders (together with its successors and assigns in that capacity, the
"Agent").
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Capitalized defined terms used in this Agreement and not otherwise
defined in this Agreement have the meanings given to those terms in Schedule X
----------
hereto, and the rules of construction set forth in Schedule X govern this
----------
Agreement.
ARTICLE 2
THE CREDITS
2.1 Commitments.
(a) Loan Commitments. Subject to and upon the terms and conditions of
this Agreement and in reliance upon the representations, warranties and
covenants contained herein, each Lender severally agrees to make Loans to the
Borrowers during the Availability Period in an aggregate amount not to exceed
its Pro Rata Share of the Aggregate Commitment, to be used in accordance with
this Agreement.
(b) Separate Loan Obligations. Each Lender will fund its Pro Rata
Share of each Loan simultaneously with the other Lenders at the time designated
by the Agent pursuant to Section 2.2(c), provided that the failure of any Lender
--------------
to fund its Pro Rata Share of a Loan shall not affect the obligation of any
other Lender to fund its Pro Rata Share of such Loan. No Lender
<PAGE>
will be responsible for a default by any other Lender in funding its Pro Rata
Share of a Loan nor shall any Commitment of any Lender be increased or decreased
by reason of any such default.
2.2 Funding of Loans.
(a) Loans.
(i) From time to time during the Availability Period, but not
more frequently than once during each calendar month, the Borrowers (as a group)
may request a Loan by delivering a Notice of Borrowing to the Agent no later
than 11:00 a.m., New York time, at least three (3) LIBOR Business Days prior to
the proposed Funding Date. The Notice of Borrowing shall specify (A) the
proposed Funding Date, (B) the amount of the requested Loan and (C) the Interest
Period.
(ii) All Loans shall mature on the Maturity Date, unless payment
thereof is due prior to such date by acceleration, by mandatory prepayment or
otherwise. The minimum amount of each Loan pursuant to this Section 2.2(a) shall
be $1,000,000 and, in each case, integral multiples of $100,000 in excess of
such amount (or if less, the remaining Commitment).
(b) Loans to Pay Interest, Fees and Expenses. On each LIBOR Business
Day during the Availability Period on which interest, fees or expenses are due
and payable hereunder and are not otherwise paid or provided for, the Borrowers
may request the Lenders to make, a Loan to the Borrowers in the aggregate amount
of all interest, fees and expenses then due and payable and hereby irrevocably
authorize the Agent to apply the proceeds of such Loan to the payment of such
interest, fees and expenses. The Lenders shall have no obligation to make any
Loan pursuant to this Section 2.2(b).
--------------
(c) Loan Funding Procedure.
(i) Promptly after receipt of a Notice of Borrowing, the Agent
will notify each Lender of the proposed Loans and of such Lender's Pro Rata
Share thereof, and each Lender will make available to the Agent at the Agent's
main office in New York such Lender's Pro Rata Share of the proposed Loans in
immediately available funds no later than 10:00 a.m., New York time, on the
Funding Date. Upon satisfaction or waiver of the applicable conditions precedent
set forth in Article 3, the Agent will disburse all such amounts made available
---------
to it by the Lenders to the Borrowers by wire transfer of such amounts to
account no. 203-00000-70736 of the Borrower at First Union Bank of Washington,
D.C., ABA #054-001220.
(ii) Unless a Lender has notified the Agent prior to the Funding
Date of a Loan that such Lender does not intend to make available its Pro Rata
Share of such Loan, the Agent may assume that such Lender has made such amount
available to the Agent on the Funding Date and the Agent may, in its sole
discretion, make available to the Borrowers a corresponding amount on the
Funding Date, provided that the Agent shall have no obligation to make available
to the Borrowers any amount not actually received from the Lenders. If the Agent
makes available to the Borrowers any Loan amount not received from a Lender, the
Agent shall be entitled to recover such amount on demand from such Lender,
together with interest thereon for each day from the Funding Date that such
amount remains unpaid. Interest on such amount shall be payable at the Base
Rate. If the defaulting Lender does not pay such amount forthwith upon
2
<PAGE>
demand by the Agent, the Agent shall promptly notify the Borrowers and the
Borrowers shall immediately pay such amount to the Agent, together with interest
on such amount at a rate per annum equal to LIBOR plus the Applicable Margin for
each day from the Funding Date that such amount remains unpaid. Any such
payment by the Borrowers shall not be deemed a prepayment for purposes of
Section 2.9, no Breakage Costs shall be payable by the Borrowers in respect
- -----------
thereof and the Borrowers shall not be obligated to pay interest at the Default
Rate in respect thereof. Each Lender agrees that if it fails to make available
to or to reimburse the Agent for any amount made available by the Agent on its
behalf, it will have no interest in such amount and hereby assigns all of its
right, title and interest in such amount to the Agent or any assignee designated
by the Agent. Nothing in this paragraph shall be deemed to relieve any Lender
of its obligation to fulfill its Commitments hereunder or shall prejudice any
rights the Borrowers may have against any Lender as a result of any default by
such Lender.
(d) Notices.
Each Notice of Borrowing shall be irrevocable on and after the related
Interest Rate Determination Date.
2.3 Interest.
(a) Interest Rates.
(i) The Loans shall bear interest on the unpaid principal amount
thereof from the date made to but excluding maturity (whether at the Maturity
Date, by acceleration, because of mandatory prepayment or otherwise) during each
Interest Period applicable thereto at a rate per annum equal to LIBOR as
determined for such Interest Period plus the Applicable Margin, computed on the
basis of a year of 360 days for the actual number of days elapsed.
(ii) LIBOR applicable to a Loan during a particular Interest
Period shall be determined by the Agent on the Interest Rate Determination Date
with respect to such Loan on the basis of the duration of such Interest Period
and the amount of such Loan. Each such determination shall be conclusive and
binding on the parties, absent manifest error.
(b) Interest Periods. Subject to Schedule X, each Interest Period:
----------
(i) in respect of a Loan and a Note converted pursuant to
Article 2A, respectively, which would otherwise end on a day that is not a
- ----------
LIBOR Business Day or Business Day, respectively, shall end on the next
succeeding LIBOR Business Day or Business Day, respectively, unless such day
falls in the next calendar month, in which case such Interest Period shall end
on the next preceding LIBOR Business Day or Business Day, respectively; and
(ii) in respect of a Loan, which begins on the last LIBOR
Business Day of a calendar month or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period,
shall end on the last LIBOR Business Day of the calendar month at the end of
such Interest Period.
3
<PAGE>
(c) Maximum Number of Loans Outstanding. There shall be a maximum of
three (3) Loans outstanding at any one time and for this purpose all Loans with
the same Interest Period shall be considered a single Loan.
(d) Interest Payment Dates. Interest shall be payable as follows:
(i) interest shall be payable in arrears on the last day of each
Interest Period;
(ii) all accrued and unpaid interest shall be payable in full
upon the maturity (whether at the Maturity Date, by acceleration, because of
mandatory prepayment (subject to clause (iii) below) or otherwise);
(iii) upon prepayment of principal, in whole or in part, interest
shall be payable on the date of such payment on the principal amount prepaid;
and
(iv) after maturity (whether at the Maturity Date, by
acceleration, because of mandatory prepayment or otherwise), interest shall be
payable upon demand.
(e) Default Interest. Overdue principal and, to the extent permitted
by Applicable Law, overdue interest in respect of any amount payable by a
Borrower hereunder that is overdue shall bear interest at a rate per annum (the
"Default Rate") equal to two percent (2%) in excess of the rate of interest
otherwise applicable to such outstanding amounts, provided that with respect to
such overdue amounts, the Agent in its sole discretion shall select Interest
Periods of one month or less. Upon the occurrence and during the continuance of
an Event of Default, all amounts owing by the Borrowers hereunder shall bear
interest at the Default Rate.
(f) Limitation. Notwithstanding any other provision of the Credit
Documents, if the rate of interest on any Obligation of the Borrowers (or
Guarantors) under any Credit Document shall at any time exceed the highest rate
permitted by Applicable Law, the rate of interest on such Obligation shall be
equal to the highest rate permitted by Applicable Law.
2.4 Notes. The Borrowers shall each execute and deliver to each
Lender on the Closing Date a Note or Notes substantially in the form of Exhibit
A . The Notes shall be dated the Closing Date, shall be in the aggregate
principal amount of such Lender's Commitment and shall evidence such Lender's
Pro Rata Share of the Loans made hereunder. Each Note shall have other
appropriate insertions and shall be subject to and entitled to the benefits of
the Credit Documents. At the time a Loan is made, each Lender is authorized to
make a notation on the schedule attached to the relevant Note indicating the
date, the amount of such Lender's Pro Rata Share and the interest rate of such
Loan. Absent manifest error, the information set forth in such schedule shall
be prima facie evidence of the outstanding principal amount of such Note and of
the interest due thereon. Failure to make any such notation shall not limit or
affect the obligations of the Borrowers under the Loans or any other Credit
Document.
4
<PAGE>
2.5 Fees.
(a) Closing and Funding Fees. On the earlier of the Closing Date or
the last day of the Availability Period, the Borrowers shall pay to the Agent a
non-refundable acceptance fee in the amount of 3.50% of the Aggregate
Commitment.
(b) Commitment Fees. On the earlier of the Closing Date or September
21, 1998, the Borrowers shall pay to the Agent a non-refundable commitment fee
of $100,000.
2.6 Security. The Loans and all other amounts payable by the
Borrowers under this Agreement and the other Credit Documents are secured by the
Collateral and are entitled to the benefits of the Security Documents. On and
after the Restructuring Date, the Guaranty by CGX (and all other Guarantors) of
all other amounts payable by the Borrowers under this Agreement and the other
Credit Documents shall be in full force and effect and enforceable in accordance
with its terms.
2.7 Use of Proceeds. The proceeds of the Loans will be used
exclusively to (a) prepay and fully discharge all outstanding obligations of the
Borrowers (as defined therein) under the First Union Loan Agreement, (b) to
provide financing for capital expenditures incurred (or to be incurred),
directly or indirectly in connection with the rollout of the "OverVoice"
product, and (c) for general working capital purposes.
2.8 Reductions of Commitments. The Borrowers shall have the right,
upon at least five (5) LIBOR Business Days' notice to the Agent, to terminate,
or to reduce in part, the unused portion of the Aggregate Commitment, provided
that (a) each partial reduction shall be in the amount of $500,000 or an
integral multiple of $100,000 in excess thereof and (b) the Borrowers shall
certify in writing to the Lenders that such termination or reduction will not
have a Material Adverse Effect on the Borrowers.
2.9 Repayment of Principal.
(a) General. The Loans are not revolving in nature, and any amounts
repaid or prepaid may not be reborrowed and shall reduce the amount of the
Aggregate Commitment.
(b) Mandatory Repayments. The entire unpaid principal amount of the
Loans shall be due and payable on the Maturity Date.
(c) Optional Prepayments. The Borrowers shall have the right to
prepay at any time any Loan or Loans, in whole or in part, provided that (i) the
Borrowers must give the Agent at least five (5) LIBOR Business Days' prior
irrevocable notice of any such prepayment specifying the date of prepayment, the
aggregate principal amount being prepaid and the specific Loan or Loans being
prepaid and in what principal amounts, (ii) the Borrowers shall also pay all
accrued interest on the principal amount being prepaid through the date of
payment together with Breakage Costs, (iii) any partial prepayment of a Loan
must be in a minimum principal amount of $500,000 and integral multiples of
$100,000 in excess of such amount and (iv) after such prepayment, all Loans must
remain in compliance with the second sentence of Section 2.2(a)(ii).
------------------
(d) Mandatory Prepayments.
5
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(i) In the event of the sale or issuance by any Borrower or any
of its Subsidiaries of any Capital Stock (or any similar related instrument)
(other than in connection with the Restructuring so long as shares of Capital
Stock are issued only to Owners or Borrowers existing on the date of this
Agreement) or the incurrence of any Indebtedness by any Borrower or any of its
Subsidiaries (other than the Loans hereunder), immediately thereupon the
Borrowers shall prepay the Loans in an amount equal to the proceeds (net of
expenses of sale, issuance or incurrence) of such sale, issuance or incurrence,
together with all accrued and unpaid interest on the principal amount on the
Loans being repaid through the date of prepayment and any Breakage Costs
applicable thereto.
(ii) In the event of the occurrence of an Asset Sale,
immediately thereupon the Borrowers shall prepay the Loans in an amount equal to
the Net Cash Proceeds of such Asset Sale, together with all accrued and unpaid
interest on the principal amount on the Loans being repaid through the date of
prepayment and any Breakage Costs applicable thereto; provided, however, that
-------- -------
such prepayment shall be required only if Net Cash Proceeds from any Asset Sale
exceed $250,000 (it being understood that if Net Cash Proceeds exceed $250,000,
the entire amount thereof must be used to prepay the Loans, not just the amount
in excess of $250,000) when aggregated with Net Cash Proceeds from other Asset
Sales since the date of this Agreement.
(iii) If the Borrowers are required to prepay the Loans on a day
other than on the last day of the applicable Interest Period, the Borrowers
shall not be obligated for any Breakage Costs in connection therewith if (x) the
Borrowers irrevocably deposit in escrow with the Agent cash or securities issued
by the United States or a combination thereof in amounts (including interest,
but without consideration of any reinvestment of such interest) and with
maturities sufficient to pay and discharge on such last day of an applicable
Interest Period the principal of and interest on such Loans, (y) (to the extent
that the Borrowers deposit securities) the Borrowers deliver to the Agent a
certificate from a nationally recognized firm of independent accountants
expressing its opinion that such deposited cash and/or securities will provide
cash at such times and in such amounts as will be sufficient to pay the
principal of and interest on such Loans due on such last day of the applicable
Interest Period, and (z) on such last day of the applicable Interest Period such
cash and/or securities have a value sufficient to pay in full the principal of
and interest on such Loans. The Agent shall apply all amounts so deposited with
it, as appropriate, to such prepayment and payment on the last day of the
applicable Interest Period. The Borrowers will cause the Agent to have (for the
benefit of the Lenders) a First Priority Lien on any such cash and securities.
(e) Termination of Commitments; Payment of Other Obligations. Upon
the earlier of (i) any prepayment in full, or (ii) the occurrence of any event
that would require the prepayment in full of the outstanding principal and
interest on the Loans, all Commitments of the Lenders shall forthwith terminate
without the need for further action by the parties hereto, and the Borrowers
shall pay all other Obligations then due and payable hereunder and under the
other Credit Documents.
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2.10 Payments.
(a) Method of Payment. All payments by the Borrowers hereunder or
under any other Credit Document shall be made in immediately available funds in
U.S. Dollars to the Agent at its main office in New York for its account or for
the accounts of the respective Lenders, as the case may be. All such payments
must be received no later than 3:00 p.m. on the date due and shall be made in
full without defense, set-off or counterclaim of any kind and without the
requirement of presentment, notice or demand. Subject to the requirements of
Section 2.3(b), whenever any payment to be made hereunder or under any other
- --------------
Credit Document is stated to be due on a day which is not a LIBOR Business Day
(Business Day, in the case of a converted Note), the due date of such payment
shall be extended to the next succeeding LIBOR Business Day (Business Day, in
the case of a converted Note) and such extension of time shall be included in
the computation of such payment.
(b) Currency of Payment. All payments under the Credit Documents must
be made in U.S. Dollars, and no payment obligation shall be deemed to have been
novated, satisfied or discharged by the tender of any currency other than U.S.
Dollars or recovery under a judgment expressed in a currency other than U.S.
Dollars, unless such tender or recovery shall result in the effective payment in
full of such obligation in U.S. Dollars at the place indicated in Section
-------
2.10(a). The amount, if any, by which any tender or recovery fails to result in
- -------
such payment in full shall remain due and payable hereunder as a separate
obligation of the Borrowers, unaffected by any action of the Borrowers or
judgment obtained.
(c) Application of Payments. Except to the extent expressly provided
otherwise herein or in the other Credit Documents, all payments received by the
Agent or the Lenders hereunder shall be applied in the following order of
priority:
(i) to the payment or reimbursement of all costs, expenses,
Taxes and other amounts payable under Sections 2.11, 8.11 or 8.12;
---------------------------
(ii) to the payment of all fees payable under Section 2.5;
-----------
(iii) to the payment of all accrued interest on the Loans;
(iv) to the payment of the principal of the Loans; and
(v) to the payment or reimbursement of any other amounts due to
the Agent or any Lender hereunder or under any other Credit Document.
All payments applied to interest on or principal of any Loan shall be
paid to the Lenders in proportion to their respective Pro Rata Shares of such
Loan. All payments applied to any other category of obligation set forth above
shall be paid to the various payees within such category in proportion to the
respective amounts due to them.
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2.11 Increased Costs and Unavailability.
(a) Taxes.
(i) All payments made by the Borrowers under any Credit
Document shall be made free and clear of, and without deduction or withholding
for, any present or future Taxes (1) excluding (A) Lender Income Taxes and (B)
Taxes applicable on the Initial Date, but (2) not excluding Taxes which arise as
a result of a change in law, (including any change in the interpretation or
administration of any law) after the Initial Date (such non-excluded Taxes being
"Reimbursable Taxes"), and the Borrowers shall pay all Reimbursable Taxes in
respect of payments under the Credit Documents. The Borrowers hereby indemnify
the Agent and each Lender (each, an "Affected Party") for all Reimbursable Taxes
and all costs and liabilities incurred by such Affected Party in connection
therewith. The Borrowers will reimburse each Affected Party, on demand, for any
Reimbursable Taxes paid by such Affected Party on an after-tax basis so that
such Affected Party (A) receives the full amount payable to it under the Credit
Documents and (B) is made whole after taking into account all income taxes it
will owe on the reimbursement payment (assuming that such payment is subject to
taxation at the highest marginal rates applicable to such Affected Party). Each
Affected Party shall have the absolute right to arrange its tax affairs in
whatever manner it deems appropriate, and no Affected Party shall be obligated
to claim any particular deduction, credit or other benefit.
(ii) If the Borrowers are prohibited or prevented (by Law or
otherwise) from making any payment to an Affected Party required under Section
-------
2.11(a)(i), then the amount of the payments due to such Affected Party under the
- ----------
Credit Documents shall be increased by the amount necessary to insure that such
Affected Party will receive the full amount payable to it under the Credit
Documents.
(iii) Within 30 days after the date on which any Reimbursable Tax
is due, the Borrowers will furnish to the Agent and the Lenders official
receipts or notarized copies thereof evidencing payment of such Reimbursable
Tax.
(iv) The Agent and each Lender agree to deliver to the Borrowers
all forms and documents necessary to establish any exemption from withholding
for Taxes to which they are entitled. Any Person that becomes the successor
holder of a Note shall deliver the forms and documents required under this
Section 2.11(a)(iv).
- -------------------
(b) Capital Adequacy. In the event that the adoption after the date
hereof of any law, treaty, governmental (or quasi-governmental) rule,
regulation, guideline or order regarding capital adequacy, reserve requirements
or similar requirements or compliance by any Lender or any corporation
controlling such Lender with any request or directive regarding capital
adequacy, reserve requirements or similar requirements (whether or not having
the force of law and whether or not failure to comply therewith would be
unlawful) from any central bank or governmental agency or body having
jurisdiction does or shall have the effect of imposing or increasing the amount
of capital, reserves or other funds required to be maintained by such Lender or
any corporation controlling such Lender and thereby reducing the rate of return
on such Lender's or such corporation's capital as a consequence of its
obligations hereunder, then the Borrowers shall from time to time within fifteen
(15) days after notice and demand from such
8
<PAGE>
Lender (which demand shall be made as promptly as practicable after such Lender
obtains knowledge that such law, treaty, governmental rule, regulation, order or
requirement exists and such Lender determines to make such demand and shall be
accompanied by the certificate referred to in the next sentence and with a copy
to the Agent) pay to the Agent, for the account of such Lender, additional
amounts sufficient to compensate such Lender for such reduction. A certificate
as to the amount of such cost and showing the basis of the computation of such
cost submitted by such Lender to the Borrowers and the Agent, shall, absent
manifest error, be final, conclusive and binding for all purposes.
(c) Reserve Requirements. The Borrowers shall pay to each Lender,
upon demand, such amounts as such Lender from time to time determines to be
necessary to compensate such Lender for any costs incurred by such Lender or any
reduction in the amount received or receivable by such Lender under the Credit
Documents, resulting from, any change in Law, any change in the interpretation
or administration of any Law or compliance with any directive, guideline or
request from any Government Instrumentality (whether or not having the force of
Law) which:
(i) imposes or modifies any reserve, special deposit, compulsory
loan or similar requirements relating to any loans, extensions of credit or
other assets of, or any deposits with or other liabilities of, such Lender
(including any Loans or any deposits referred to in the definition of LIBOR); or
(ii) imposes any other cost or condition affecting any Credit
Document, any Loan, any obligation to make any Loan, the London interbank market
or the certificate of deposit market.
(d) Funding Losses. The Borrowers shall compensate each Lender, upon
demand, for any loss, cost or liability (including interest paid by such Lender
on funds borrowed to make or continue a Loan and losses sustained in liquidating
deposits and in the re-employment of funds) incurred as a result of:
(i) repayment (including repayment due to acceleration) or
prepayment on a date other than the last day of an Interest Period for such Loan
to the extent set forth in the definition of Breakage Costs;
(ii) failure of the Borrowers to borrow a Loan on the Funding
Date therefor; or
(iii) failure of the Borrowers to repay a Loan when due (whether
at the Maturity Date, by acceleration, because of mandatory prepayment or
otherwise) or on the date specified therefor in a notice delivered pursuant to
Section 2.9(c).
- --------------
(e) Unavailability. In the event that on or before any Interest Rate
Determination Date a Lender determines that:
(i) U.S. Dollar deposits are not being generally offered in the
London interbank market;
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(ii) adequate and fair means (as set forth in the definition of
LIBOR) do not exist for ascertaining interest rates by reference to LIBOR; or
(iii) LIBOR does not represent the cost to such Lender of funding
or maintaining a requested Loan or effective pricing to such Lender for a
requested Loan, such Lender shall give prompt notice of such fact to the
Borrowers and the Agent, and, at the election of such Lender, such Lender's
obligation to make or maintain Loans based on LIBOR shall be immediately
suspended and such Lender's portion of all outstanding Loans shall be converted
to Loans which, on and after the date of such notice, bear interest at a rate
per annum equal to the Base Rate plus 3.25%.
(f) Illegality. If a Lender determines that any Law, any change in
Law, any change in the interpretation or administration of any Law or compliance
by such Lender with any directive, guideline or request (whether or not having
the force of Law) of any Government Instrumentality makes it unlawful or
impossible for such Lender to fund or maintain Loans based on LIBOR, then upon
notice of such fact to the Borrowers and the Agent by such Lender, the
obligation of such Lender to fund or maintain Loans shall be immediately
suspended. In addition, the outstanding principal amount of such Lender's
portion of all outstanding Loans shall be converted to Loans which, on and after
the date of such notice, bear interest at a rate per annum equal to the Base
Rate plus 3.25%, or, if such Lender determines that immediate conversion is not
required, at the end of the respective Interest Periods of such Loans. In the
event of repayment of a Loan pursuant to this Section 2.11(f) prior to the end
---------------
of its Interest Period, the Borrowers shall compensate such Lender for all
losses, costs and liabilities described in Section 2.11(d).
---------------
(g) Notice and Mitigation.
(i) Upon the occurrence of an event that will entitle the Agent
or any Lender (each, an "Affected Party") to compensation, reimbursement or
indemnification pursuant to this Section 2.11, such Affected Party will give the
------------
Borrowers notice of such event as promptly as practicable.
(ii) Each Affected Party will take reasonable measures to avoid
the need for, or reduce the amount of, compensation, reimbursement or
indemnification pursuant to this Section 2.11, provided that no Affected Party
------------
shall be required to take any measure that, in its judgment, would be
disadvantageous to it, contrary to its policies or inconsistent with its legal
and regulatory position. For such purpose and subject to the limitation set
forth in the foregoing proviso the Affected Party may designate a different
lending office in respect of its portion of an affected Loan.
(iii) If any Tax or other charge is imposed on payments to any
Lender and the Borrowers are obligated hereunder to compensate such Lender for
such Tax or other charge, the Borrowers may, within 30 days after receipt of
notice of such Tax or other charge, request that such Lender assign its portion
of the affected Loan or Loans to another Person chosen by the Borrowers, and
such Lender will use reasonable efforts to negotiate such an assignment.
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(h) Determinations. A determination by any Lender or by the Agent
under this Section 2.11 shall be conclusive and binding on the parties, absent
------------
manifest error.
ARTICLE 2A
CONVERSIONS OF LOANS
2A.1. Conversion Event. If any of the principal, premium or interest
on any outstanding Loan is not paid on the Maturity Date (March 4, 1999) for
such Loan, the principal amount of each Note representing such unpaid amounts
shall thereupon be amended to represent such aggregate unpaid amount together
with all other amounts then due under the other Credit Documents. Subject to
the terms and conditions of this Article 2A and so long as the holding of such
----------
Notes by the Lenders is permitted under applicable law and will not subject them
to any tax, penalty or liability, upon such event, the Notes representing Loans
shall be automatically converted into Notes containing the terms and subject to
the conditions set forth in this Article 2A, the Borrowers shall continue to be
----------
obligated thereon as "Issuers" and the Guaranty shall continue in full force and
effect with respect to the converted Notes.
2A.2 Interest.
(i) On and after the Conversion the Notes shall bear interest on the
unpaid principal amount thereof from the Conversion Date to but excluding the
maturity date thereof, (whether at the Maturity Date, by acceleration, because
of mandatory prepayment or otherwise) at a rate per annum equal to the rate on
5-year U.S. Treasury Securities plus 5.0%.
(ii) The applicable rate of interest shall be determined on the
Interest Rate Determination Date for converted Notes.
(iii) The provisions of Section 2.3 (b), (c), (d) and (e) shall apply
---------------------------------
to the converted Notes.
2A.3 Notes.
(i) The Issuers shall execute and deliver to each holder of Notes
upon request a new converted Note or Notes of appropriate denominations to
replace the Notes representing Loans converted pursuant to this Article.
(ii) The Issuers shall maintain at their principal executive offices
a register in which the Issuers shall provide for the registration, exchange and
transfer of Notes.
(iii) The converted Notes shall mature on the Maturity Date for such
Notes unless payment thereof is due prior to such date by acceleration,
prepayment, redemption or otherwise.
2A.4. Redemption.
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(i) The converted Notes may be redeemed in whole at the option of
the Issuers at any time at a redemption price of 100% of the principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date.
(ii) The Issuers shall, not less than 10 and not more than 60 days
prior to the redemption date fixed by the Issuers, notify the Noteholders in
writing of such redemption date.
2A.5 Exchange Fee. A Conversion pursuant to this Article 2A shall
----------
not be effected unless the Issuers shall have paid on the scheduled Conversion
Date (the Maturity Date of the Loans to be converted) to the Lenders a fee in an
amount equal to three (3.0)% of the principal amount (as converted) of the
converted Notes. Upon any failure to make such payments on such due date an
Event of Default of the type referred to in Section 6.1(a) hereunder shall be
deemed to have occurred on and as of such due date.
2A.6 Ranking. The converted Notes shall be senior secured
obligations of the Issuers and shall continue to be secured and guaranteed as
contemplated in Section 2.6.
-----------
2A.7 Repayment. The provisions of Section 2.9 (a), (b) and (d) shall
----------------------------
apply to the converted Notes, with the exception of references to Breakage
Costs.
2A.8 Method of Payment. The provisions of Section 2.10 (a), (b) and
(c) (with the exception of (c) (ii)) shall apply to the converted Notes.
2A.9 Conditions Precedent. A Conversion pursuant to this Article 2A
shall not be effected unless the fee payable under Section 2A.5 shall have been
------------
paid in full and the following conditions have been fulfilled on or prior to the
Conversion Date to the satisfaction of the Lenders and the Agent:
(i) the Credit Documents, Warrant Agreement and Warrant Registration
Rights Agreement will continue to be in full force and effect with respect to
the converted Notes without any further action required;
(ii) all Liens in the Collateral shall continue to be perfected of
the type and priority in favor of the Noteholders as was required to be in favor
of the Lenders pursuant to Article 3 hereof;
---------
(iii) all representations and warranties of the Issuers, Guarantors
and Obligors contained in the Credit Documents shall be true, correct and
complete in all material respects on and as of the Conversion Date (and after
giving effect to the Conversion) to the same extent as though made on and as of
such date;
(iv) no act, event or circumstance shall have occurred with respect
to the Issuers, Guarantors, Obligors or their Subsidiaries or otherwise which
has or could reasonably be expected to have a Material Adverse Effect;
(v) the Issuers, Guarantors and Obligors shall be in compliance with
all covenants and agreements in the Credit Documents on the Conversion Date and
after giving effect to the Conversion (other than the payment default giving
rise to a Conversion Event);
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(vi) there shall be no pending or, to the knowledge of the Issuers,
Guarantors and Obligors, threatened litigation, investigation or other
proceeding which could reasonably be expected to have a Material Adverse Effect;
(vii) the Agent shall have received an Officer's Certificate from
each Issuer, Guarantor and Obligor to the foregoing effect;
(viii) the Issuers, Guarantors and Obligors shall have executed and
delivered to the Agent and the Noteholders, upon request, such documents,
instruments and opinions of counsel and shall do or cause to be done all things
that may be necessary in the view of the Agent and the Noteholders, provided,
however that the Agent and the Noteholders shall not require the revision of
Section 8.10(c) hereof;
(ix) a private placement number issued by S&P's CUSIP Service
Bureau shall have been obtained for the converted Notes;
(x) the aggregate principal amount of converted Notes shall be in
an amount no less than $1,000,000;
(xi) all proceedings in connection with the Conversion and all
documents and instruments incident to such Conversion shall be satisfactory to
the Agent and Noteholders provided, however that the Agent and the Noteholders
shall not require the revision of Section 8.10(c) hereof; and
(XII) Ted Ammon shall have duly and validly pledged under the Pledge
and Security Agreement all shares of Capital Stock of all Borrowers which shall
be owned by him and shall have executed all Credit Documents to which the
Pledgors are subject.
2A.10 No Waiver. The failure of the Agent or any Noteholders to
require satisfaction of any condition precedent set forth above shall not
constitute a waiver of such condition precedent unless the Noteholders shall so
state in writing.
2A.11 Covenants. The provisions of Article 5 shall apply in full to
the Issuers, Guarantors and Obligors from and after the Conversion Date until
all converted Notes and other Obligations under the Credit Documents have to be
paid and satisfied in full.
2A.12 Events of Default. The provisions of Article 6 shall apply in
full to the Issuers, Guarantors and Obligors in respect of converted Notes.
2A.13 Registration; Exchange; Substitution of Converted Notes.
(i) Registration of Notes. The Issuers shall keep at their
principal executive office a register for the registration, exchange and
registration of transfers of Notes. The name and address of each holder of one
or more Notes, each transfer thereof and the name and address of each transferee
of one or more Notes shall be registered in such register. Prior to due
presentment for registration of transfer, the Person in whose name any Note
shall be registered shall be deemed and treated as the owner and holder thereof
for all purposes hereof, and the Issuers shall not be affected by any notice or
knowledge to the contrary. The Issuers shall give to
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<PAGE>
any holder of a Note that is an institutional investor promptly upon request
therefor, a complete and correct copy of the names and addresses of all
registered holders of Notes.
(ii) Transfer and Exchange of Notes. Upon surrender of any Note at
the principal executive office of the Issuers for registration of transfer or
exchange (and in case of a surrender for registration of transfer, duly endorsed
or accompanied by a written instrument of transfer duly executed by the
registered holder of such Note or his attorney duly authorized in writing and
accompanied by the address for notices of each transferee of such Note or part
thereof), the Issuers shall execute and deliver, at the Issuers' expense (except
as provided below), one or more new Notes (as requested by the holder thereof)
in exchange therefor, in an aggregate principal amount equal to the unpaid
principal amount of the surrendered Note. Each such new Note shall be
substantially in the form of Exhibit A and shall be payable to such Person as
such holder may request. Each such new Note shall be dated and bear interest
from the date to which interest shall have been paid on the surrendered Note or
dated the date of the Surrendered Note if no interest shall have been paid
thereon. The Issuers may require payment of a sum sufficient to cover any stamp
tax or governmental charge imposed in respect of any such transfer or exchange
of Notes. Any transferee, by its acceptance of a Note registered in its name
(or the name of its nominee), shall be deemed to have agreed to be bound by all
of the provisions of this Agreement applicable to the holder of any Note.
(iii) Replacement Notes. Upon receipt by the Issuers of evidence
reasonably satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Note (which evidence shall be, in the case of
an institutional investor, notice from such institutional investor of such
ownership and such loss, theft, destruction or mutilation); and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to the issuers (provided that if the holder of such Note
is, or is a nominee for, an original purchaser or an institutional investor,
such Person's own unsecured agreement of indemnity, reasonably satisfactory to
the Issuers, shall be deemed to be satisfactory),
(b) in the case of mutilation, upon surrender and cancellation
thereof, the Issuers at their own expense shall execute and deliver, on lieu
thereof, a new Note, dated and bearing interest, from the date to which interest
shall have been paid on such lost, stolen, destroyed or mutilated Note or dated
the date of such lost, stolen, destroyed or mutilated Note if no interest shall
have been paid thereon.
2A.14 Use of Proceeds. The provisions of Section 2.7 shall apply to
-----------
the converted Notes.
2A.15 Increased Costs. The provisions of Section 2.11(a) shall apply
---------------
to the converted Notes.
14
<PAGE>
ARTICLE 3
CONDITIONS PRECEDENT
3.1. Conditions Precedent to Initial Loans. The obligation of the
Lenders to fund the initial Loans shall be subject to the satisfaction of each
of the following conditions precedent on or prior to the Closing Date:
(a) The Lenders and the Agent shall have received each of the
following, in each case in form and substance satisfactory to the Agent and the
Lenders:
(i) the Credit Documents, duly authorized, executed and
delivered by each of the parties thereto; (including the Guaranty);
(ii) judgment lien and UCC searches, and such other searches of
the records of Government Instrumentalities as the Agent shall require,
performed with respect to the Borrowers, the Obligors and each of their
Subsidiaries in all relevant jurisdictions;
(iii) the legal opinion of Borrowers' Counsel in the form of
Exhibit B;
(iv) such other legal opinions as the Lenders may reasonably
request;
(v) certified copies of:
(A) the articles of incorporation and by-laws (or other
organizational documents) of each of the Borrowers and each
Obligor (that is not an individual);
(B) good standing certificates with respect to the
Borrowers and each Obligor (that is not an individual or a trust)
issued by the appropriate authority in the applicable
jurisdiction of organization;
(C) incumbency certificates for the signatories of the
Borrowers and each Obligor (that is not an individual), and
resolutions of the Borrowers and each Obligor (that is not an
individual) approving the Credit Documents to which it is a party
and the transactions contemplated thereby; and
(D) a Budget for calendar years 1998-2002 and all combined
financial statements of the Borrowers and their combined
Subsidiaries requested by the Lenders; provided, that the
Borrowers must deliver a Budget to the Lenders and the Agent on a
quarterly basis for so long as any Loan is outstanding.
(vi) certificates of each of the Borrowers and Obligors
certifying that:
(A) all Credit Documents executed by the Borrowers and
Obligors on or prior to the Closing Date are in full force and
effect, the Borrowers and
15
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the Obligors are in compliance with all covenants and provisions
thereof, and no breach or event of default (or any event which
would become a breach or event of default with the giving of
notice or passage of time or both) has occurred and is continuing
under any such Credit Document;
(B) all representations and warranties of the Borrowers and
the Obligors contained in the Credit Documents are true, correct
and complete in all material respects;
(C) all financial statements and information provided to the
Lenders are true, correct and complete in all material respects;
each balance sheet fairly presents the consolidated financial
position of the Borrowers, the Guarantors, CGX and their
Subsidiaries as at the date indicated and was prepared in
accordance with GAAP except as specifically noted therein; there
has occurred no material adverse change in the financial position
of the Borrowers, the Guarantors, CGX and their Subsidiaries
since the date of the most recent balance sheet provided to the
Lenders; and the financial statements (or the footnotes thereto)
provided to the Lenders disclose all liabilities, contingent or
otherwise, of the Borrowers, the Guarantors, CGX and their
Subsidiaries required to be disclosed in accordance with GAAP;
the Borrowers are currently in discussions with their accounting
firms with respect to the proper accounting treatment of certain
options and other non-cash compensation arrangements that have
been or may be entered into with certain management employees,
the results of which will result in additional non-cash charges
to income for fiscal 1997 and subsequent years; and
(D) no act, event or circumstance has occurred with respect
to the Borrowers, the Obligors or any of their Subsidiaries or
otherwise which has had or could have a Material Adverse Effect;
(b) The Warrant Agreement and the Warrant Registration Rights
Agreement shall have been duly authorized, executed and delivered by the parties
thereto and Warrants representing 3.0% of the fully diluted common stock of the
Warrant Issuers shall have been duly authorized, executed and delivered to the
Lenders.
(c) All Taxes, fees and expenses required to be paid by the Borrowers
on or before the Closing Date shall have been paid.
(d) All conditions precedent set forth in Section 3.2 shall have been
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satisfied.
(e) The Borrowers and Obligors shall have obtained all Required
Approvals, except for those which are obtainable only at a later stage and which
the Lenders are satisfied, on the basis of evidence provided by the Borrowers,
will be obtainable in the ordinary course prior to the time required, and all
Required Approvals obtained shall be final, nonappealable and not subject to any
onerous or unusual conditions.
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(f) A First-Priority security interest in the Collateral existing on
the Closing Date shall have been created and perfected (provided, however, that
a second-priority security interest in the RFC Collateral may be created and
perfected), and shall continue to be perfected, in favor of the Agent on behalf
of the Lenders in all relevant jurisdictions, and there shall be no other Liens
on the Collateral (other than on the RFC Collateral and other than Permitted
Liens).
(g) A duly executed satisfaction and release of all liens created
under the First Union Loan Agreement, satisfactory in form and substance to the
Agent, shall be delivered to the Agent and a duly executed Form UCC-3 shall be
delivered to the Agent or a nominee thereof for filing in all appropriate
places.
3.2 Conditions Precedent to All Other Loans.
(a) The Agent shall have received a Notice of Borrowing in the form
attached hereto as Exhibit C, with all attachments thereto, sent in compliance
with Section 2.2(a)(i).
-----------------
(b) No event shall have occurred and be continuing or would result
from the making of the Loan requested that would constitute a Default or an
Event of Default.
(c) All representations and warranties of the Borrowers, Guarantors
and the Obligors contained in the Credit Documents shall be true, correct and
complete in all material respects on and as of the date of such Loan (and after
giving effect thereto) to the same extent as though made on and as of such date.
(d) Except as otherwise disclosed in the Information Memorandum, no
act, event or circumstance shall have occurred with respect to the Borrowers,
the Guarantors, the Obligors or their Subsidiaries or otherwise which has had or
could have a Material Adverse Effect.
(e) There shall be no pending or, to the knowledge of the Borrowers,
the Guarantors and Obligors threatened litigation, investigation or other
proceeding which could reasonably be expected to have a Material Adverse Effect.
(f) The Borrowers, Guarantors and Obligors shall be in compliance with
all covenants and agreements in the Credit Documents on and as of the date of
such Loan and after giving effect thereto.
(g) The Agent shall have received an Officer's Certificate from each
Borrower to the effect of (b), (c), (d), (e) and (f) above.
(h) On and after the Restructuring Date, the duly executed Guaranty
shall be in full force and effect and enforceable in accordance with its terms
in favor of the Agent and the Lenders.
3.3 No Waiver. The failure of the Agent or any Lender to require
satisfaction of any condition precedent set forth in Article 3, or the funding
---------
of any Loan despite the failure of the Borrowers, Guarantors or Obligors to
satisfy any such condition precedent, shall not constitute a waiver of such
condition precedent, unless the Lenders shall so state in writing. The
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waiver by the Lenders of any condition precedent in connection with the funding
of any Loan shall not affect the applicability of such condition precedent to
the funding of subsequent Loans.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties. The Borrowers, Guarantors and
Obligors each represent and warrant to the Agent and the Lenders as of the date
of this Agreement, on the Closing Date and on each Funding Date as follows:
(a) Existence; Authority of Borrowers and Guarantors. Each of the
Borrowers and Guarantors is duly organized, validly existing and in good
standing under the Laws of its respective jurisdiction of organization and duly
qualified to do business and in good standing in each jurisdiction in which such
qualification is necessary to carry on its current or proposed business and
operations or the ownership of its properties, except whether the failure to be
so qualified and in good standing would not have a Material Adverse Effect. The
Borrowers and Guarantors each have all necessary rights, franchises and
privileges and full power and authority to execute, deliver and perform the
Credit Documents to which it is a party, the Warrant Agreement and the Warrant
Registration Rights Agreement and to conduct its business as currently conducted
and as proposed to be conducted. The Borrowers and Guarantors have taken all
necessary action to execute, deliver and perform the Credit Documents, the
Warrant Agreement and the Warrant Registration Rights Agreement to which it is a
party, and such Credit Documents, the Warrant Agreement and the Warrant
Registration Rights Agreement have been duly executed and delivered by the
Borrowers and Guarantors, as the case may be, and constitute the legally valid
and binding obligations of the Borrowers and Guarantors, as the case may be,
enforceable in accordance with their respective terms.
(b) Existence; Authority of Obligors. Each Obligor (that is not an
individual) is duly organized, validly existing and in good standing under the
Laws of its respective jurisdiction of organization. Each Obligor that is not
an individual is duly qualified to do business and in good standing in each
jurisdiction in which such qualification is necessary to carry on its current or
proposed business and operations or the ownership of its properties, except
where the failure to be so qualified and in good standing would not have a
Material Adverse Effect. Each Obligor has all necessary rights, franchises and
privileges and full power and authority to execute, deliver and perform the
Credit Documents to which it is a party and to conduct its business as currently
conducted and as proposed to be conducted. Each Obligor has taken all necessary
action to execute, deliver and perform the Credit Documents to which it is a
party, and such Credit Documents have been duly executed and delivered by such
Obligor and constitute the legally valid and binding obligations of such
Obligor, enforceable in accordance with their respective terms.
(c) Name, Address and Records. The names of the Borrowers, Guarantors
and Obligors set forth in the first paragraph of this Agreement and on the
signature pages hereto are true, correct and complete names of the Borrowers,
Guarantors and Obligors, and the Borrowers and Obligors do not conduct business
under any other name or tradestyle, except as
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set forth on Schedule B hereto. The legal address of the Borrowers, Guarantors
----------
and Obligors and the address of the principal place of business and chief
executive office of the Borrowers, Guarantors and Obligors is set forth in
Schedule C hereto.
- ----------
(d) No Violations, Defaults or Liens.
(i) None of the Borrowers, the Guarantors nor any of their
Subsidiaries (A) is in violation of any Law (including Environmental Laws),
except such violations that could not reasonably be expected to have a Material
Adverse Effect, (B) is in violation of or default under the charter, bylaws,
partnership agreement or other constituent documents of the Borrowers, the
Guarantors or such Subsidiary or (C) is in violation of or default under any
Credit Document, the Warrant Agreement or the Warrant Registration Rights
Agreement or (to the extent it could reasonably be expected to have a Material
Adverse Effect) any other Contractual Obligation (considered individually or in
the aggregate).
(ii) No Event of Default has occurred and is continuing.
(iii) Each of the Borrowers and Guarantors and the applicable
Obligors, with respect to the Collateral provided by such Person, is the legal
and beneficial owner of, and has good, marketable and valid title to, the
Collateral, and none of the Collateral nor any other property of the Borrowers,
Guarantors or Obligors is subject to any Lien other than Permitted Liens (and
other than in respect of RFC Collateral). No effective mortgage, deed of trust,
financing statement, security agreement or other instrument similar in effect
which is not a Security Document is on file or of record in the office of any
Government Instrumentality with respect to any Collateral (other than (A) in
respect of RFC Collateral and (B) in respect of the First Union Loan Agreement,
which Lien, in the case of (B), shall be released on the Closing Date).
(iv) The execution, delivery and performance by the Borrowers,
Guarantors or any Obligor of the Credit Documents to which it is a party do not
and will not (A) violate any Law (including Environmental Laws), (B) violate, or
result in a default under, the charter, bylaws, partnership agreement or other
constituent documents of the Borrowers, Guarantors or any Obligor, (C) violate,
or result in a default under, any Contractual Obligation of any of the Borrowers
or Obligors, other than such defaults as would not, individually or in the
aggregate, have a Material Adverse Effect, (D) result in or require the creation
or imposition of any Lien on (x) the Collateral or (y) other property of the
Borrowers, Guarantors or any Obligor other than Liens created under the Security
Documents and other than in respect of RFC Collateral or (E) give rise to the
need to obtain any Required Approval from any Person that has not been obtained.
(e) Required Approvals. The Borrowers, Guarantors and Obligors have
obtained all Required Approvals required to be obtained at or prior to the time
of this representation and warranty in order for the Borrowers, Guarantors,
Obligors, the Agent and the Lenders and their respective activities to be in
compliance with Applicable Law, and the Borrowers, Guarantors and Obligors have
no reason to believe that any of the Required Approvals not yet obtained cannot
or will not be obtained in the normal course of business as and when required
and without significant expense.
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(f) Taxes.
(i) There is and will be no Tax payable or imposed on or by
virtue of the execution, delivery, performance or enforcement of the Credit
Documents or on any payment to be made by the Borrowers, Guarantors or any
Obligor thereunder, other than Lender Income Taxes and normal and customary
income taxes payable by the Borrowers, Guarantors and the Obligors upon their
income in the jurisdictions in which such income is earned.
(ii) The Borrowers, Guarantors, Obligors and each of their
Subsidiaries have filed in a timely manner all Tax returns required by Law and
have paid all Taxes shown to be due and payable on such returns and all other
Taxes and assessments levied upon them or their properties, assets, income or
franchises, to the extent such Taxes and assessments have become due and payable
and before they have become delinquent, except for any Taxes and assessments (i)
the amount of which is not individually or in the aggregate material or (ii) the
amount, applicability or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which the Borrowers,
Guarantors, Obligors or Subsidiaries, as the case may be, has established
adequate reserves in accordance with GAAP. The Borrowers and Guarantors know of
no basis for any other tax or assessment that could be expected to have a
Material Adverse Effect. The charges, accruals and reserves on the books of the
Borrowers, Guarantors and Subsidiaries in respect of Federal, state or other
Taxes for all fiscal periods are adequate.
(g) Financial Statements.
(i) Subject to the next sentence, all the financial statements
of the Borrowers, Guarantors and their Subsidiaries (as well as all notes and
schedules thereto) furnished to the Agent by the Borrowers, Guarantors or their
representatives, are true, complete and correct in all material respects
(subject, as to interim statements, to changes resulting from audits and year-
end adjustments), have been prepared in accordance with GAAP (except as
otherwise stated therein) and show all liabilities, direct and contingent, of
the Borrowers and their Subsidiaries required to be shown under GAAP. Such
financial statements (or drafts thereof) furnished to the Agent on or prior to
the date of this Agreement are true and correct in all material respects and
have been prepared in accordance with GAAP (other than in respect of required
notes and schedules). Subject, as to interim statements, to changes resulting
from audits and year-end adjustments, each balance sheet fairly presents the
consolidated financial condition of the Borrowers, Guarantors and their
Subsidiaries as at the dates thereof, and each profit and loss and surplus
(deficit) statement fairly presents the results of the operations of the
Borrowers, Guarantors and their Subsidiaries for the periods indicated. There
has been no material adverse change in the business, condition or operations
(financial or otherwise) of the Borrowers or any of their Subsidiaries since
June 30, 1998, and the Borrowers and Guarantors do not know of any reasonable
basis for the assertion against the Borrowers, Guarantors or any of their
Subsidiaries of any obligation or liability that (A) is not fully reflected in
the financial statements furnished to the Agent and (B) is not otherwise
permitted by the terms of this Agreement.
(ii) The Budgets, including all financial projections contained
therein, prepared by or on behalf of the Borrowers and delivered by or on behalf
of the Borrowers to the Lenders, the Agent or their representatives are based on
the assumptions set forth therein, which
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assumptions were reasonable at the time indicated in such Budgets to have been
made (it being understood that the Budgets and any projections or other future
events assumed therein are not to be viewed as facts, that actual results may
differ from projected or estimated results, and that none of the Borrowers or
its officers, directors, advisors or employees shall be liable for the accuracy
of the Budgets or such projections or future events). None of the Borrowers,
Guarantors or any of their Subsidiaries has any material liability, contingent
or otherwise, including any liability for Taxes, or any unusual forward or long
term commitments which are not disclosed by, or reserved against in, the Budgets
which under GAAP are of a nature and an amount required to be so disclosed or
reserved. There are no unrealized or anticipated losses from any unfavorable
commitments of any of the Borrowers, Guarantors or any of their Subsidiaries
which could reasonably be expected to have a Material Adverse Effect.
(h) No Proceedings. There is no pending or, to the knowledge of the
Borrowers or Guarantors, threatened action, suit, litigation, investigation,
arbitration or other proceeding involving or affecting the Borrowers,
Guarantors, any of their Subsidiaries or any of their respective properties or
assets before any Government Instrumentality, which could reasonably be expected
to have a Material Adverse Effect. None of the Borrowers, Guarantors, the
Obligors or any of their Subsidiaries or any of their respective properties or
assets is subject to any order, writ or injunction which prohibits, enjoins or
limits any aspect of the transactions contemplated by the Credit Documents or
which could reasonably be expected to have a Material Adverse Effect.
(i) No Broker's Fees. The Borrowers have no obligation (direct,
indirect, contingent or otherwise) to pay any fee, commission or compensation to
any broker, finder or intermediary with respect to or as a result of any
transaction contemplated by the Credit Documents.
(j) Environmental Matters. The Borrowers, Guarantors and their
Subsidiaries are in compliance with all Environmental Laws. There are no past,
current, pending or threatened Environmental Claims in any way relating to the
Borrowers, Guarantors or their Subsidiaries.
(k) ERISA. None of the Borrowers, Guarantors or any ERISA Affiliate
of the same sponsors, maintains, administers, contributes to, participates in,
or has any obligation to contribute to or any liability under, any Plan, except
for the CGX Communications, Inc. 401(k) Retirement Savings Plan.
(l) Investment Company Act. None of the Borrowers or any of their
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
(m) Use of Proceeds.
(i) The proceeds of the Loans have been and will be used only
for the purposes described in Section 2.7 and in accordance with the
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requirements and conditions of this Agreement.
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(ii) The Borrowers and Guarantors are not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G, T, U or X issued by the Board of Governors of the
Federal Reserve System), and no proceeds of any Loan will be used, directly or
indirectly, in violation of such regulations.
(iii) No proceeds of any Loan will be used to acquire any security in
any transaction which is subject to Section 13 or 14 of the Securities Exchange
Act of 1934, as amended.
(n) Collateral.
(i) The descriptions of the Collateral existing as of the date on
which this representation is deemed made contained in the Security Documents are
true, correct and complete and are sufficient to describe the Collateral and to
create, attach and perfect the Liens intended to be created in such Collateral
by the Security Documents.
(ii) As of the Closing Date, all necessary and appropriate deliveries,
notices, recordings, filings and registrations have been effected to perfect
First Priority Liens (or, for as long as the obligations under the Receivables
Sale Agreement are outstanding, second priority Liens in respect of the RFC
Collateral) on the Collateral in favor of the Agent as agent for the Lenders in
all relevant jurisdictions, and the Agent as agent for the Lenders has as of the
Closing Date, and will continue to have until the Lenders and Noteholders have
been repaid in full and released their Liens, subject to the filing of any UCC
continuation statements, duly and validly created, attached, perfected and
enforceable First Priority Liens (or, for as long as the obligations under the
Receivables Sale Agreement are outstanding, second priority Liens in respect of
the RFC Collateral) on such Collateral in all relevant jurisdictions.
(o) Full Disclosure. No representation or warranty of the Borrowers,
Guarantors or any Obligor contained in any Credit Document, the Warrant
Agreement or the Warrant Registration Rights Agreement or any other document,
certificate or written statement furnished to the Agent or any Lender or their
representatives by or on behalf of any such person for use in connection with
the Credit Documents and such other agreements contains any untrue statement of
a material fact or omitted or omits to state a material fact necessary in order
to make the statements contained therein not misleading.
4.2 Survival. The representations and warranties of the Borrowers,
Guarantors and Obligors contained in the Credit Documents, the Warrant Agreement
and the Warrant Registration Rights Agreement, or made by the Borrowers,
Guarantors or any Obligor in any certificate, notice or report delivered
pursuant to any such document shall survive the Closing Date, the making and
repayment of the Loans, the Restructuring Date, the Conversion Date and any
transfer or assignment of Notes and converted Notes.
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ARTICLE 5
COVENANTS
5.1 Affirmative Covenants. Each of the Borrowers, Guarantors and
Obligors covenant and agree that until the Credit Agreement Termination Date, it
will perform and observe each of the following covenants, unless (and then only
to the extent) compliance with such covenant has been waived pursuant to Section
-------
8.5:
- ---
(a) Existence. Other than as a result of the Restructuring, each of
the Borrowers, Guarantors and Obligors shall preserve and maintain their
existence, rights, franchises and privileges and remain in good standing in the
jurisdiction of its organization, and qualify and remain qualified in good
standing in each jurisdiction in which such qualification is necessary to carry
on its current or proposed business and operations or the ownership of its
properties except where the failure to be so qualified and in good standing
could not reasonably be expected to have a Material Adverse Effect.
(b) Subsidiaries. Other than as a result of the Restructuring, each
of the Borrowers, Guarantors and Obligors shall cause each of their Subsidiaries
to preserve and maintain its respective existence, and its material rights,
franchises and privileges and to remain in good standing in the jurisdiction of
its formation, and to qualify and remain qualified in good standing in each
jurisdiction in which such qualification is necessary to carry on its current or
proposed business and operations or the ownership of its properties except,
where the failure to be so qualified and in good standing could not reasonably
be expected to have a Material Adverse Effect.
(c) Compliance with Laws, Approvals and Obligations. Each of the
Borrowers, Guarantors and Obligors shall comply with, and shall cause each of
their Subsidiaries to comply in all material respects with, all Applicable Laws,
all Required Approvals, the Credit Documents, the Warrant Agreement and the
Warrant Registration Rights Agreement and its other Contractual Obligations.
Each of the Borrowers, Guarantors and Obligors shall satisfy before the same
become delinquent all Claims other than Claims being contested in good faith by
appropriate proceedings with proper reserves established which do not result in
the imposition of a Lien prohibited by Section 5.2(c). Each of the Borrowers,
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Guarantors and Obligors shall obtain and maintain in full force and effect all
Required Approvals required from time to time except at any time for those
obtainable only at a later stage and which will be obtainable in the ordinary
course of business prior to the time required.
(d) Title. Each of the Borrowers and the Obligors shall maintain good
and marketable title to the Collateral and shall at all times warrant and defend
the title to the Collateral against all Claims.
(e) Collateral. The Borrowers and Obligors shall take all actions
necessary to insure that the Lenders have and continue to have in all relevant
jurisdictions until payment in full of all Obligations hereunder, duly and
validly created, attached, perfected and enforceable First-Priority Liens in
favor of the Agent on behalf of the Lenders on the Collateral (other than, for
as long as the obligations under the Receivables Sale Agreement are outstanding,
the RFC
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Collateral, as to which a second-priority Lien shall be created, attached,
perfected and enforceable) (including after-acquired Collateral). The Borrowers
and Obligors shall deliver possession of any Collateral to the Agent or its
designated agent, immediately upon acquiring rights therein, to the extent the
Agent is required to perfect its interest in such Collateral by taking
possession thereof.
(f) Maintenance of Property; Insurance.
(i) The Borrowers and Guarantors shall maintain and preserve, and
cause their Subsidiaries to maintain and preserve, all of their respective
material properties in good working order and condition, ordinary wear and tear
excepted and all licenses and permits necessary for the proper conduct of its
business as conducted and proposed to be conducted, including, without
limitation, the Overvoice License.
(ii) Each of the Borrowers and Guarantors will, and will cause each
of their Subsidiaries to, maintain (either in the name of such Borrower or
Guarantor or in such Subsidiary's own name) with financially sound and
responsible insurance companies, insurance of such types, in at least such
amounts and against at least such risks (and with such risk retention) as are
usually insured against in similar circumstances in the same general area by
companies of established repute engaged in the same or a similar business; and
will furnish to the Agent upon request information presented in reasonable
detail as to the insurance so carried.
(g) Taxes. The Borrowers and Guarantors shall file, and shall cause each of
their Subsidiaries to file, all Tax returns required by Law in a timely manner
and shall pay, and shall cause each of their Subsidiaries to pay, before the
same become delinquent all Taxes imposed upon them or upon their respective
properties, other than Taxes being contested in good faith by appropriate
proceedings with proper reserves established which do not result in the
imposition of a Lien prohibited by Section 5.2(e).
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(h) Records and Inspection Rights. The Borrowers and Guarantors shall keep
and maintain true, correct and complete records and books of account, in which
complete entries will be made in accordance with GAAP and Applicable Law,
reflecting all financial transactions of such Borrower or Guarantor and their
Subsidiaries. The Borrowers and Guarantors shall also keep and maintain, and
shall cause each Obligor to keep and maintain, true, correct and complete
inventories of all Collateral and records of all transactions relating thereto.
At any reasonable time and from time to time, the Borrowers, Guarantors and
Obligors agree to permit, and shall cause each Subsidiary to permit, the Agent
and any agents or representatives thereof, to examine and make copies of and
abstracts from such records, books of account and inventories, to visit the
properties of the Borrowers and Guarantors and their Subsidiaries and to discuss
the affairs, finances and accounts of the Borrowers and Guarantors and their
Subsidiaries directly with the Borrowers', Guarantors' and Subsidiaries'
auditors and with any of the officers or managers of the Borrowers and
Guarantors and their Subsidiaries.
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(i) Reporting Requirements. The Borrowers and Guarantors shall furnish to
the Agent:
(i) as soon as available and in any event within 10 days of the date
of this Agreement, financial statements of the Borrowers, Guarantors and their
Subsidiaries (as well as all notes and schedules thereto) covering each of three
full fiscal years of such Persons ending on December 31, 1997 and the six month
period ending on June 30, 1998, that have been prepared in accordance with GAAP
(except as otherwise stated therein) and showing all liabilities, direct and
contingent, of the Borrowers, Guarantors and their Subsidiaries required to be
shown under GAAP.
(ii) as soon as available (meaning the first date on which such
information is provided to any shareholder or creditor of the Borrowers or
Guarantors) and in any event within 45 days after the end of each of the first
three quarters of each fiscal year of the Borrowers and Guarantors, complete
unaudited consolidated financial statements of the Borrowers, the Guarantors and
their Subsidiaries, including the balance sheet as of the end of such quarter,
and profit and loss statements, statements of shareholders' capital (or retained
earnings, if appropriate) and statements of cash flows for such quarter and for
the elapsed portion of such fiscal year, in each case prepared in accordance
with GAAP consistently applied (subject to normal year-end audit adjustments and
the absence of footnote disclosures) and setting forth in comparative form the
figures for the corresponding period of the previous fiscal year, certified to
the Lenders by the chief financial officer of each of the Borrowers and
Guarantors;
(iii) as soon as available (meaning the first date on which such
information is provided to any shareholder or creditor of the Borrowers or
Guarantors) and in any event within 90 days after the end of each fiscal year of
such Borrower or Guarantor, complete audited consolidated financial statements
of such Borrower or Guarantor and its Subsidiaries, including the balance sheet
as of the end of such fiscal year, and a profit and loss statement, a statement
of shareholders' capital (or retained earnings, if appropriate) and a statement
of cash flows for such fiscal year, in each case prepared in accordance with
GAAP consistently applied and setting forth in comparative form the figures for
the previous fiscal year, certified, without material qualifications or
limitations as to the scope of the audit by Arthur Andersen LLP or by other
independent certified public accountants acceptable to the Lenders;
(iv) promptly after the sending, filing or receipt thereof, a copy of
each material report, notice, certificate, application, demand, request or other
communication which the Borrowers or Guarantors or their Subsidiaries send to,
file with or receive from any Government Instrumentality;
(v) such other information respecting the condition, operations or
condition (financial or otherwise) of the Borrowers, the Guarantors or of any
Subsidiary as the Lenders may from time to time reasonably request; and
(vi) on or before a date not more than 120 days after the end of each
fiscal year of each of the Borrowers and Guarantors ending after the date
hereof, and 60 days after the end of each fiscal quarter ending after the date
hereof, a written statement signed by the principal executive officer, principal
financial officer or principal accounting officer of each Borrower and
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Guarantor in his/her capacity as an officer of such Borrower and Guarantor, as
to compliance herewith, including whether or not, after a review of the
activities of each Borrower and Guarantor during such year and of such
Borrower's and Guarantor's performance under this Credit Agreement, to the best
knowledge, based on such review, of the signers thereof, such Borrower and
Guarantor have fulfilled all of their respective obligations and are in
compliance with all conditions and covenants under this Agreement and the other
Credit Documents throughout such year and, if there has been a Default or Event
of Default specifying each Default or Event of Default and the nature and status
thereof and any actions being taken by the Borrowers or Guarantors with respect
thereto.
Notwithstanding the foregoing, after the Restructuring Date, only financial
statements of CGX as parent holding company shall be required to be delivered
hereunder, provided that this exception shall not apply to other Borrowers or
Guarantors added other than in connection with the Restructuring.
(j) Notice Requirements. The Borrowers and Guarantors shall give the
Agent prompt notice of the occurrence of any of the following events:
(i) any Default or Event of Default;
(ii) any default, breach or violation or any potential default,
breach or violation under any Contractual Obligation of the Borrowers or
Guarantors or any of their Subsidiaries which could reasonably by expected to
have a Material Adverse Effect;
(iii) any other event having a Material Adverse Effect or any
event or circumstance which could reasonably be expected to have a Material
Adverse Effect;
(iv) any pending or, to the knowledge of such Borrower or
Guarantor, threatened Claim, action, attachment, proceeding, suit, litigation,
investigation or arbitration involving or affecting such Borrower or Guarantor
or any of its Subsidiaries or any of their respective properties or assets by
any Person or before any Government Instrumentality which could reasonably be
expected to have a Material Adverse Effect;
(v) any termination, revocation, suspension or modification of
any Required Approval, or any action or proceeding which could reasonably be
expected to result in any of the events specified in clauses (i) - (iv) above;
(vi) the receipt of any management letter or similar
communication from such Borrower's or Guarantor's or Subsidiaries' auditors, or
the resignation, discharge or change of the Borrower's or Guarantor's or
Subsidiaries' auditors;
(vii) any Environmental Claim or any fact, circumstance or
condition (including any release or spill of any Hazardous Substance) that could
form the basis of an Environmental Claim with respect to such Borrower or
Guarantor or any of its Subsidiaries;
(viii) any material dispute involving such Borrower or Guarantor
or any of its Subsidiaries on the one hand and any Government Instrumentality on
the other hand; and
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(ix) such Borrower's or Guarantor's or Subsidiaries' or any
ERISA Affiliate's adoption of or participation in any Plan, or intention to
adopt or participate in any Plan.
In each notice delivered pursuant to this Section 5.1(j), such
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Borrower and Guarantor shall include reasonable details concerning the
occurrence that is the subject of such notice as well as such Borrower's or
Guarantor's proposed course of action, if any. Delivery of a notice pursuant to
this Section 5.1(j) shall not affect such Borrower's or Guarantor's Obligations
--------------
under any other provision of the Credit Documents.
(k) Long-term Financing. The Borrowers shall use commercially
reasonable efforts to obtain long-term financing, whether through the offering
or placement of debt or equity securities or otherwise, in order to effect the
prepayment of all outstanding Loans and the termination of any unused portion of
the Aggregate Commitment, in each case prior to the Maturity Date.
(l) Costs. The Borrowers and Guarantors shall bear all costs and
expenses involved in complying with their obligations under Article 5.
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(m) Pay Obligations to Lenders and Perform Other Covenants. The
Borrowers and Guarantors shall make full and timely payment of the Obligations,
whether now existing or hereafter arising, (b) duly comply with all the terms
and covenants contained in this Agreement and in each of the Credit Documents,
the Warrant Agreement and the Warrant Registration Rights Agreement, all at the
times and places and in the manner set forth therein, and (c) except for the
filing of the continuation statements and the making of other filings by the
Agent as secured party or assignee, at all times take all action necessary to
maintain the Liens and security interests provided for under or pursuant to this
Agreement and the Security Documents as valid and perfected Liens on the
property intended to be covered thereby and having the priority required under
this Agreement (subject only to Liens expressly permitted hereunder) and supply
all information to the Agent necessary for such maintenance.
(n) Restructuring. Within 30 days after the Closing Date, the
Borrowers shall have effected a reorganization whereby CGX shall be a parent
holding company of all of the outstanding Capital Stock of Cleartel (which shall
have succeeded to all the assets of Cleartel LP) (from and after the
Restructuring Date, the term "Cleartel" shall be deemed to refer to Cleartel and
Cleartel LP considered as one enterprise), and CAIS (which shall have succeeded
to all the assets of CAIS LP) (from and after the Restructuring Date the term
"CAIS" shall be deemed to refer to CAIS and CAIS LP considered as one
enterprise) (the "Restructuring"). On the Restructuring Date, the Guaranty
shall commence to be in full force and effect and enforceable in accordance with
its terms, CGX's role shall be that of Guarantor hereunder and under the other
Credit Documents, Cleartel and CAIS shall be deemed to be the "Borrowers" and
each of CGX, Cleartel and CAIS and their Owners (as defined in the Pledge and
Security Agreement) shall execute and deliver to the Agent such documents and
instruments as the Agent shall in its sole discretion require to evidence, among
other things, the continuing liability for and assumption by Cleartel and CAIS
of all of the Borrowers' Obligations in effect prior to the Restructuring and
the continuing pledge by CGX and its Owners of all the Capital Stock of CGX,
Cleartel and CAIS (provided, however, that revision of Section 8.10(c) shall not
be so
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required). In addition, on the Restructuring Date, there shall be delivered to
the Agent all documents evidencing the dissolution (by merger or otherwise) of
CAIS LP and Cleartel LP. Upon the effectiveness of the Restructuring none of the
Borrowers, Guarantors and other Obligors shall be in breach, violation or
default under any of its respective representations, warranties and covenants
contained in the Credit Documents. Upon the effectiveness of the Restructuring,
all warrants previously issued by Borrowers shall automatically convert into
Warrants for shares of common stock of CGX in accordance with the Warrant
Agreement.
(o) Additional Obligors and Guarantors. The Borrowers shall cause
each direct or indirect Wholly-Owned Subsidiary not in existence on the date
hereof to execute this Agreement as a Borrower, and cause the direct parent of
each such Subsidiary to pledge all of the Capital Stock of such Subsidiary
pursuant to the Pledge and Security Agreement. From and after the Closing Date,
the Borrowers shall cause every holder of its Capital Stock not referenced on
the Schedules hereto, except for those holders that own less than 1% of the
Capital Stock of such Borrower, to pledge all of such Capital Stock (when and as
issued to such holder) pursuant to the Pledge and Security Agreement, except
that in the case of Mr. Ammon, such pledge shall occur on or before the
Restructuring Date. Each of the Guarantors shall cause any future direct parent
of such Guarantor (which is not an individual) to execute the Guaranty as a
Guarantor.
(p) The Borrowers shall cause a Form UCC-3, satisfactory in form and
substance to the Agent, by First Union National Bank of Virginia to be filed in
all appropriate places.
5.2 Negative Covenants. The Borrowers, Obligors and Guarantors
covenant and agree that, so long as any Lender shall have any Commitment
hereunder and until payment in full of all Loans, Notes and other Obligations,
it will perform and observe each of the following covenants, unless (and then
only to the extent) compliance with such covenant has been waived pursuant to
Section 8.5:
(a) Business. Neither the Borrowers, Guarantors nor any of their
Subsidiaries shall engage in a business which is not substantially the
Telecommunications Business. Without the prior written consent of the Lenders,
which shall not be unreasonably withheld, (i) none of the Borrowers or
Guarantors shall change its name, its legal address, the address of its
principal place of business or chief executive office or the location of its
books, records and contracts, (ii) the Borrowers and Guarantors shall not adopt
or change any trade name or fictitious business name and (iii) none of the
Borrowers and Guarantors shall amend any material Contractual Obligation to
which it is a party without the prior approval of the Lenders.
(b) Mergers and Sales of Assets.
(i) The Borrowers and Guarantors will not and will not permit any of
their Subsidiaries, in a single transaction or through a series of related
transactions, to consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any other Person or group of
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Persons (other than to effect the imposition of Liens under the Credit
Documents), unless at the time and after giving effect thereto:
(1) either (A) the Borrowers and Guarantors or such Subsidiary will be
the continuing corporation in the case of a consolidation or merger involving a
Borrower, Guarantor or such Subsidiary, as the case may be, or (B) the Person
(if other than a Borrower or Guarantor) formed by such consolidation or into
which such Borrower, Guarantor or Subsidiary is merged or the Person which
acquires by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of such Borrower, Guarantor or
Subsidiary (the "Surviving Entity") will be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and such Person expressly assumes, by all
relevant documentation in form and substance reasonably satisfactory to the
Agent, all the Obligations of such Borrower, Guarantor or Subsidiary, as the
case may be, under this Agreement, the Loans and the Notes, the Guaranty, the
other Credit Documents and the Warrant Agreement and Warrant Registration Rights
Agreement, as the case may be, and the Loans and the Notes, the Guaranty, the
other Credit Documents, the Warrant Agreement and the Warrant Registration
Rights Agreement as applicable will remain in full force and effect as so
supplemented; provided, however, that the exceptions permitted by this clause
(1) shall not apply to any transaction referred to therein whereby prior to the
Restructuring any assets are sold, assigned, conveyed, transferred, or otherwise
disposed of to CGX or a consolidation or merger is effected whereby CGX is the
surviving corporation;
(2) immediately before and immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an Obligation of a Borrower or Guarantor or any of their Subsidiaries which
becomes the obligation of such Borrower or Guarantor or any of their
Subsidiaries as a result of such transaction as having been incurred at the time
of such transaction), no Default or Event of Default will have occurred and be
continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis (including any Indebtedness incurred or anticipated to be incurred in
connection with such transaction), the Consolidated Net Worth of such Borrower
or Guarantor or the Surviving Entity, as the case may be, is at least equal to
the Consolidated Net Worth of such Borrower or Guarantor immediately prior to
such transaction;
(4) at the time of the transaction, each Guarantor, if any, unless it
is the other party to the transactions described above, will have confirmed to
the Agent's satisfaction that its Guaranty shall apply to such Person's
Obligations under the Credit Documents;
(5) at the time of the transaction if any of the property or assets
of the Borrowers, Guarantors or any of their Subsidiaries would thereupon become
subject to any Lien, such Lien is a Permitted Lien hereunder;
(6) such transaction would not result in the loss, material impairment
or adverse modification or amendment of any authorization or license of a
Borrower or Guarantor or any of their Subsidiaries that could have a Material
Adverse Effect; and
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(7) at the time of the transaction such Borrower, Guarantor or
the Surviving Entity will have delivered, or caused to be delivered, to the
Agent, in form and substance reasonably satisfactory to the Agent, an Officers'
Certificate and an Opinion of Counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, transfer, lease
or other transaction comply with this Agreement and that all conditions
precedent herein provided for relating to such transaction have been complied
with.
(ii) Notwithstanding the foregoing, the provisions of (i) (3) shall
not apply to (1) a merger or consolidation between a Borrower or a Guarantor and
any of its Subsidiaries or between one or more of its Subsidiaries, and (2) a
merger or consolidation of a Borrower or a Guarantor into any Person in a
transaction designed solely for the purpose of effecting a change in the
jurisdiction of incorporation of such Borrower or Guarantor within the United
States of America.
(iii) In the event of any transaction (other than a lease) described
in and complying with the conditions listed in (i) in which a Borrower or
Guarantor is not the surviving Person, such surviving Person shall succeed to,
and be substituted for, and may exercise every right and power of such Borrower
or Guarantor and such Borrower or Guarantor shall be discharged from all of its
Obligations and covenants under this Agreement, the Loans, the Notes, the
Guaranty, the Pledge and Security Agreement, the other Credit Documents, the
Warrant Agreement and the Warrant Registration Rights Agreement, as the case may
be.
(iv) The Borrowers and Guarantors will not, and will not permit any
Subsidiary, directly or indirectly, whether in a single transaction or a series
of related transactions, to consummate an Asset Sale unless (1) no Default or
Event of Default has occurred or would occur as a result thereof, (2) at least
75% of the consideration from such Asset Sale is received in cash or other
comparable consideration (as described below), and (3) the Borrowers and
Guarantors or such Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject to
such Asset Sale. Such determination of Fair Market Value shall be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such Fair Market Value exceeds $1.0 million. No
later than the date of such Asset Sale, the Borrowers and Guarantors shall
deliver to the Agent an Officer's Certificate stating that such Asset Sale is
permitted hereby and setting forth the basis upon which the calculations
required above were computed, together with a copy of any fairness opinion or
appraisal required hereby. The following types of consideration shall be deemed
"comparable consideration" for the purposes of this covenant: (A) Cash
Equivalents, (B) liabilities (contingent or otherwise) of such Borrower,
Guarantor or Subsidiary assumed by the transferee (or its designee) such that
such Borrower, Guarantor or Subsidiary has no further liability therefor, and
(C) any securities, notes or other obligations received by such Borrower,
Guarantor or Subsidiary from such transferee that are immediately converted by
such Borrower, Guarantor or Subsidiary into cash. Such Borrowers, Guarantors or
Subsidiaries shall within 180 days of the Asset Sale use the Net Cash Proceeds
to invest in property and other assets that will be used only in the
Telecommunications Business or to permanently repay the Loans or Notes, as the
case may be. The amount of such Net Cash Proceeds required to be so applied or
invested during such 180 day period and not so applied or invested constitutes
"Excess Proceeds". When the aggregate amount of Excess Proceeds equals or
exceeds $1.5 million, such Borrower or Guarantor, as the case may be, will apply
the Excess Proceeds to the repayment of the Loans or
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Notes as the case may be as follows: The Borrowers or Guarantors, as the case
may be, will make an offer to purchase (an "Offer") on a pro rata basis, from
all Lenders or Noteholders, in accordance with the procedures set forth herein,
in the aggregate maximum principal amount (expressed as a multiple of $1,000) of
Loans or Notes plus accrued and unpaid interest, that may be purchased out of
such Excess Proceeds. The offer price for the Loans or Notes will be payable in
cash in an amount equal to 100% of the principal amount of the Loans or Notes
plus accrued and unpaid interest, if any, to the date such Offer is consummated
(the "Offered Price"). If the aggregate principal amount of Loans or Notes
surrendered by holders thereof exceeds the amount of Excess Proceeds, the Loans
or Notes to be purchased shall be purchased on a pro rata basis. Upon the
completion of the purchase of all the Loans or Notes tendered pursuant to an
Offer the amount of Excess Proceeds, if any, shall be reset at zero. If a
Borrower or Guarantor becomes obligated to make an Offer pursuant hereto, the
Loans or Notes shall be purchased by the Borrowers or Guarantors, at the option
of the holders thereof, in whole or in part in integral multiples of $1,000, on
a date that is not earlier than 30 days and not later than 60 days from the date
the notice of the Offer is given to holders, or such later date as may be
necessary for the Borrowers or Guarantors to comply with the applicable
requirements under the Exchange Act. The Borrowers and Guarantors will comply
with the applicable tender offer rules, including Rule 14e-1 under the Exchange
Act, and any other applicable securities laws or regulations in connection with
an Offer.
(c) Liens. The Borrowers, Obligors and Guarantors shall not, and
shall not permit any of their Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist, any Lien upon or with respect to any tangible
or intangible property or asset of the Borrowers and Guarantors, or such
Subsidiary now owned or hereafter acquired, or any income or profits therefrom,
or assign or convey any right to receive income therefrom, except that the
foregoing restrictions shall not apply to the following ("Permitted Liens"):
(i) the Security Document Liens;
(ii) Liens for Taxes, if such Taxes (1) are not at the time
delinquent and thereafter can be paid without penalty, or (2) are being
contested in good faith by appropriate proceedings promptly initiated and
diligently pursued with proper reserves established and such Liens have been
bonded over and do not involve any risk that a significant interest in or right
to the Collateral may be sold, lost or forfeited or that any Security Document
Lien may be impaired;
(iii) carriers', warehousemen's, materialmen's and mechanics'
Liens and other similar Liens imposed by Law and arising in the ordinary course
of the Borrowers', Guarantors' or such Subsidiary's business, if such Liens have
been bonded over and either (1) are not filed of record and are not delinquent
or (2) are being contested in good faith by appropriate proceedings with proper
reserves established and have not proceeded to judgment and do not involve any
risk that a significant interest in or right to the Collateral may be sold, lost
or forfeited or that any Security Document Lien may be impaired;
(iv) Liens arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, old age pensions, or other social
security or retirement benefits or similar legislation (other than Liens imposed
by ERISA);
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(v) Liens with respect to which (1) the aggregate principal amount of
the Indebtedness (not constituting Capital Lease Obligations) at any one time
outstanding and secured by Liens permitted by this clause shall not exceed
$200,000, (2) the aggregate amount of the Indebtedness (constituting Capital
Lease Obligations) at any one time outstanding and secured by Liens permitted by
this clause shall not exceed $1,500,000, so long as in either case of clauses
(1) or (2) such Indebtedness shall not otherwise be prohibited by the terms of
this Agreement; and
(vi) Liens arising under the Receivables Sale Agreement; and
(vii) Liens in favor of a Borrower or Guarantor.
If foreclosure or enforcement of any Lien upon the Collateral or any part
thereof is at any time initiated, the Agent shall have the right, but not the
obligation, to take any action it shall deem appropriate, including payment of
the obligation secured by such Lien, and the Borrowers shall immediately upon
demand reimburse the Agent for all sums expended by the Agent in taking any such
action. Any amounts not reimbursed upon demand shall bear interest at the
Default Rate and shall be obligations secured by the Security Document Liens.
(d) Indebtedness. The Borrowers and Guarantors shall not, and shall not
permit any of their Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Indebtedness, except:
(i) Indebtedness of the Borrowers under the Loans, Notes and
the other Credit Documents;
(ii) Capital Lease Obligations;
(iii) Indebtedness that is incurred to immediately repay all
outstanding Indebtedness and other Obligations under the Credit Documents and to
reduce the Commitment of the Lenders hereunder to $0;
(iv) Indebtedness permitted under the Receivables Sale Agreement
pursuant to Section 5.2(k);
(v) Indebtedness of the Borrowers under the Shareholder Promissory
Notes; and
(vi) Subordinated Indebtedness of (A) any Subsidiary owed to and held
by a Borrower, a Guarantor or one of their Subsidiaries; or (B) a Borrower or
Guarantor owed to and held by one of their Subsidiaries.
(e) Lease Obligations. The Borrowers and Guarantors will not create
or suffer to exist any obligations for the payment of rent for any property
under operating leases or agreements to lease having a term of one year or more
other than (i) such operating leases (and agreements) existing on the date of
this Agreement (including any extensions, amendments, supplements or renewals
thereof) and (ii) additional such operating leases and agreements so long as the
direct or contingent liabilities of the Borrowers and Guarantors and in respect
of all
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such obligations created after the date of this Agreement in accordance with
this clause (ii) and payable in any calendar year will not exceed $1,000,000.
(f) Distributions. The Borrowers and Guarantors shall not, and shall
not permit any of their Subsidiaries to, directly or indirectly, make, declare
or pay any distributions, dividends or returns of capital in respect of, or
purchase, retire, redeem or otherwise acquire for value any of their Capital
Stock now or hereafter outstanding, or make any distribution of assets or
property to their shareholders as such. The Borrowers and Guarantors shall not
make any principal payment on, or repurchase, redeem, defease, retire or
otherwise acquire for value, prior to any scheduled principal payment, sinking
fund payment, mandatory redemption payment or other stated maturity, any
Indebtedness of such Borrowers, Guarantors or their Subsidiaries that is
subordinate or junior in right of payment (whether pursuant to its terms or by
operation of law) to the Loans, Notes or the Guaranty, as the case may be.
(g) Transactions with Affiliates and Third Parties. Without the
consent of the Lenders, the Borrowers and Guarantors shall not, and shall not
permit any of their Subsidiaries to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, transfer, disposition, purchase, exchange or lease
of assets, property or services) with, or for the benefit of, any Affiliate of
such Borrower, Guarantor or Subsidiary or any beneficial owner of 5 percent or
more of the Capital Stock or other ownership interest of any of the foregoing
entities at any time outstanding (each of the foregoing being "Interested
Persons"), unless (a) such transaction or series of related transactions is
entered into in good faith and on terms that are no less favorable to such
Borrower, Guarantor or Subsidiary, as the case may be, than those which could
have been obtained in a comparable transaction at such time from persons who are
not Affiliates or Interested Persons, (b) with respect to a transaction or
series of transactions involving aggregate payments or value equal to or greater
than $1,000,000, other than in connection with the Restructuring, such Borrower,
Guarantor or Subsidiary has obtained an opinion from an independent financial
advisor stating that the terms of such transaction or series of transactions are
fair to such Borrower, Guarantor or Subsidiary, as the case may be, from a
financial point of view and (c) with respect to a transaction or series of
transactions involving aggregate payments or value equal to or greater than
$2,000,000, such Borrower, Guarantor or Subsidiary, as the case may be, shall
have delivered an Officer's Certificate to the Agent certifying that such
transaction or series of transactions complies with the preceding clause (a)
and, if applicable, certifying that the opinion referred to in the preceding
clause (b) has been delivered and that such transaction or series of
transactions has been approved by a majority of the disinterested members of the
Board of Directors of such Borrower, Guarantor or Subsidiary.
(h) Use of Proceeds. The Borrowers will use the proceeds of the Loans
only for the purposes described in Section 2.7 and in accordance with the
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requirements and conditions of the Credit Documents.
(i) Auditors. The Borrowers and Guarantors shall not discharge or
change their auditors without the prior written consent of the Lenders, which
consent shall not be unreasonably withheld. The Borrowers and Guarantors shall
not change their fiscal years.
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(j) Publicity. The Borrowers and Guarantors shall not issue, or
consent to the issuance of, any press release, announcement or advertisement
that refers to the financing contemplated by the Credit Documents without the
prior written consent of the Agent.
(k) The Receivables Sale Agreement. The Receivables Sale Agreement
shall not be amended, outstanding Indebtedness thereunder shall not exceed
$5,500,000, and the obligations thereunder shall not be prepaid, without the
prior written consent of the Lenders and Noteholders, as the case may be.
(l) Perfection. The Borrowers, Obligors and Guarantors shall not
change their name or address or do any other act in such a manner that would
adversely affect the Liens or the perfection of the Liens in favor of the Agent
under the Security Documents without the prior written consent of the Lenders,
which shall not be unreasonably withheld.
ARTICLE 6
EVENTS OF DEFAULT
6.1 Events of Default. Each of the following shall constitute an
"Event of Default" under this Agreement:
(a) Any principal of any Loan or Note shall not be paid when due.
(b) Any interest on any Loan or Note or any fee or other amount
(including premiums and make-whole amounts) payable under any Credit Document
(other than amounts described in clause (a) above) shall not be paid within five
days after such interest, fee, or other amount is due.
(c) Any representation or warranty made by or on behalf of a
Borrower, Guarantor or any other Obligor (or any of their respective officers or
representatives) in any Credit Document, the Warrant Agreement or the Warrant
Registration Rights Agreement or in any certificate, financial statement, or
other document furnished pursuant to or in connection with any such document or
the transactions contemplated hereby shall prove to have been incorrect in any
material respect at the time it was made, deemed to have been made, or
confirmed.
(d) A Borrower, Guarantor or any other Obligor shall fail to perform
or observe (i) any term or covenant contained in Sections 5.1(e), 5.1(j), 5.1(n)
-------------------------------
or 5.2 of this Agreement or the Guaranty or (ii) any other covenant, agreement
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or other obligation contained in this Agreement, any other Credit Document, the
Warrant Agreement or the Warrant Registration Rights Agreement (other than those
contained in paragraphs (a), (b) or (c) above) to be performed or observed by
it, and, in the case of clause (ii) only, such failure shall remain unremedied
for 10 days after written notice thereof has been given to such Person by the
Agent or any Lender or Noteholder.
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(e) The Security Documents shall for any reason cease to create
perfected, valid and enforceable First-Priority Liens on the Collateral (or
second-priority Liens in respect of the RFC Collateral), or a Borrower,
Guarantor or any other Obligor shall so state in writing.
(f) The Guaranty or any material provision of any Credit Document,
the Warrant Agreement or the Warrant Registration Rights Agreement shall (i) be
terminated, repudiated, or declared to be invalid by a Borrower, Guarantor or
any other Obligor, as applicable, (ii) be declared by a court or Government
Instrumentality of competent jurisdiction to be void, voidable or unenforceable,
or (iii) for any reason cease to be valid and binding and of full force and
effect.
(g) A Borrower, Guarantor, or a Subsidiary thereof shall fail to pay
any Indebtedness (other than Indebtedness evidenced by the Loans, Notes,
Guaranty or arising under the other Credit Documents), or any interest or
premium thereon, when due (after giving effect to any applicable grace periods),
or any other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness or to permit the exercise of
any remedies against such Person or any of their respective properties, whether
or not such default or event shall be waived by the holders or trustees for such
Indebtedness; or any such Indebtedness shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof.
(h) A final judgment or order for the payment of money in excess of
$500,000 shall be rendered against a Borrower, Guarantor, or a Subsidiary
thereof and either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order or (ii) a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect for any period of 60 days.
(i) A Bankruptcy Event shall occur with respect to a Borrower,
Guarantor, an Obligor owning more than 10% of the Capital Stock of a Borrower or
a Guarantor, or a Subsidiary thereof.
(j) Excluding the events described in paragraph (i) above, any
seizure, compulsory acquisition, expropriation or nationalization of any assets
of a Borrower, Guarantor, or any Subsidiary thereof for which there is not paid
Fair Market Value and where the seizure, compulsory acquisition, expropriation
or nationalization (whether by an outright taking or by confiscatory tax or
other policies), individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect.
(k) A Change of Control shall have occurred.
6.2 Remedies. (a) Acceleration. Upon the occurrence of an Event of
Default described in Section 6.1(i), the Commitments of the Lenders shall
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forthwith terminate, the Loans (and the converted Notes, as applicable), all
interest thereon and all other amounts payable under the Guaranty and the other
Credit Documents shall become and be immediately due and payable, without
presentment, demand, protest or further notice of any kind, all of which
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are hereby expressly waived by the Borrowers. Upon the occurrence and during the
continuance of any other Event of Default other than an Event of Default in
respect of the Loans described in Section 6.1(a) or (b) as to which a Conversion
shall have been effected contemporaneously therewith (and as to clause (b) only
in respect of non-payment of interest due on the Maturity Date of the Loans on
March 4, 1999), the Agent shall at the request, or may with the consent, of the
Majority Lenders, by notice to the Borrowers, (i) declare the Commitments of
each Lender to be terminated, whereupon the same shall forthwith terminate, and
(ii) declare the converted Loans and Notes, as applicable, all interest thereon
and all other amounts payable under the Credit Documents to be forthwith due and
payable, whereupon such Loans and Notes, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by the Borrowers.
(b) Conversion Event. Upon the occurrence of an Event of Default
described in Section 6.1(a) or (b) (as to clause (b) only in respect of accrued
and unpaid interest as of the Maturity Date of the Loans on March 4, 1999), a
Conversion Event shall be deemed to have occurred whereby the outstanding unpaid
principal, interest, premium and all other amounts due on the Loans or under the
Credit Documents shall be converted into the principal amount of converted Notes
in accordance with Section 2A.1.
(c) Other Remedies. If any Default or Event of Default has occurred
and is continuing, and irrespective of whether any Loans or Notes have become or
have been declared immediately due and payable under Section 6.2, the Lenders or
Noteholders may proceed to protect and enforce their rights by any action at
law, suit in equity or other appropriate Loan or Note, or for an injunction
against a violation of any of the terms hereof or thereof, or in aid of the
exercise of any power granted hereby or thereby or by law or otherwise.
(d) Rescission. At any time after any Loans or Notes have been
declared due and payable pursuant to clause (a) or clause (c) of Section 6.2,
the Majority Lenders by written notice to the Borrowers (Issuers), may rescind
and annul any such declaration and its consequences if (a) the Borrowers
(Issuers) have paid all overdue interest on the Loans and Notes, all principal
of and premium, if any, due and payable on any Loans and Notes other than by
reason of such declaration, and all interest on such overdue principal and
premium, if any, and (to the extent permitted by applicable law) any overdue
interest in respect of the Loans and Notes, at the Default Rate, (b) all Events
of Default and Defaults, other than non-payment of amounts that have become due
solely by reason of such declaration, have been cured or have been waived under
this Agreement, and (c) no judgment or decree has been entered for the payment
of any monies due pursuant hereto or to the Loans or Notes. No recission and
annulment under the Section 6.2(d) will extend to or affect any subsequent Event
of Default or Default or impair any right consequent thereon.
(e) No Waivers or Election of Remedies, Expenses, etc. No course of
dealing and no delay on the party of any Lender or Noteholder in exercising any
right, power or remedy shall operate as a waiver thereof or otherwise prejudice
such holder's rights, powers or remedies. No right, power or remedy conferred
by this Agreement or by any Lender or Noteholder upon any holder thereof shall
be exclusive of any other right, power or remedy referred to herein or therein
or now or hereafter available at law, in equity, by statute or
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otherwise. Without limiting the obligations of the Borrowers elsewhere in this
Agreement, the Borrowers (Issuers) will pay to the Lenders and Noteholders on
demand such further amount as shall be sufficient to cover all reasonable costs
and expenses of such Lender or Noteholder incurred in any enforcement or
collection under this Article 6, including, without limitation, reasonable
---------
attorneys' fees, expenses and disbursements.
ARTICLE 7
THE AGENT
7.1 Authorization and Action. Each Lender hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Credit Documents as are delegated
to the Agent by the terms hereof and thereof, together with such powers as are
reasonably incidental thereto. The Agent shall have no duties,
responsibilities, obligations or liabilities other than those expressly set
forth in the Credit Documents, and no additional duties, responsibilities,
obligations or liabilities shall be inferred from the provisions of the Credit
Documents or imposed on the Agent. As to matters not expressly provided for by
this Agreement or the other Credit Documents (including enforcement or
collection of the Notes), the Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of the Majority Lenders, and such instructions shall be
binding upon all the Lenders and all Noteholders, provided that the Agent shall
in no event be required to take any action which exposes the Agent to personal
liability, which is contrary to the Credit Documents or Law or with respect to
which the Agent does not receive adequate instructions or full indemnification
from the Lenders or Noteholders. The provisions of this Article 7 are solely
---------
for the benefit of the Agent, its agents and their respective Affiliates and the
Lenders and Noteholders. The Agent has no duties or relationship of trust or
agency with or to the Borrowers, the Guarantors, Obligors, their Subsidiaries or
their respective Affiliates.
7.2 Delegation of Duties. The Agent may delegate any of its
responsibilities or duties under the Credit Documents to one or more agents and
shall not be liable for the negligence or misconduct of any agent selected by it
with reasonable care.
7.3 Agent's Reliance. None of the Agent, its agents or any of their
respective Affiliates shall be liable for any action taken or omitted to be
taken by any of them under or in connection with the Credit Documents, except
that each shall be liable for its own gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction. Without limiting the
generality of the foregoing, the Agent: (a) may treat the payee of any Note as
the holder thereof until the Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to the Agent; (b)
may consult with legal counsel (including counsel for the Borrowers),
independent public accountants and other experts selected by it and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants or experts; (c) makes no
representation or warranty to any Lender and shall not be responsible to any
Lender for any statements,
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representations or warranties made in or in connection with the Credit
Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of the
Credit Documents or to inspect the books and records or any other property of
the Borrowers, Guarantors or their Subsidiaries; (e) shall not be responsible to
any Lender for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of any Credit Document or any other document
or instrument furnished pursuant thereto, or for the failure of any Person to
perform its obligations under any Credit Document; and (f) shall incur no
liability under or in respect of this Agreement or any other Credit Document or
otherwise by acting upon any notice, consent, waiver, certificate or other
writing or instrument (including facsimiles, telexes, telegrams and cables)
believed by it to be genuine and signed or sent by the proper Person or Persons.
7.4 Notice of Default. The Agent shall not be deemed to have
knowledge or notice of any Default or Event of Default unless and until it has
received written notice from a Lender or a Borrower referring to this Agreement,
describing the Default or Event of Default and stating that such notice is a
"notice of default".
7.5 Agent as Lender. With respect to its Commitments, the Loans
funded by it and the Notes issued to it, ING (U.S.) Capital Corporation shall
have the same rights and powers under the Credit Documents as any other Lender
and may exercise the same as though it were not the Agent; and, unless otherwise
expressly indicated, the term "Lender" or "Lenders" shall include ING (U.S.)
Capital Corporation in its individual capacity. ING (U.S.) Capital Corporation
and its Affiliates may accept deposits from, lend money to, act as trustee under
indentures of and generally engage in any kind of business with the Borrowers,
the Guarantors and their Affiliates, and any Person who may do business with or
own securities of the Borrowers, the Guarantors or any of their Affiliates, all
as if ING (U.S.) Capital Corporation were not the Agent and without any duty to
account therefor to the Lenders.
7.6 Credit Decisions. Each Lender acknowledges that neither the
Agent nor any of its Affiliates has made any representations or warranties with
respect to the Borrowers or any other matter, and agrees that no review or other
action by the Agent or any of its Affiliates shall be deemed to constitute any
such representation or warranty. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender, and based
on the financial statements referred to in Section 4.1(g) and such other
--------------
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and the other Credit
Documents to which it is party. Each Lender also acknowledges and agrees that
it will, independently and without reliance upon the Agent or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Credit Documents. The Agent shall have no obligation to provide to
any Lender any information or documents concerning the Borrowers or any other
Person or matter that may come into the Agent's possession or to obtain any such
information or documents, provided that the Agent shall deliver to the Lenders
information and documents actually received by the Agent from the Borrowers
pursuant to the Credit Documents for distribution to the Lenders.
7.7 Indemnification. The Lenders agree to indemnify the Agent, its
agents and their respective Affiliates (to the extent not reimbursed by the
Borrowers), ratably according
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to the respective principal amounts of the Notes then held by each of the
Lenders (or if no Notes are at the time outstanding, ratably according to the
respective amounts of the Lenders' Commitments), from and against any and all
Claims, liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses and disbursements of any kind or nature
whatsoever which may be imposed on, incurred by or asserted against the Agent,
its agents or their respective Affiliates by any Person (including any Lender)
in any way relating to or arising out of (a) any Credit Document, (b) any action
taken or omitted by the Agent or any Lender, (c) any claim for brokerage fees or
commissions in connection with any transaction contemplated by the Credit
Documents, (d) any Claim based on any misstatement or inaccuracy in or omission
from any disclosure provided by the Borrowers, the Guarantors or their
representatives in connection with the syndication of the Loans or the resale of
the Notes, (e) the existence, use, generation, manufacture, handling,
processing, storage, release, transportation, removal, disposal or clean-up
thereof of any Hazardous Substance by the Borrowers, the Guarantors, any of
their Subsidiaries or any of their respective Affiliates or (f) any
Environmental Claim asserted against or relating to the Borrowers, the
Guarantors, any of their Subsidiaries or any of their respective Affiliates or
any actual or alleged violation of any Environmental Law by any of such Persons,
provided that no Lender shall be liable to any Person for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from such Person's gross negligence
or willful misconduct as finally determined by a court of competent
jurisdiction. Without limiting the generality of the foregoing, each Lender
agrees to reimburse the Agent promptly upon demand for such Lender's ratable
share of any cost, expense or Tax described in Section 8.11 incurred by or
------------
imposed on the Agent for which the Agent does not receive reimbursement from the
Borrowers or Guarantors. Payment by an indemnified party shall not be a
condition precedent to the obligations of the Lenders under this indemnity.
This Section 7.7 shall survive the Closing Date, the making and repayment of the
-----------
Loans and any transfer or assignment of Notes.
7.8 Successor Agent. The Agent may resign at any time by giving at
least 30 days' prior written notice thereof to the Lenders and the Borrowers and
may be removed at any time with or without cause by the Majority Lenders. Upon
any such resignation or removal, the Majority Lenders shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed
by the Majority Lenders and shall have accepted its appointment within 30 days
after the resignation or removal of the retiring Agent, the retiring Agent may,
on behalf of the Lenders, appoint a successor Agent, which shall be a commercial
bank organized under the Laws of the United States or of any State thereof and
shall have a combined capital and surplus of at least $500,000,000. Upon the
acceptance of its appointment as Agent, the successor Agent shall thereupon
succeed to and be vested with all the rights, powers, privileges and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations under the Credit Documents. After any retiring Agent's
resignation or removal, the provisions of this Article 7 shall inure to its
---------
benefit as to any actions taken or omitted to be taken by it while it was Agent.
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ARTICLE 8
GENERAL PROVISIONS
8.1 Counterparts. Each of the Credit Documents may be executed in
any number of counterparts and by the different parties thereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
8.2 Integration. The Credit Documents, the Warrant Agreement and the
Warrant Registration Rights Agreement contain the complete agreement among the
Borrowers, the Guarantors, the Obligors, the Lenders, the Noteholders and the
Agent with respect to the matters contained therein and supersede, except with
respect to a commitment letter agreement between ING (U.S.) Capital Corporation
and the Borrowers, all prior commitments, agreements and understandings, whether
written or oral, with respect to the matters contained therein.
8.3 Severability. Any provision of any Credit Document which is
invalid or prohibited in any jurisdiction shall, as to such jurisdiction, be
ineffective and severable from the rest of such Credit Document to the extent of
such invalidity or prohibition, without impairing or affecting in any way the
validity of any other provision of such Credit Document or of any other Credit
Document, or of such provision in other jurisdictions. The parties agree to
replace any provision which is ineffective by operative of this Section 8.3 with
-----------
an effective provision which as closely as possible corresponds to the spirit
and purpose of such ineffective provision and the affected Credit Document as a
whole.
8.4 Further Assurances. At any time and from time to time upon the
request of the Agent, the Borrowers, the Guarantors and Obligors shall execute
and deliver such further documents and instruments and do such other acts as the
Agent may reasonably request in order to effect fully the purposes of the Credit
Documents, to create, perfect, maintain and preserve Liens of the priority
required herein on the Collateral in favor of the Agent, and to provide for the
payment of the Loans, Notes and the other Obligations of the Borrowers,
Guarantors and Obligors in accordance with the terms of the Credit Documents
(provided, however, that revision of Section 8.10(c) hereof shall not be
required by the Agent hereby). The Borrowers and Guarantors irrevocably
------------- -----------
constitute and appoint the Agent, with full power of substitution, as the
- -------------------------------------------------------------------------
Borrowers', Obligors' and Guarantors' true and lawful attorney-in-fact, in the
- ---------- ----------------------------------------
name and on behalf of the Borrowers, Obligors and Guarantors and at the
- -----------------------------------
Borrowers', Obligors' and Guarantors' expense, to execute and deliver any
- ---------- -----------------------------------
documents and instruments and to do and to perform any acts such as are referred
- --------------------------------------------------------------------------------
to in this Section 8.4, whether or not an Event of Default has occurred and
- ---------------------------------------------------------------------------
without notice to or the consent of the Borrowers, Obligors or Guarantors. This
- ------------------------------------------------- ----
power of attorney is coupled with an interest and is not revocable.
- ------------------------------------------------------------------
8.5 Amendments and Waivers. No amendment or waiver of any provision
of any Credit Document, the Warrant Agreement or the Warrant Registration Rights
Agreement, or consent to any departure by the Borrowers or Guarantors or
Obligors therefrom, shall be effective unless it is in writing and signed by the
Majority Lenders, provided that no amendment, waiver or consent shall, unless in
writing and signed by all the Lenders, do any of the following:
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(a) increase any Commitment or subject the Lenders to any additional obligation,
(b) reduce the principal of, or interest on, the Loans or any fees payable under
the Credit Documents, (c) postpone any date fixed for the payment of principal
of, or interest on, the Loans or any fees payable under the Credit Documents,
(d) release a material portion of the Collateral, (e) amend or waive the
provisions of Sections 8.5 or 8.7(b) or (f) change the definition of "Majority
------------- ------
Lenders". A waiver or consent granted pursuant to this Section 8.5 shall be
-----------
effective only in the specific instance and for the specific purpose for which
it is given.
8.6 No Waiver; Remedies Cumulative. The waiver of any right, breach
or default under any Credit Document by the Agent or any Lender must be made
specifically and in writing. No failure on the part of the Agent or any Lender
to exercise, and no forbearance or delay in exercising, any right under any
Credit Document shall operate as a waiver thereof; no single or partial exercise
of any right under any Credit Document shall preclude any other or further
exercise thereof or the exercise of any other right; and no waiver of any breach
of or default under any provision of any Credit Document shall constitute or be
construed as a waiver of any subsequent breach of or default under that or any
other provision of any Credit Document. No notice to or demand upon the
Borrowers shall entitle the Borrowers to any further, subsequent or other notice
or demand in similar or any other circumstances. Each of the rights and
remedies of the Agent and the Lenders under the Credit Documents is cumulative
and not exclusive of any other right or remedy provided or existing by agreement
or under Law.
8.7 Successors and Assigns.
(a) Each Credit Document shall be binding upon and inure to the
benefit of the parties thereto and all future holders of Notes and their
respective successors and permitted assigns.
(b) Other than in connection with effectuating the Restructuring, the
Borrowers shall not have the right to assign their respective rights or
interests, or delegate their respective duties or obligations, under any Credit
Document without the prior written consent of all the Lenders.
(c) The Lenders shall have the right to syndicate or transfer all or
any part of their respective Commitments to other financial institutions only
upon receipt of (except if the transfer is to another existing Lender hereunder)
the prior written consent of the Agent and the prior written consent, (such
consent not to be unreasonably withheld) of the Borrowers. In connection with
each such transfer, the transferring Lender and its transferee shall execute and
deliver a supplement to this Agreement in a form acceptable to the parties.
Upon delivery of such supplement to the Borrowers and the Agent, the transferee
shall become a "Lender" under the Credit Documents with all of the attendant
rights, benefits and obligations; the respective Pro Rata Share of the
transferring Lender and its transferee shall be appropriately adjusted; and the
Borrowers shall execute and deliver to the transferring Lender and its
transferee replacement Notes reflecting their respective Pro Rata Share. The
Note or Notes being replaced shall be canceled and returned to the Borrowers.
Each replacement Note shall have endorsed thereon the disbursements, payments
and amount outstanding thereunder. After any such transfer, the transferring
Lender shall have no obligations with respect to the portion of its Commitments
transferred. The transferring Lender shall pay to the Agent a processing and
recording fee of
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$3,000. Notwithstanding the foregoing, transfers and exchanges of converted
Notes shall be governed by Section 2A.12 and not by this clause (c).
-------------
(d) The holder of any Note or Commitment shall have the right to grant
participations in such Note or Commitment to any Person on such terms and
conditions as shall be determined by such holder in its sole and absolute
discretion, provided that no such grant of participations shall release any
Lender from its obligations hereunder.
(e) Each Lender shall have the right to assign and pledge all or any
portion of the obligations owing to it under the Credit Documents to any Federal
Reserve Bank or to the United States Department of the Treasury as collateral
security pursuant to Regulation A of the Board of Governors of the Federal
Reserve System and any Operating Circular issued by the Federal Reserve System,
provided that no such collateral assignment shall release any Lender from its
obligations hereunder.
(f) Each Lender represents and warrants to the Agent, each other
Lender and the Borrowers that in making Loans hereunder such Lender will be
acquiring the Notes issued to it for the purpose of investment and not with the
view to, or for sale in connection with, any distribution in violation of the
Securities Act of 1933, as amended.
8.8 No Agency. The Borrowers are not agents or representatives of
the Agent or any Lender and are not authorized to act on behalf of or bind the
Agent or any Lender in any way.
8.9 No Third Party Beneficiaries. Except as otherwise expressly
stated therein, each Credit Document is intended to be solely for the benefit of
the parties thereto and their respective successors and permitted assigns and is
not intended to and will not confer any rights or benefits on any third party.
8.10 Nonrecourse. The Loans are the obligations solely of the
Borrowers, and the Lenders will have (a) access only to the Collateral and the
----
assets of the Borrowers for repayment, (b) recourse against the Guarantors only
----
to the extent of their obligations under the Guaranty and any other Document to
which they are a party and with respect to any Collateral pledged by them and
(c) recourse to each other Obligor only with respect to any Collateral required
----
to be pledged by it and no claim shall be otherwise made against such other
Obligor under this Agreement.
8.11 Costs, Expenses and Taxes. The Borrowers agree to pay to the
Agent and (as to enforcement only) the Lenders on demand all costs, expenses and
Taxes (other than withholding Taxes (which will be governed by Section 2.11(a),
or Lender Income Taxes) incurred or arising in connection with the preparation,
documentation, negotiation, execution, delivery, funding, syndication,
administration or enforcement of the Credit Documents or the transactions
contemplated thereby or effected pursuant thereto. Such costs, expenses and
Taxes shall include (a) all fees, costs and expenses arising or incurred in
connection with the syndication of the Loans, up to an aggregate of $10,000, (b)
all fees of, and expenses incurred by, Lenders' Counsel and all other advisers
and consultants engaged pursuant to the Credit Documents, (c) all Taxes and all
filing and recordation fees and expenses payable in order to
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create, attach, perfect, continue and enforce the Liens of the Security
Documents, (d) all fees, costs, expenses, Taxes and insurance premiums incurred
in connection the protection, maintenance, preservation, collection, liquidation
or sale of, or foreclosure or realization upon, any Collateral or RFC
Collateral, and (e) all attorneys' fees and expenses and other costs incurred in
connection with (i) complying with any subpoena or similar legal process
relating in any way to any Credit Document, the Borrowers, the Guarantors,
Obligors or any Subsidiaries thereof, (ii) determining the rights and
responsibilities of the Agent or the Lenders under the Credit Documents, (iii)
any enforcement, amendment or restructuring of, or waiver or consent under,
under any Credit Document, (iv) foreclosure or realization upon any Collateral
or RFC Collateral or (v) any bankruptcy, insolvency, receivership,
reorganization, liquidation or similar proceeding or any appellate proceeding
involving, the Borrowers, the Guarantors, Obligors or any Subsidiaries thereof.
The Borrowers agree to make the payments required under this Section 8.11
------------
regardless of whether the transactions contemplated by the Credit Documents are
consummated and hereby indemnify the Agent and the Lenders for all liabilities
resulting from any failure or delay in making any payment required under this
Section 8.11. The Borrowers' obligations under this Section 8.11 will constitute
- ------------ ------------
Obligations secured by the Security Document Liens.
8.12 Indemnity. The Borrowers agree to indemnify the Lenders, the
Agent and their respective Affiliates from and against any and all Claims,
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses and disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against them or any one or more of them by
any Person (including any Lender) in any way relating to or arising out of (a)
any Credit Document, (b) any action taken or omitted by them or any one or more
of them pursuant to any Credit Document, (c) any claim for brokerage fees or
commissions in connection with any transaction contemplated by the Credit
Documents, (d) any claim based on any misstatement or inaccuracy in or omission
from any disclosure provided by the Borrowers or their representatives in
connection with the syndication of the Loans, (e) the existence, use,
generation, manufacture, handling, processing, storage, release, transportation,
removal, disposal or clean-up thereof of any Hazardous Substance by the
Borrowers, any of their Subsidiaries or any of their respective Affiliates or
(g) any Environmental Claim asserted against or relating to the Borrowers, any
of their Subsidiaries or any of their respective Affiliates or any actual or
alleged violation of any Environmental Law by any of such Persons, provided that
the Borrowers shall not be liable to any Person for any portion of such Claims,
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from such Person's gross negligence
or willful misconduct as finally determined by a court of competent
jurisdiction. Payment by an indemnified party shall not be a condition
precedent to the obligations of the Borrowers under this indemnity. This
Section 8.12 shall survive the Closing Date, the making and repayment of the
- ------------
Loans and any transfer or assignment of Notes.
8.13 Right of Set-off. Upon the occurrence and during the
continuance of an Event of Default, each Lender is hereby authorized at any time
and from time to time, without notice to the Borrowers or Guarantors, as the
case may be (any such notice being expressly waived by the Borrowers or
Guarantors), to set off and apply any and all deposits (general or special, time
or demand) at any time held and other indebtedness at any time owing by such
Lender (at any of its offices, branches or agencies, wherever located) to or for
the credit or the account of the Borrowers or Guarantors against any and all of
the Obligations, irrespective of
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whether or not such Lender or the Agent shall have made any demand under any
Note or any other Credit Document, and although such obligations may be
continuing or unmatured. Each Lender agrees to notify the Borrowers and
Guarantors promptly after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of the Lenders under this Section 8.13 are in addition
------------
to all other rights and remedies (including other rights of set-off) which the
Lenders may have.
8.14 Sharing of Payments. Each Lender agrees that if as of any date
it obtains any payment (whether by voluntary payment, realization upon security,
exercise of the right of set-off or banker's lien, counterclaim or cross action
or otherwise) on account of the Note or Notes held by it in excess of its Pro
Rata Share of all payments on account of the Notes obtained by the Lenders, it
will purchase for cash without recourse or warranty from the other Lenders
interests in their Notes in such amounts as shall result in a proportional
participation by all of the Lenders in such excess payment. If any of such
excess payment is subsequently recovered from such purchasing Lender, any
purchases of interests in Notes shall be rescinded and the purchase prices
restored to the extent of such recovery, in each case without interest. The
Borrowers agree that any Lender purchasing an interest in a Note pursuant to
this Section 8.14 may exercise all its rights of payment (including the right of
------------
set-off) with respect to such interest as fully as if such Lender were the
direct creditor of the Borrowers in the amount of such interest. This Section
-------
8.14 is for the sole benefit of the Lenders and shall not confer any rights upon
- ----
the Borrowers.
8.15 Governing Law. Each Credit Document, except to the extent
provided otherwise therein, will be governed by, and construed in accordance
with, the Laws of the State of New York, other (to the greatest extent
permissible by law) conflict of laws principles that would apply the Laws of
another jurisdiction.
8.16 Waiver of Presentment, Demand, Protest and Notice. The
Borrowers, Guarantors and other Obligors irrevocably waive presentment, demand,
protest, and, to the extent permitted by Applicable Law, notice of any kind in
connection with any Credit Document or any Collateral.
8.17 (Intentionally omitted.)
8.18 Waiver of Jury Trial. THE BORROWERS, GUARANTORS, OBLIGORS, THE
AGENT AND THE LENDERS WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED ON OR ARISING FROM ANY CREDIT DOCUMENT, ANY
TRANSACTION CONTEMPLATED THEREBY OR EFFECTED PURSUANT THERETO, ANY DEALINGS OR
COURSE OF DEALING BETWEEN OR AMONG THEM RELATING IN ANY WAY TO THE SUBJECT
MATTER OF THE CREDIT DOCUMENTS OR ANY STATEMENTS OR ACTIONS OF ANY OF THEM OR
THEIR AFFILIATES. Each of the parties acknowledges and agrees that this waiver
is a material inducement to enter into the business relationship contemplated by
the Credit Documents and that each has relied on this waiver in entering into
the Credit Documents to which it is a party and will continue to rely on this
waiver in its future dealings with the other parties. The scope of this waiver
is intended to be all-encompassing, and this waiver shall apply to all Claims,
of any nature whatsoever, whether deriving from contract, arising by law, based
on tort or otherwise. THE BORROWERS, GUARANTORS, OBLIGORS, THE AGENT AND
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THE LENDERS HAVE MADE THIS WAIVER KNOWINGLY AND VOLUNTARILY, AND THIS WAIVER
SHALL BE IRREVOCABLE. THIS WAIVER SHALL ALSO APPLY TO ALL AMENDMENTS,
SUPPLEMENTS, RESTATEMENTS, EXTENSIONS AND MODIFICATIONS OF ANY CREDIT DOCUMENT
AS WELL AS TO ANY CREDIT DOCUMENT ENTERED INTO AFTER THE DATE OF THIS AGREEMENT.
In the event of litigation, this Agreement may be filed as a written consent to
a trial by the court.
8.19 Consent to Jurisdiction. The Borrowers, Obligors and Guarantors
hereby irrevocably submit to the jurisdiction of any New York state or (to the
extent that such court would have subject matter jurisdiction) United States
federal court sitting in New York City over any action or proceeding arising out
of or relating to any Claim, and the Borrowers, Obligors and Guarantors hereby
irrevocably agrees that all Claims in respect of such action or proceeding may
be heard and determined in such New York state or United States federal court.
The Borrowers, Obligors and Guarantors irrevocably waive any objection which
they may now or hereafter have to the laying of venue in such forums and agrees
not to plead or claim that any such action or proceeding brought in any such New
York state or United States federal court has been brought in an inconvenient
forum. The Borrowers, Obligors and Guarantors irrevocably consent to the
service of any and all process in any such action or proceeding by the mailing
of copies of such process to the Borrowers, Obligors and Guarantors at the
respective addresses set forth on the signature pages to this Agreement. The
Borrowers, Obligors and Guarantors agree that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by Law.
Nothing in this Section 8.19 shall affect the right of the Agent and the Lenders
------------
to serve legal process in any other manner permitted by Law or affect the right
of the Agent and the Lenders to bring any action or proceeding against the
Borrowers and Guarantors or their property in the courts of any other
jurisdiction.
8.20 Confidentiality. The Borrowers, Obligors and Guarantors, the
Agent and the Lenders agree to use reasonable efforts to keep confidential the
Credit Documents and each document and all information which is delivered to
them by another party to this Agreement and marked "confidential".
Notwithstanding the foregoing, each party shall be permitted to disclose
confidential documents and information (a) to another party, (b) to its
Affiliates, advisers and consultants, (c) to prospective participants or
prospective purchasers or transferees of interests in Notes and their respective
Affiliates, advisers and consultants, (d) to any Government Instrumentality
having jurisdiction over such party, (e) in response to any subpoena or other
legal process or to comply with Law, (f) to the extent reasonably required in
connection with any litigation to which such party is a party, (g) to the extent
reasonably required in connection with the exercise of its rights or remedies
under any Credit Document, (h) to the extent such documents or information
already have been publicly disclosed by another Person and (i) and in any public
or private offering of debt or equity securities where disclosure is required by
law or is deemed by the Borrowers to be material to the offerees. Each
prospective participant, purchaser and transferee and each adviser and
consultant to which confidential documents or information is disclosed shall be
required to execute a confidentiality agreement containing the provisions of
this Section 8.20.
------------
8.21 Notices. All notices, consents, certificates, waivers, documents
and other communications required or permitted to be delivered to any party
under the terms of any Credit
45
<PAGE>
Document (a) must be in writing, (b) must be personally delivered, transmitted
by an internationally recognized courier service or transmitted by facsimile,
and (c) must be directed to such party at its address or facsimile number set
forth on the signature pages to this Agreement. All notices will be deemed to
have been duly given and received on the date of delivery if delivered
personally, three days after delivery to the courier if transmitted by courier,
or the date of transmission with confirmation if transmitted by facsimile,
whichever occurs first, provided that notices to the Agent pursuant to Article 2
---------
or 7 shall not be effective until actually received by the Agent. Any party may
-
change its address or facsimile number for purposes hereof by notice to all
other parties.
46
<PAGE>
IN WITNESS WHEREOF, the parties, intending to be legally bound, have
caused this Agreement to be signed on the date first above written.
BORROWERS:
CGX Communications, Inc.
By: /s/ Ulysses G. Auger, II
--------------------------
Name: Ulysses G. Auger, II
Title: President
Address:
1232 22nd St. NW
Washington, D.C. 20037
Attention: Ulysses G. Auger, II
Facsimile No.: (202) 463-7190
CAIS, Inc.
By: /s/ Ulysses G. Auger, II
------------------------
Name: Ulysses G. Auger, II
Title: President
Address:
6861 Elm Street
McLean, VA 22101
Attention: Ulysses G. Auger, II
Facsimile No.: (703) 790-8805
47
<PAGE>
Cleartel Communications, Inc.
By: /s/ Ulysses G. Auger, II
------------------------
Name: Ulysses G. Auger, II
Title: President
Address:
1232 22nd St. NW
Washington, D.C. 20037
Attention: Ulysses G. Auger, II
Facsimile No.: (202) 463-7190
Cleartel Communications Limited Partnership
By: Cleartel Communications, Inc., Its General Partner
By: /s/ Ulysses G. Auger, II
------------------------
Name: Ulysses G. Auger, II
Title: President
Address:
1232 22nd St. NW
Washington, D.C. 20037
Attention: Ulysses G. Auger, II
Facsimile No.: (202) 463-7190
48
<PAGE>
CAIS Limited Partnership
By: CAIS, Inc., Its General Partner
By: /s/ Ulysses G. Auger, II
------------------------
Name: Ulysses G. Auger, II
Title: President
Address:
6861 Elm Street
McLean, VA 22101
Attention: Ulysses G. Auger, II
Facsimile No.: (703) 790-8805
LENDERS:
ING (U.S.) Capital Corporation
By: /s/ Bart Staal
--------------
Name: Bart Staal
Title: Managing Director
Pro Rata Share of the Aggregate Commitment: 100%
Address:
153 East 57th Street
--------------------------------------
New York, NY 10022
--------------------------------------
Attention: Lisa Hannahoe
--------------
Facsimile No.: (212) 486-6341
--------------
49
<PAGE>
AGENT:
ING (U.S.) Capital Corporation
By: /s/ Bart Staal
--------------
Name: Bart Staal
Title: Managing Director
Address:
153 East 57th Street
------------------------------
New York, NY 10022
------------------------------
Attention: Lisa Hannahoe
-------------------
Facsimile No.: (212) 486-6341
---------------
OWNERS:
ULYSSES G. AUGER, SR.
/s/ Ulysses G. Auger, Sr.
-------------------------
ULYSSES G. AUGER, II
/s/ Ulysses G. Auger, II
------------------------
WILLIAM M. CALDWELL, IV
/s/ William M. Caldwell, IV
---------------------------
EVANS ANDERSON
/s/ Evans Anderson
------------------
50
<PAGE>
BARTON GROH
/s/ Barton Groh
---------------
THE BRIDGETTE KATHRYN AUGER
TRUST
THE GREGORY ULYSSES AUGER, III
TRUST
THE ALEXANDER ROBERT AUGER TRUST
THE ULYSSES GEORGE HAWTHORNE
AUGER, III TRUST
THE NICHOLAS WILLIAM RANDOLPH
AUGER TRUST
THE JAMES FREDERICK AUGER TRUST
THE ANNABEL-ROSE AUGER TRUST
THE CONSTANDINOS ULYSSES
FRANCISCOS AUGER ECONOMIDES
TRUST
THE VASSILIKI ILLIAS AUGER
ECONOMIDES TRUST
THE CONSTANDINA FRANCISCA AUGER
ECONOMIDES TRUST
By: /s/ James Pedas
-----------------
James Pedas, Trustee
(As to each Trust)
51
<PAGE>
SCHEDULE A
Owners
Ulysses G. Auger, II
Ulysses G. Auger, Sr.
Bridgette Kathryn Auger Trust
Gregory Ulysses Auger III Trust
Alexander Robert Auger Trust
Ulysses George Hawthorne Auger III Trust
Nicholas William Randolph Auger Trust
James Frederick Auger Trust
Annabel-Rose Auger Trust
Constandinos Ulysses Franciscos Auger Economides Trust
Vassiliki Illias Auger Economides Trust
Constandina Francisca Auger Economides Trust
<PAGE>
SCHEDULE B
CGX
CGX Communications
CGX Telecom
Cleartel
Cleartel Communications
CAIS
CAIS Internet
OverVoice
<PAGE>
SCHEDULE C
Legal Address and Address of the
Principal Place of Business and
Chief Executive Office of the Borrowers,
Guarantors and Obligors
CAIS, Inc.
6861 Elm Street
McLean, VA 22102
CAIS, LP
6861 Elm Street
McLean, VA 22102
Cleartel Communications, Inc
1232 22nd Street, NW
Washington, D.C. 20037
Cleartel Communications, LP
1232 22nd Street, NW
Washington, D.C. 20037
CGX Communications, Inc.
1232 22nd Street, NW
Washington, DC 20037
Ulysses G. Auger, II
1232 22nd Street, NW
Washington, DC 20037
Ulysses G. Auger, Sr.
1217 22nd Street, NW
Washington, DC 20037
Auger Trusts
c/o
James Pedas
1101 23rd Street, NW
Washington, DC 20037
<PAGE>
SCHEDULE X
I. Definitions.
When used in the Credit Documents, the following capitalized defined
terms shall have the respective meanings set forth below:
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing; provided that beneficial ownership of 10% or more
of the Voting Stock of a Person shall be deemed to be control over such Person.
"Agent" means ING (U.S.) Capital Corporation, New York, New York, as
agent for the Lenders, or any successor thereto appointed by the Lenders
pursuant to Section 7.8 of the Credit Agreement.
"Aggregate Commitment" means $7,000,000.00. The Aggregate Commitment
is subject to reduction under Sections 2.8 and 2.9 of the Credit Agreement.
"Applicable Law" means all Laws governing, applicable to, or in any
way related to the execution, delivery, performance or enforcement of the Credit
Documents, the Warrant Agreement or the Warrant Registration Rights Agreement,
or the existence or activities of the Agent, the Lenders, the Noteholders, an
Obligor, a Borrower or a Guarantor.
"Applicable Margin" means five percent (5.00%) per annum.
"Approvals" means any and all approvals, permits, permissions,
licenses, authorizations, consents, certifications, actions, orders, waivers,
exemptions, variances, franchises, filings, declarations, rulings,
registrations, applications and notices to, from or issued by any Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including by way of merger, consolidation or sale/leaseback
transaction), directly or indirectly, in one or a series of related
transactions, to any Person other than a Borrower or Guarantor or a Wholly-Owned
Subsidiary of a Borrower or Guarantor, of (a) any Capital Stock of any
Subsidiary, (b) all or substantially all of the properties and assets of any
division or line of business of a Borrower, Guarantor or any Subsidiary of the
same; or (c) any other properties or assets of a Borrower, Guarantor or any such
Subsidiary, other than in the ordinary course of business. For the purposes of
this definition, the term "Asset Sale" shall not include any transfer of
properties and assets (A) in connection with the Restructuring, (B) the Fair
Market Value of which in the aggregate does not exceed $100,000 in any
transaction or series of related transactions, or (C) which constitutes the
granting of any Permitted Lien.
<PAGE>
"Auger Trusts" means each of the Bridgette Kathryn Auger Trust, the
Gregory Ulysses Auger, III Trust, the Alexander Robert Auger Trust, the Ulysses
George Hawthorne Auger, III Trust, the Nicholas William Randolph Auger Trust,
the James Frederick Auger Trust, the Annabel-Rose Auger Trust, the Constandinos
Ulysses Franciscos Auger Economides Trust, the Vassiliki Illias Auger Economides
Trust and the Constandina Francisca Auger Economides Trust.
"Availability Period" means the period beginning on the Closing Date
and ending on the earliest to occur of (i) the date which is 90 days after the
Closing Date or (ii) termination of the entire Aggregate Commitment pursuant to
Section 2.8, 2.9(e) or 6.2 of the Credit Agreement.
"Bankruptcy Event" means, with respect to a Person, (a) the insolvency
of such Person, the inability of such Person to pay its debts as they become
due, or the admission by such Person in writing of its inability to pay its
debts as they become due, (b) a general assignment by such Person for the
benefit of its creditors, (c) any action taken or initiated by such Person for
its winding-up or liquidation or for the appointment of a receiver, trustee,
custodian, or similar officer for it or for any of its assets or revenues, (d)
the commencement by such Person of any bankruptcy, insolvency, reorganization,
or liquidation case, action, or proceeding or any other proceeding for relief
under any bankruptcy Law or any other Law for the relief of debtors or affecting
the rights of creditors generally, (e) the commencement by any Person against
such Person of any case, action, or proceeding described in clause (c) or (d) or
similar in effect which remains undismissed or undischarged for a period of 60
days, (f) any court takes jurisdiction of such Person's assets or revenues and
such action remains undismissed or undischarged for a period of 60 days, or (g)
any corporate, partnership, or other action taken or initiated by such Person
authorizing, approving, consenting to, or indicating acquiescence in any case,
action, or proceeding described in clause (b), (c), (d), (e), or (f).
"Base Rate", on any day, means a rate of interest per annum equal to
the greater of (i) the rate of interest per annum announced from time to time by
the Agent as its base lending rate for U.S. domestic commercial loans, as in
effect on such day, or (ii) the Federal Funds Rate in effect on such day plus
0.5%. The rate announced by the Agent as its base lending rate for U.S.
domestic commercial loans is a reference rate and is not necessarily the lowest
or best rate actually charged by the Agent to any borrower. The Agent may make
loans at rates of interest at, below or above such base lending rate.
"Borrowers" means each of the Persons listed in the first paragraph of
the Credit Agreement as such, and on and after the date of the Restructuring
means, Cleartel and CAIS, successors to Cleartel and CAIS. On and after the
occurrence of the Conversion, the Borrowers shall be deemed to be the "Issuers"
of the Notes.
"Borrower's Counsel" means Swidler Berlin Shereff Friedman, LLP.
"Breakage Costs" means, as to any payment of principal of any Loan
made other than on the last day of the then applicable Interest Period for such
Loan, as a result of prepayment, acceleration of the Loan or for any other
reason, any amounts required to compensate the Lenders for any additional
losses, costs or expenses which any of the Lenders
2
<PAGE>
may incur as a result of such payment, including, without limitation, any loss,
cost or expense incurred by reason of the liquidation or redeployment of
deposits or other funds acquired by any such Lender to fund or maintain such
Loans.
"Budget" means, for the period, a budget for the Borrowers and
Guarantors with respect to such period prepared by the Borrowers and Guarantors
in good faith and with due care which sets forth in reasonable detail (i) the
projected revenues and expenses of each of the Borrowers and Guarantors on a
monthly basis, (ii) the amount and timing of expected capital expenditures,
(iii) cash flow projections and working capital needs and (iv) such other
information as the Lenders shall reasonably request.
"Business Day" means any day other than a Saturday, Sunday or day on
which commercial banks in New York City are required or authorized to be closed.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) in such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person, together in each case with
any rights (other than Indebtedness convertible into an equity interest),
warrants or options to subscribe for or acquire an equity interest in such
Person.
"Cash Equivalents" means, (i) any evidence of Indebtedness with a
maturity of 180 days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptances with a
maturity of 180 days or less of any U.S. financial institution that is a member
of the Federal Reserve System having combined capital and surplus and undivided
profits of not less than U.S.$500,000,000 and whose short-term debt has a
rating, at the time as of which any investment therein is made, of at least "A-
1" by Standard & Poor's Corporation ("S&P") or at least "P-1" by Moody's
Investors Service, Inc. ("Moody's") or at least an equivalent rating category of
another nationally recognized securities rating agency; (iv) commercial paper,
maturing not more than 180 days after the date of acquisition, issued by a
corporation (other than a Borrower or Guarantor or an Affiliate or Subsidiary of
a Borrower or Guarantor) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P and (v) any money market deposit accounts issued or offered by
a U.S. commercial bank having capital and surplus in excess of $500,000,000;
provided that the short term debt of such commercial bank has a rating, at the
time of investment, of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange
3
<PAGE>
Act), other than the Permitted Holders, is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time, upon the happening of an event or otherwise),
directly or indirectly, of more than 35% of the total outstanding Voting Stock
of any Borrower or Guarantor or Subsidiary thereof; (b) the Permitted Holders
shall at any time beneficially own less than 90% in the aggregate of the Voting
Stock of the Borrowers and Guarantors in the aggregate held by them on the
Closing Date; (c) other than in connection with the Restructuring, any Borrower
or Guarantor is liquidated or dissolved or adopts a plan of liquidation, (d)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors of any Borrower or Guarantor
(together with any new directors whose election to such board or whose
nomination for election by the stockholders of such Borrower or Guarantor was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved), cease for any reason to constitute a
majority of such Board of Directors then in office; (e) any Borrower or
Guarantor consolidates with or merges with or into any Person or sells, conveys,
transfers or leases all or substantially all of its assets (on a consolidated
basis) to any Person, other than in connection with the Restructuring; or (f)
any corporation consolidates with or merges into or with any Borrower or
Guarantor, in any such event, pursuant to a transaction in which the outstanding
Voting Stock of such Borrower or Guarantor is changed into or exchanged for
cash, securities or other property, other than in connection with the
Restructuring and other than any such transaction where the outstanding Voting
Stock of such Borrower or Guarantor is not changed or exchanged at all (except
to the extent necessary to reflect a change in the jurisdiction of incorporation
of such Borrower or Guarantor or where no "person" or "group", other than a
Permitted Holder, owns, immediately after such transaction, directly or
indirectly, more than 35% of the total outstanding Voting Stock of the surviving
corporation).
"Claim" means any claim, suit, demand, proceeding, complaint,
assessment, lien, injunction, order, judgment, notice of non-compliance or
violation, investigation or other action by or before any Government
Instrumentality or any other Person.
"Closing Date" means the date on which the conditions precedent set
forth in Section 3.1 of the Credit Agreement are satisfied and the initial Loan
or Loans are funded.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Pledged Shares and all other property, rights
and interests from time to time subject, or purported to be subject, to the
Security Document Liens.
"Commitment" means the commitment of each Lender to make Loans set
forth in Section 2.1(a) of the Credit Agreement.
"Consolidated Net Worth" means with respect to any Person at any date,
the consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to Redeemable Capital Stock of such Person and
its subsidiaries, determined in accordance with GAAP.
4
<PAGE>
"Contractual Obligation," as applied to any Person, means any
provision of any security issued by such Person or of any indenture, mortgage,
deed of trust, lease, contract, undertaking, agreement or instrument to which
such Person is a party or by which it or any of its property is bound or to
which it or any of its property is subject.
"Conversion" means the conversion of Loans into Notes pursuant to
Article 2A of the Credit Agreement.
"Conversion Date" means March 4, 1999.
"Credit Agreement" means the Credit Agreement dated September 4, 1998,
by and among the Borrowers and the Owners referred to therein and the Lenders,
Noteholders and Agent, as it may be amended, supplemented or otherwise modified
from time to time.
"Credit Agreement Termination Date" means the first date on which (i)
no Lender shall have any Commitment under the Credit Agreement, (ii) no
principal of or interest on any Loan or Note, and no fee payable pursuant to
Section 2.5 of the Credit Agreement, shall be unpaid and (iii) no other
Obligations shall be due and payable.
"Credit Documents" means the Credit Agreement (including this Schedule
X), the Loans, the Notes, the Security Documents, the Guaranty, the
Subordination Agreement, and all other agreements, guaranties and instruments
evidencing, securing or relating to the Loans, the Notes or the Collateral.
"Default" means any event which, with the passage of time or the
giving of notice or both, would be an Event of Default.
"Default Rate" is defined in Section 2.3(d) of the Credit Agreement.
"Environmental Claim" means any Claim in any way relating to any
Hazardous Substance or Environmental Law and includes any Claim asserted by a
Government Instrumentality or any other Person for damages, injury, clean-up,
remediation, contribution or indemnity.
"Environmental Laws" means all Laws and Approvals in any way relating
to the protection of human health or safety, the environment or natural
resources or to any Hazardous Substance or the existence, use, generation,
manufacture, handling, processing, storage, release, transportation, removal,
disposal or clean-up thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate", with respect to any Person, means any member
(whether or not incorporated) of a group which is under common control (within
the meaning of the regulations under Section 414 of the Code, and of which such
Person is a member.
"Estimated Balance Sheets" means, as of any date, the estimated
consolidated balance sheets of each of the Borrowers and Guarantors.
5
<PAGE>
"Event of Default" means an event described in Section 6.1 of the
Credit Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any properties or assets,
the sale value, as determined by the applicable Board of Directors of the
Borrowers and Guarantors, acting in good faith, which would reasonably be
expected to be obtained in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided, however, that, with respect to
-------- -------
any transaction or related series of transactions which involves an asset or
assets in excess of $250,000 in the aggregate, such determination shall be
evidenced by resolutions of the majority of disinterested members of the Boards
of Directors of the respective Borrowers and Guarantors delivered to the Agent.
"Federal Funds Rate", on any day, means a rate of interest per annum
(rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers as
published for such day (or if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or if such rate
is not so published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by the Agent from three
federal funds brokers of recognized standing selected by the Agent.
"Financing Statements" means all financing statements on Form UCC-1
and all similar documents and instruments executed, filed or recorded for the
purpose of perfecting Liens on the Collateral.
"First-Priority" when used with respect to any Security Document Lien
on any Collateral, means that, under Applicable Law, such Security Document Lien
on such Collateral is subordinate to no Liens.
"First Union Loan Agreement" means the Business Loan and Security
Agreement dated as of May 10, 1996 among CAIS, Inc., Capital Area Internet
Service, Inc., Ulysses G. Auger, II and First Union National Bank of Virginia.
"Funding Date" means the LIBOR Business Day on which a Loan is funded,
the Restructuring Date and the Conversion Date in the event of a Conversion
pursuant to the Credit Agreement.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect from time to time in the United States.
"Government Instrumentality" means any nation, government, province,
state, or any political subdivision, instrumentality, ministry, department,
agency, court, tribunal, authority, corporation, commission or other body or
entity of, or under the direct or indirect control of, any of the foregoing,
including any central bank or other fiscal, monetary or other authority.
6
<PAGE>
"Guarantor" means, on and after the Restructuring Date, CGX
Communications, Inc. and any other Person that becomes a party to the Guaranty.
"Guaranty" means the Guaranty dated as of the Restructuring Date made
by the Guarantors to the Agent for the benefit of the Lenders.
"Hazardous Substance" means any hazardous substance or material, toxic
substance or material, pollutant, waste, chemical, contaminant, degradation by-
product, asbestos, petroleum, hydrocarbon or petroleum or hydrocarbon product,
including any "hazardous substance", "hazardous material", "toxic substance",
"toxic material", "hazardous waste" or "toxic pollutant", as such terms are
defined or identified in any Environmental Law.
"Indebtedness" means with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii) all
obligations of such Person evidenced by bonds, notes, debentures, guarantees,
letters of credit or other similar instruments, (iii) all indebtedness created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (unless the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising in
the ordinary course of business, (iv) all obligations under Interest Rate
Agreements of such Person, (v) all Capital Lease Obligations of such Person or
the balance deferred and unpaid of the purchase price of any property, (vi) all
Indebtedness referred to in clauses (i) through (v) above of other Persons and
all dividends of other Persons, the payment of which is secured by (or for which
the holder of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien, upon or with respect to property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness,
(vii) all Redeemable Capital Stock issued by such Person valued at the greater
of its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends, (viii) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (vii) above. and (ix) liabilities in respect
of unfunded vested benefits under Plans covered by Title IV of ERISA. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to this Agreement, and if such price is based upon, or
measured by, the Fair Market Value of such Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such Stock.
In no event shall "Indebtedness" include any trade payable or other current
liabilities arising in the ordinary course of business excluding the current
maturity of any obligation which would otherwise constitute Indebtedness. The
amount of any item of Indebtedness shall be the amount of such Indebtedness
properly classified as a liability on a balance sheet prepared in accordance
with GAAP.
7
<PAGE>
"Information Memorandum" means the Information Memorandum dated July,
1998 relating to the proposed issuance by one or more of the Borrowers of
$20,000,000 in equity.
"Initial Date" means, in the case of a Lender, the date hereof, and,
in the case of a successive holder of a Note, the date on which such holder
becomes a holder of a Note.
"Interest Payment Date" means any date on which interest is payable on
the Loans pursuant to Section 2.3(c) of the Credit Agreement and on the Notes
pursuant to Section 2A.2 of the Credit Agreement.
"Interest Period" means, (a) as to any Loan, subject to Section 2.3(b)
of the Credit Agreement, the period commencing on the date of the funding of
such Loan and ending on the numerically corresponding day in the calendar month
that is one, two or three months thereafter, as so elected by the Borrower in
the Notice of Borrowing in respect of such Loan, and each period thereafter
commencing on the last day of the then current Interest Period and having a
duration of one, two or three months, as applicable (except that each Interest
Period that commences on the last day of a calendar month (or on any day for
which there is no numerically corresponding day for the appropriate subsequent
calendar month) shall end on the last day of the appropriate subsequent calendar
month), and (b) as to any Note converted pursuant to Article 2A of the Credit
Agreement, subject to Section 2.3(b) of the Credit Agreement, the quarterly
periods ending on May 31, August 31, November 30 and February 28 in each year,
commencing on the Conversion Date, provided that:
(i) the first Interest Period with respect to each Loan other than
the initial Loan shall commence on the Funding Date of such subsequent Loan and
shall end on the last day of the Interest Period as established above;
(ii) the last Interest Period for a Loan or converted Note commencing
prior to a Maturity Date shall end on the Maturity Date; and
(iii) with respect to interest accrued on any overdue amounts,
Interest Period means such period as the Agent shall determine pursuant to
Section 2.3(d).
"Interest Rate Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
interest rate protection agreements (including, without limitation, interest
rate swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Interest Rate Determination Date" means the date for calculating
LIBOR for purposes of determining the interest rate applicable to a Loan during
a particular Interest Period. The Interest Rate Determination Date shall be the
second LIBOR Business Day prior to the first day of the related Interest Period
for a Loan. In respect of converted Notes, the Interest Rate Determination Date
shall be the second Business Day prior to the Conversion Date.
"Internet Service Business" means any business whose principal
business is operating an Internet connectivity or Internet enhancement service
as it exists from time to time, including, without limitation, dial up or
dedicated Internet service, web hosting or co-location
8
<PAGE>
services, security solutions, the provision and development (including the
intellectual property related thereto) of software in connection therewith,
configuration services, electronic commerce, intranet solutions, data backup and
restoration, business content and collaboration, communications tools or network
equipment products or services (including without limitation, any business
conducted by the Borrowers or any Subsidiary on the date of the Credit
Agreement), and any business reasonably related to the foregoing. A good faith
determination by a majority of the Boards of Directors of the Borrowers as to
whether a business meets the requirements of this definition shall be
conclusive, absent manifest error.
"Issuer" means, on and after the occurrence of the Conversion,
Cleartel, CAIS and each of their successors and assigns.
"Law" means any law, statute, act, legislation, bill, enactment,
policy, treaty, international agreement, ordinance, judgment, injunction, award,
decree, rule, regulation, interpretation, determination, requirement, writ or
order of any Government Instrumentality.
"Lender Income Taxes" means all normal and customary net income taxes
and franchise taxes imposed on the Agent or any Lender by (i) the United States,
(ii) any jurisdiction in which the Agent or such Lender is organized or has its
principal office or is otherwise resident for tax purposes, (iii) the
jurisdiction in which the Agent performs its services hereunder or in which such
Lender books or funds its portion of the Loans or (iv) a political subdivision
of any of the foregoing.
"Lenders" means the lenders named on the signature pages to the Credit
Agreement and any successors, assigns and transferees thereof. On and after the
occurrence of the Conversion, the term "Lenders" shall be deemed to refer to
Noteholders.
"LIBOR", with respect to an Interest Period, means the rate of
interest per annum equal to (i) the arithmetic mean (rounded upward, if
necessary, to the nearest 1/16 of 1%) of the offered rates for deposits in U.S.
Dollars, for a period approximately equal to such Interest Period and in an
amount approximately equal to the average principal amount of the applicable
Loans, quoted on the second LIBOR Business Day prior to the first day of such
Interest Period as such rate appears on the display designated as page "3750" on
the Telerate Service (or such other page as may replace page "3750" on the
Telerate Service or such other service as may be nominated by the British
Bankers' Association Interest Settlement Rates for U.S. Dollar deposits)
("Telerate Page 3750") as of 11:00 a.m. (London time) on such date or (ii) if,
as of 11:00 a.m. (London time) on any such date fewer than two such rates appear
on Telerate Page 3750, the arithmetic mean (calculated as mentioned above) of
the respective rates per annum at which deposits in U.S. Dollars are offered by
leading banks in the London interbank market at approximately 11:00 a.m. (London
time) on the second LIBOR Business Day prior to the first day of such Interest
Period in an amount approximately equal to the principal amount of the Loans to
which such Interest Period applies and with a maturity comparable to such
Interest Period.
"LIBOR Business Day" means any Business Day which is also a day for
trading by and between banks in U.S. Dollar deposits in the London interbank
market.
9
<PAGE>
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease properly
classified as an operating lease under GAAP and intellectual property licensing
arrangements.
"Loan" means a loan made to the Borrowers pursuant to Section 2.2(a)
or 2.2(b) of the Credit Agreement and upon the occurrence of the Conversion,
shall be deemed to be the Notes referred to in Article 2A of the Credit
Agreement.
"Majority Lenders" means, at any time, the holders of at least a
majority of the unpaid principal amount of the Loans then outstanding, or if no
Loans are then outstanding, Lenders having at least a majority of the Aggregate
Commitment and, on and after the occurrence of the Conversion means the holders
of at least a majority of the unpaid principal amount of Notes then outstanding.
Notes held by the Borrowers, Guarantors or Obligors shall not be counted in the
determination of a majority of unpaid principal.
"Material Adverse Effect" means a material adverse effect on or
affecting (i) the business (including, without limitation, the ability to
generate cash flow in an amount sufficient to repay the Loans, the Notes, the
Guaranty and other amounts due under the Credit Documents on or before the
applicable Maturity Date), the condition (financial or other), prospects,
management, property, assets, stockholders' equity or results of operations of
the Borrowers and Guarantors (on a combined basis) or on the value of the
Collateral, (ii) the ability of the Borrowers or Guarantors, or any other
Obligor to observe the provisions of, and to perform its Obligations under, any
Credit Document to which it is a party, (iii) the rights or interests of the
Agent or any Lender under any Credit Document, or (iv) the validity, attachment,
perfection, priority or enforceability of any Lien granted or purported to be
granted under any Security Document.
"Maturity Date" means, with respect to a Loan, March 4, 1999 and
(after the occurrence of the Conversion) with respect to the converted Notes,
the date which numerically corresponds to the Conversion Date and which falls in
the sixtieth (60) month subsequent to such Conversion Date.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to a Borrower, Guarantor or
any Subsidiary) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties that are the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than a
Borrower, Guarantor or any Subsidiary) owning a beneficial interest in the
assets subject to the
10
<PAGE>
Asset Sale and (v) appropriate amounts to be provided by a Borrower, Guarantor
or any Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by a
Borrower, Guarantor or any Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an Officers' Certificate delivered to the Agent. "Net Cash
Proceeds" shall not include any proceeds of an Asset Sale to the extent that
reinvestment of such proceeds in assets useful in the business conducted by the
selling entity is contemplated by the Budget.
"Note" means a promissory note, in the form of Exhibit A to the Credit
Agreement, executed and delivered by the Borrowers, payable to the order of,
prior to the Conversion Date, a Lender and, payable to the order of, on and
after the Conversion Date, a Noteholder, or Noteholders, as applicable.
"Noteholder" means the Person in whose name a Note is registered in
the registers maintained by the Issuers pursuant to the Credit Agreement.
"Notice of Borrowing" means a notice in the form of Exhibit C to the
Credit Agreement.
"Obligations" means all principal, premium, interest (including
interest which would accrue but for the filing of a petition in bankruptcy),
fees, expenses, and liabilities, guarantees and obligations of any kind, whether
monetary or nonmonetary, owing from the Borrowers, the Issuers, the Guarantors
or the other Obligors to the Agent or any Lender or Noteholder or due to be
performed by the Borrowers, the Issuers, the Guarantors or the other Obligors
for the benefit of the Agent or any Lender or Noteholder under or in connection
with any Credit Document.
"Obligor" means each Person providing Collateral under the Security
Documents or having any other Obligations.
"Officer's Certificate" means a certificate signed by the President,
the Chief Executive Officer, the Chief Financial Officer or a Vice President
(regardless of Vice Presidential designation), and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of a Borrower or
any Guarantor, as the case may be, and in form and substance reasonably
satisfactory to, and delivered to, the Agent.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for a Borrower, a Guarantor or the Agent, and which opinion shall be in
form and substance reasonably satisfactory to the Agent.
"OverVoice" means the patented and patent pending proprietary
technology called OverVoice, which enables the transmission of voice, data and
video simultaneously over traditional copper wires.
"OverVoice License" means the license granted to CAIS by Inline
Connection Corporation in connection with the "OverVoice" technology.
11
<PAGE>
"Owners" means the parties listed on Schedule I to the Pledge and
Security Agreement.
"Permitted Holder" means Ulysses G. Auger, Sr., Ulysses G; Auger, II,
the Auger Trusts and any entity controlled by either of them.
"Permitted Liens" is defined in Section 5.2(c) of the Credit
Agreement.
"Person" means and includes natural persons, corporations, limited
liability companies, limited partnerships, limited liability partnerships,
general partnerships, joint-stock companies, joint ventures, associations,
companies, trusts, banks, trust companies and other organizations, whether or
not legal entities, and governments and agencies and political subdivisions
thereof.
"Plan" means a pension plan subject to the provisions of Title IV of
ERISA and in respect of which the Borrower or any ERISA Affiliate is (or, if
such plan were terminated, would under Section 4069 of ERISA be deemed to be) an
"employer" as defined in Section 3(5) of ERISA.
"Pledge and Security Agreement" means the Pledge and Security
Agreement dated as of the Closing Date, by and among the Borrowers, the
Guarantors, the other Obligors and the Agent, as it may be amended, supplemented
or otherwise modified from time to time.
"Pledged Shares" means the shares of stock of, and other equity
interests in, the Borrowers and Guarantors that are pledged to the Agent for the
benefit of the Lenders and the Noteholders, as the case may be, pursuant to the
Pledge and Security Agreement.
"Pro Rata Share" means with respect to each Lender, such Lender's pro
rata share (expressed as a percentage) of the Aggregate Commitment as set forth
on the signature pages to the Loan Agreement (as such may be amended or deemed
amended).
"Receivables Sale Agreement" means the Receivables Sale Agreement
dated as of June 26, 1997, by and between Cleartel Communications, Inc.,
Cleartel Communications Limited Partnership and RFC.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed prior to the Maturity Date of the
principal of the Loans or Notes, as applicable, or is redeemable at the option
of the holder thereof at any time prior to such Maturity Date, or is convertible
into or exchangeable for debt securities at any time prior to any such Maturity
Date at the option of the holder thereof.
"Required Approvals" means all Approvals required in connection with
the execution, delivery, performance admission into evidence or enforcement of
the Credit Documents.
12
<PAGE>
"Restructuring" has the meaning ascribed thereto in Section 5.1(n) of
the Credit Agreement.
"Restructuring Date" means the date the Restructuring becomes
effective.
"RFC" means Receivables Funding Corporation.
"RFC Collateral" means the property and assets that are subject to a
Lien created under the Receivables Sale Agreement.
"Security Document Liens" means the Liens created, or purported to be
created, under the Security Documents.
"Security Documents" means the Pledge and Security Agreement, the
Trademark Security Agreement, the Financing Statements and all other agreements
and instruments referred to therein or executed by the Borrowers, the
Guarantors, the other Obligors or any other Person to provide security for the
Loans, the Notes and the other Obligations under the Credit Documents.
"Shareholder Promissory Notes" means the following promissory notes:
(i) Promissory Note dated August 1, 1996 from Cleartel LP to Ulysses G. Auger,
Sr. in the original principal amount of $2,100,000 of which an aggregate of
$2,100,000 remains outstanding as of August 31, 1998; (ii) Promissory Note dated
May 8, 1996 from CAIS to Ulysses G. Auger, Sr. in the original principal amount
of $1,000,000 of which an aggregate of $633,026 remains outstanding as of August
31, 1998; (iii) Promissory Note dated February 27, 1998 from CGX to Ulysses G.
Auger, Sr. in the original principal amount of $500,000 of which an aggregate of
$500,000 remains outstanding as of August 31, 1998; (iv) Promissory Note dated
July 9, 1998 from CGX to Ulysses G. Auger, Sr. in the original principal amount
of $500,000 of which an aggregate of $500,000 remains outstanding as of August
31, 1998; (v) Promissory Note dated March 15, 1996 from CAIS to Ulysses G.
Auger, II in the original principal amount of $100,000 of which an aggregate of
$100,000 remains outstanding as of August 31, 1998; and (vi) Promissory Note
dated October 31, 1997 from CAIS to Ulysses G. Auger, II in the original
principal amount of $250,000 of which an aggregate of $250,000 remains
outstanding as of August 31, 1998.
"Short Term Indebtedness" means Indebtedness with a maturity,
determined as of its date of issuance or incurrence, of 12 months or less.
"Subordination Agreement" means the Subordination Agreement dated
September 4, 1998 by and among CGX , CAIS, Cleartel LP, Ulysses G. Auger II and
Ulysses Auger, Sr.
"Subsidiary" means, with respect to any Person, (A)(i) any
corporation, association or other business entity of which outstanding Capital
Stock having at least the majority of the votes entitled to be cast in the
election of directors is owned, directly or indirectly, by such Person and/or
any one or more Subsidiaries of such Person, or (ii) of which at least a
majority of voting interest is owned, directly or indirectly, by such Person
and/or one or more Subsidiaries of such Person; (B) any general partnership,
joint venture or similar entity, of
13
<PAGE>
which at least a majority of voting interest is owned, directly or indirectly,
by such Person and/or any one or more other Subsidiaries of such Person or; and
(C) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner.
"Tax" means any tax, levy, imposition, impost, fee, assessment,
deduction, charge or withholding imposed by any Government Instrumentality, as
well as any interest, penalty or assessment payable or imposed with respect to
any of the foregoing.
"Telecommunications Business" means any business whose principal
business is (i) transmitting, providing services relating to or developing
applications for the transmission of, voice, video or data through owned or
leased wireline or wireless transmission facilities, (ii) creating, developing,
constructing, installing, repairing, maintaining or marketing communications-
related systems, network equipment and facilities, software and other products,
(iii) creating, developing, producing or marketing audiotext or videotext, (iv)
marketing (including direct marketing and telemarketing), (v) an Internet
Service Business, (vi) evaluating, participating in or pursuing any other
business that is primarily related to those identified in the foregoing clauses
(i), (ii), (iii), (iv) or (v) above (in the case of clauses (iii) and (iv),
however, in a manner consistent with the Borrowers' manner of business on the
date of the Credit Agreement), and shall, in any event, include all businesses
in which the Borrowers or any of their Subsidiaries is engaged on the date of
the Credit Agreement; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Boards of
Directors of the Borrowers.
"Termination Event" means (i) a Reportable Event described in Section
4043 of ERISA and the regulations issued there under (other than a Reportable
Event not subject to the provision for 30-day notice to the Pension Benefit
Guaranty Corporation under such regulations), or (ii) the withdrawal of a Person
from a Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of
intent to terminate a Plan or the treatment of a Plan amendment as a termination
under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate
a Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA,
or (v) any other event or condition which might constitute grounds under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan.
"Trademark Security Agreement" means the Trademark Security Agreement
dated as of the Closing Date among the Shareholders, the Owners, the Lenders and
the Agent.
"UCC" means the Uniform Commercial Code in effect in the State of New
York, as amended.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
14
<PAGE>
"Warrant Agreement" means the Warrant Agreement dated as of the
Closing Date among CGX Communications, Inc., Cleartel Communications, Inc.,
CAIS, Inc. and the Agent.
"Warrant Issuers" has the meaning ascribed thereto in the Warrant
Agreement.
"Warrant Registration Rights Agreement" means the Warrant Registration
Rights Agreement dated as of the Closing Date among CGX Communications, Inc.,
Cleartel Communications, Inc., CAIS, Inc. and the Agent.
"Warrants" means the Warrants issued to the Lenders and Noteholders,
as the case may be, pursuant to the Warrant Agreement dated as of September 4,
1998.
"Wholly-Owned Subsidiary" means any Subsidiary of a Person of which
100% of the outstanding Capital Stock is owned by such Person or by one or more
Wholly-Owned Subsidiaries of such Person or by such Person and one or more
Wholly-Owned Subsidiaries of such Person.
II. Rules of Construction.
The following rules of construction shall apply in the Credit
Documents:
(i) titles and headings are for convenience only and will not be
deemed part of the Credit Documents for purposes of interpretation;
(ii) unless otherwise stated, references in a Credit Document to
"Sections", "Exhibits" and "Appendices" refer, respectively, to Sections of, and
Exhibits and Appendices to, such Credit Document;
(iii) including" means "including, but not limited to", and "include"
or "includes" means "include, without limitation" or "includes, without
limitation";
(iv) "month" means "calendar month";
(v) "hereunder", "herein", "hereto" and "hereof", when used in a
Credit Document, refer to such Credit Document and not to a particular Section
or clause of such Credit Document;
(vi) in the case of defined terms, the singular includes the plural
and vice versa;
(vii) unless otherwise indicated, all accounting terms not
specifically defined shall be construed in accordance with U.S. GAAP;
(viii) unless otherwise indicated, each reference to a particular Law
is a reference to such Law it may be amended, modified, extended, restated or
supplemented from time to time, as well as to any successor Law thereto; and
15
<PAGE>
(ix) unless otherwise indicated, each reference to a particular
agreement is a reference to such agreement it may be amended, modified,
extended, restated or supplemented from time to time, as well as to any
successor agreement thereto.
16
<PAGE>
EXHIBIT A
SENIOR SECURED NOTE
-------------------
U.S.$[ ] New York, New York
[ ], 1998
FOR VALUE RECEIVED, the undersigned CGX COMMUNICATIONS, INC., a
Delaware corporation ("CGX"), CLEARTEL COMMUNICATIONS, INC., a District of
Columbia corporation ("Cleartel"), CLEARTEL LIMITED PARTNERSHIP, a District of
Columbia limited partnership ("Cleartel LP"), CAIS, INC., a Virginia corporation
("CAIS"), CAIS LIMITED PARTNERSHIP, a Virginia limited partnership ("CAIS LP",
CGX, Cleartel, Cleartel LP, CAIS and CAIS LP are referred to, individually and
collectively, as the "Borrowers"), jointly and severally hereby promise to pay
to the order of [ ], with a place of business at [ ] (hereinafter,
together with any other holder hereof, referred to as the "Lender"), by wire
transfer to the Account of ING (U.S.) CAPITAL CORPORATION, NEW YORK, NEW YORK,
as Agent (as defined in the Credit Agreement referred to below), ABA No. [ ],
attention: [ ], Reference: [ ], or at such other place or places
and to such other account or accounts as the Agent may direct from time to time
by notice to the Borrowers in accordance with the Credit Agreement (as
hereinafter defined), in lawful money of the United States in immediately
available funds, the principal amount equal to [ ] UNITED STATES DOLLARS
(U.S.$[ ]) or, if less, the actual outstanding principal amount of
advances under the Loans (as defined in the Credit Agreement) advanced or issued
for the account of the Borrowers by the Lender pursuant to the Credit Agreement,
payable, subject to the fourth paragraph hereof, on the Maturity Date, as
provided in Section 2.9 of the Credit Agreement.
Interest shall accrue on the outstanding principal of the amount
hereof in accordance with the Credit Agreement and shall be payable on such
dates and in such amounts as determined in accordance with the Credit Agreement.
Notwithstanding any other provision of the Credit Documents (as defined in the
Credit Agreement) to the contrary, if the rate of interest on the obligation of
the Borrowers under this Note shall at any time exceed the highest rate
permitted by Applicable Law (as defined in the Credit Agreement), the rate of
interest on such obligation shall be equal to the highest rate permitted under
Applicable Law.
At the time a Loan is made, the Lender is authorized to make a
notation on the schedule attached hereto indicating the date, the amount of the
Lender's Pro Rata Share (as defined in the Credit Agreement) and the interest
rate of such Loan. Absent manifest error, the information set forth in such
schedule shall be prima facie evidence of the outstanding principal amount of
this Note and of the interest due thereon. Failure to
<PAGE>
make any such notation shall not limit or affect the obligations of the
Borrowers under this Note or any other Credit Document.
This Note is issued to evidence Loans made by the Lender to the
Borrowers pursuant to Article 2 of the Credit Agreement dated as of August ___,
1998 (as the same may be amended, supplemented or otherwise modified from time
to time, the "Credit Agreement") by and among the Borrowers, the Owners listed
on Schedule A thereto, the Lender, the other financial institutions party
thereto as the Lenders and the Agent, as to which reference is hereby made for a
statement of the terms , conditions and covenants under which the indebtedness
evidenced hereby was and will be made and is to be repaid, including, without
limitation, those related to the acceleration of the indebtedness represented
hereby upon the occurrence and during the continuation of an Event of Default
(as defined in the Credit Agreement). Loans evidenced by this Note and repaid
(mandatory and voluntary) may not be reborrowed. This Note is subject to
prepayment as provided in the Credit Agreement. Payment of this Note is secured
by the Collateral (as defined in the Credit Agreement), including all Pledged
Shares (as defined in the Credit Agreement) and other property pledged pursuant
to the Security and Pledge Agreement (as defined in the Credit Agreement), the
Trademark Security Agreement (as defined in the Credit Agreement) and by the
Guaranty (as defined in the Credit Agreement).
On and after the Conversion Date (as defined in the Credit Agreement),
this Note shall be automatically converted into a Note containing the terms and
subject to the conditions set forth in Article 2A of the Credit Agreement, the
Borrowers shall continue to be obligated hereon as "Issuers" and the Guaranty
shall continue in full force and effect with respect hereto.
The Lender shall not be required to look to the Collateral for payment
of this Note, but may proceed against the Borrowers, in such manner as it deems
desirable. None of the rights or remedies of the Lender hereunder are to be
deemed waived or affected by failure or delay on the part of the Lender to
exercise the same. All remedies conferred upon the Lender by this Note or any
other Credit Document shall be cumulative and none is exclusive, and such
remedies may be exercised concurrently or consecutively at the Lender's option.
The Borrowers hereby waive presentment, demand for payment, protest
and notice of protest, notice of dishonor and all other notices in connection
with this Note.
This Note will be governed by, and construed in accordance with, the
Laws of the State of New York, other than (to the greatest extent permissible by
Law) any rule of Law that would cause the application of the Laws of another
jurisdiction.
<PAGE>
WITNESS the hand of the Borrowers.
CGX COMMUNICATIONS, INC.
By:_________________________________
Name:
Title:
CLEARTEL COMMUNICATIONS, INC.
By:_________________________________
Name:
Title:
CLEARTEL COMMUNICATIONS LIMITED PARTNERSHIP
By: Cleartel Communications, Inc.
By:_________________________________
Name:
Title:
CAIS, INC.
By:_________________________________
Name:
Title:
CAIS LIMITED PARTNERSHIP
By: CAIS, Inc.
<PAGE>
By:_________________________________
Name:
Title:
<PAGE>
EXHIBIT A
SCHEDULE
--------
Date of Loan or Repayment Amount of Loan Amount of Repayment Balance
- ------------------------- --------------- -------------------- -------
<PAGE>
Exhibit 10.2.1
AMENDMENT NO. 1 TO THE CREDIT AGREEMENT
This Amendment No. 1 (the "Amendment"), dated as of February 12, 1999,
is to the Credit Agreement (the "Credit Agreement") dated as of September 4,
1998 among CGX Communications, Inc., a Delaware corporation, CAIS, Inc., a
Virginia corporation, Cleartel Communications, Inc., a District of Columbia
corporation, CAIS Limited Partnership, a Virginia limited partnership, Cleartel
Communications Limited Partnership, a District of Columbia limited partnership,
the shareholders, partners and other owners listed on Schedule A thereto, the
lenders named on the signature pages thereto and ING (U.S.) Capital Corporation,
New York, New York, as agent for the Lenders. Capitalized terms, unless
otherwise defined herein, shall have the meaning set forth in the Credit
Agreement.
The parties hereto agree to amend the Credit Agreement, effective from
and as of the date hereof, as follows:
Section 1. Amendments to Credit Agreement.
------------------------------
1.1 Cleartel, Cleartel LP and CAIS LP are hereby released from and,
as of the date hereof, shall no longer be parties to the Credit Agreement. As
such, the first paragraph of the Credit Agreement is hereby amended by deleting
any and all references to Cleartel, Cleartel LP and CAIS LP. All obligations of
the released parties shall vest in CAIS Internet.
1.2 The Credit Agreement is further amended pursuant to (a) CGX's
change of its name to CAIS Internet: (i) the first paragraph is amended by
deleting the reference to "CGX Communications, Inc., a Delaware corporation
("CGX")" and inserting "CAIS Internet, Inc., a Delaware corporation ("CAIS
Internet")" in lieu thereof and by deleting the reference to "CGX" in the
seventh line and inserting "CAIS Internet" in lieu thereof; and (ii) the
reference to "CGX" shall be deemed to be a reference to "CAIS Internet" in
Sections 5.1(i) (last paragraph); and (b) ING (U.S.) Capital Corporation's
change of its name to ING (U.S.) Capital LLC: the first paragraph and Sections
7.5 and 8.2 are hereby amended by deleting references to "ING (U.S.) Capital
Corporation" and inserting "ING (U.S.) Capital LLC" in lieu thereof.
1.3 Section 2A.1 is hereby amended by changing the following
parenthetical text in the second line thereof: "(March 4, 1999)" to "(September
4, 1999)."
<PAGE>
1.4 Section 2A.5 is hereby amended by deleting this section in its
entirety and inserting the following text in lieu thereof:
"2A.5 Extension Fee. Any extension of the Maturity Date beyond
March 4, 1999 shall not be effective unless the Issuers shall have paid the
Agent, on or before March 4, 1999, an extension fee in an amount equal to
three (3.0)% of the Aggregate Commitment."
1.5 Section 2A.9(xii) is hereby amended by deleting this subsection
in its entirety.
1.6 Section 4.1(d) is hereby amended by (i) deleting the following
parenthetical text: "(and other than in respect of the RFC Collateral)" in the
fifth line of subsection (iii) thereof; (ii) deleting the following
parenthetical text from the eighth, ninth and tenth lines of subsection (iii)
thereof: "(other than (A) in respect of RFC Collateral and (B) in respect of
the First Union Loan Agreement, which Lien, in the case of (B), shall be
released on the Closing Date);" and (iii) deleting "and other than in respect of
RFC Collateral" from the ninth and tenth lines of subsection (iv) thereof.
1.7 Section 4.1(k) is hereby amended by changing the reference to
"CGX Communication, Inc. 401(k) Retirement Savings Plan" to "CAIS Internet, Inc.
401(k) Retirement Savings Plan."
1.8 Section 4.1(n)(ii) is hereby amended by deleting the two
parenthetical provisions referring to the RFC Collateral.
1.9 Section 5.1(e) is hereby amended by deleting the following
parenthetical text: "(other than, for as long as the obligations under the
Receivables Sale Agreement are outstanding, the RFC Collateral, as to which a
second-priority Lien shall be created, attached perfected and enforceable)."
1.10 Section 5.1(o) is hereby amended by replacing the following text
from the eighth and ninth lines thereof: ", except that in the case of Mr.
Ammon, such pledge shall occur on or before the Restructuring Date" with ",
provided, however, that R. Theodore Ammon and CAIS-Sandler Partners, L.P. shall
- -------- -------
not be required to pledge any Capital Stock pursuant to this Section 5.1(o)" in
lieu thereof.
1.11 Section 5.2 (c) is hereby amended by deleting subsection (vi)
thereof and renumbering subsection (vii) to (vi).
2
<PAGE>
1.12 Section 5.2(d) is hereby amended by deleting subsection (iv) and
renumbering the remaining subsections.
1.13 Section 5.2(k) is hereby deleted in its entirety and Section
5.2(l) is hereby changed to Section 5.2(k).
1.14 Section 6.1(e) is hereby amended by deleting the following
parenthetical text: "(or second-priority Liens in respect of the RFC
Collateral)."
1.15 Section 6.2(b) is hereby amended by changing the date in the
parenthetical text to "September 4, 1999."
1.16 Schedule B is hereby replaced by the attached Schedule B.
1.17 Schedule C is hereby replaced by the attached Schedule C.
1.18 Schedule X is hereby amended as follows:
(a) The definition of "Agent" is amended by replacing "ING (U.S.)
Capital Corporation" with "ING (U.S.) Capital LLC."
(b) The definition of "Borrowers" is amended by deleting the following
text from the second and third lines: ", and on and after the date of the
Restructuring means Cleartel and CAIS, successors to Cleartel and CAIS."
(c) The definition of "Conversion Date" is amended by deleting "March
4, 1999" and inserting "September 4, 1999" in lieu thereof.
(d) The definition of "Guarantor" is changed to mean "CAIS Internet,
Inc., and any other Person that becomes a party to the Guaranty."
(e) The definition of "Information Memorandum" is hereby amended to
refer to the Information Memorandum dated November 1998 referencing the issuance
of $11.5 million in Series A Preferred Stock by CAIS Internet.
(f) The definition of "Interest Payment Date" is hereby amended by
changing the reference to "2.3(c)" to "2.3(d)."
(g) The definition of "Issuer" is amended by deleting "Cleartel, CAIS"
from the second line and inserting "CAIS Internet" in lieu thereof.
3
<PAGE>
(h) The definition of "Maturity Date" is amended by deleting "March 4,
1999" and inserting "September 4, 1999" in lieu thereof.
(i) The definition of "Patent Security Agreement" is hereby added to
Schedule X as "the Patent Security Agreement dated as of the date hereof among
CAIS Internet, Inc. and ING (U.S.) Capital LLC."
(j) The definition of "Shareholder Promissory Notes" is amended by
deleting subsection (i) in its entirety and inserting the following text in lieu
thereof:
"(i) Promissory Note dated January 6, 1999 from CAIS Internet to
Ulysses G. Auger, Sr. in the original principal amount of $1,000,000;"
(k) The definition of "Subordination Agreement" is hereby deleted in
its entirety.
Section 2. Representations and Warranties.
------------------------------
2.1 CAIS Internet, Inc., Cleartel Communications, Inc. and CAIS, Inc.
hereby confirm that all representations and warranties of the Borrowers,
Guarantors and Obligors contained in the Credit Documents are true, correct and
complete in all material respects immediately prior to the date of this
Amendment (and after giving effect thereto, under the circumstances as hereby
amended) to the same extent as though made on and as of such date.
2.2. CAIS Internet, Inc., Cleartel Communications, Inc. and CAIS,
Inc. hereby confirm that, except as disclosed in the Information Memorandum, no
act, event or circumstance shall have occurred with respect to the Borrowers,
the Guarantors, the Obligors or their Subsidiaries or otherwise which has had or
would reasonably be expected to have a Material Adverse Effect.
2.3 CAIS Internet, Inc., Cleartel Communications, Inc. and CAIS, Inc.
hereby confirm that there is no pending or, to the knowledge of the Borrowers,
the Guarantors and Obligors, threatened litigation, investigation or other
proceeding which would reasonably be expected to have a Material Adverse Effect.
2.4 CAIS Internet, Inc., Cleartel Communications, Inc. and CAIS, Inc.
hereby confirm that the Borrowers, the Guarantors and the Obligors are in
compliance with all of the covenants and agreements in Credit Documents on and
as of the date hereof, after giving effect to this Amendment and any other
amendments to such Credit Documents entered into on the date hereof.
4
<PAGE>
Section 3. Ratification and Confirmation. Except as expressly herein
-----------------------------
amended, the Credit Agreement (including Schedule X) is ratified and confirmed
in all respects and shall remain in full force and effect in accordance with its
terms. Each reference in the Credit Documents, the Warrant Agreement and the
Warrant Registration Rights Agreement or in any other documents delivered in
connection therewith to the Credit Agreement shall (unless otherwise
specifically provided) mean the Credit Agreement as amended by this Amendment,
and as hereafter amended or restated.
Section 4. Governing Law. This Amendment will be governed by, and
-------------
construed in accordance with, the Laws of the State of New York, other than (to
the greatest extent permissible by law) the conflict of laws principles that
would apply the Laws of another jurisdiction.
Section 5. Counterparts. This Amendment may be executed in any
------------
number of counterparts and by the different parties thereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties, intending to be legally bound, have
caused this Amendment to be signed on the date first above written.
6
<PAGE>
CAIS Internet, Inc. (successor-in-interest to CGX
Communications, Inc.)
By:
----------------------------------------------
Name:
Title:
Address:
1255 22nd St. NW
Washington, D.C. 20037
CAIS, Inc.
By:
----------------------------------------------
Name:
Title:
Address:
6861 Elm Street
McLean, VA 22101
Cleartel Communications, Inc. (consenting only to the
release from its obligations hereunder and its status
as a party to the Credit Agreement)
By:
----------------------------------------------
Name:
Title:
Address:
1255 22nd St. NW
Washington, D.C. 20037
7
<PAGE>
LENDERS:
ING (U.S.) Capital LLC
By:
By:
----------------------------------------------
Name:
Title:
Address:
55 East 52nd Street
New York, NY 10055
AGENT:
ING (U.S.) Capital LLC
By:
By:
----------------------------------------------
Name:
Title:
Address:
55 East 52nd Street
New York, NY 10055
8
<PAGE>
OWNERS:
ULYSSES G. AUGER, SR.
-------------------------------------------------
ULYSSES G. AUGER, II
-------------------------------------------------
THE BRIDGETTE KATHRYN AUGER
TRUST
THE GREGORY ULYSSES AUGER, III
TRUST
THE ALEXANDER ROBERT AUGER TRUST
THE ULYSSES GEORGE HAWTHORNE
AUGER, III TRUST
THE NICHOLAS WILLIAM RANDOLPH
AUGER TRUST
THE JAMES FREDERICK AUGER TRUST
THE ANNABEL-ROSE AUGER TRUST
9
<PAGE>
THE CONSTANDINOS ULYSSES
FRANCISCOS AUGER ECONOMIDES
TRUST
THE VASSILIKI ILLIAS AUGER
ECONOMIDES TRUST
THE CONSTANDINA FRANCISCA AUGER
ECONOMIDES TRUST
By:
----------------------------------------------
James Pedas, Trustee
(As to each Trust)
10
<PAGE>
SCHEDULE B
CGX
CGX Communications
CGX Telecom
CAIS
CAIS Internet
DESKJACK
LANJACK
OverVoice
11
<PAGE>
SCHEDULE C
Legal Address and Address of the
Principal Place of Business and
Chief Executive Office of the Borrowers,
Guarantors and Obligors
CAIS Internet, Inc.
1255 22nd Street, NW
Washington, DC 20037
CAIS, Inc.
6861 Elm Street
McLean, VA 22102
Ulysses G. Auger, II
1255 22nd Street, NW
Washington, DC 20037
Ulysses G. Auger, Sr.
1217 22nd Street, NW
Washington, DC 20037
Auger Trusts
c/o
James Pedas
1101 23rd Street, NW
Washington, DC 20037
12
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AGREEMENT made as of the 3rd day of June, 1997, by and between CAIS,
Inc., (hereinafter referred to as the "Employer" or the "Corporation"), and
Evans K. Anderson (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer is engaged, inter alia, in the business of providing
-----------
Internet services and related activities and operations throughout the United
States of America; and
WHEREAS, the Employee is experienced in the operation and marketing of
communications services; and
WHEREAS, Employer and Employee heretofore entered into a certain Employment
Agreement dated as of February 6, 1997 as amended by that certain First
Amendment to Employment Agreement dated June 3, 1997 (together the "Employment
Agreement"); and
WHEREAS, Employee also understands and hereby accepts that the Performance
Targets described in Exhibit A are based on the Employer's current lines of
business and current investments, and consequently, to the extent other lines of
business, such as OverVoice are offered for sale by CAIS, an adjustment to the
Performance Targets will be necessitated, such adjustment to be made on
reasonable terms mutually acceptable to Employer and Employee.
WHEREAS, pursuant to Section 4(B)(5) of Exhibit "A" to the Employment
Agreement, Employer and Employee agree that they would each respectively
cooperate to structure the conferral, vesting and forfeiture provisions of the
Employment Agreement to minimize the federal income tax consequences to both
such parties; and
WHEREAS, consistent with that intent both Employer and Employee desire
hereby to amend and restate the Employment Agreement in its entirety as herein
set forth.
NOW, THEREFORE, in consideration of the premises, which are incorporated
into and made part of this Agreement, and of the mutual covenants and agreements
herein contained, the parties hereby amend and restate the Employment Agreement
in its entirety as follows:
1. Duties and Term of Employment.
------------------------------
(A) The Employer does hereby employ the Employee in the capacity of
Vice-President and General Manager of CAIS to manage the overall business
interests of CAIS, to manage the Employer's sales, to develop new business
opportunities and to perform such other duties as Employer may from time to time
designate.
(B) The Employee's employment hereunder shall commence on or before
March 3, 1997 and shall continue for a period of four (4) years thereafter,
unless sooner terminated as hereinafter provided.
<PAGE>
2. Compensation of Employee.
-------------------------
As the sole compensation for all of the Employee's services rendered
hereunder to the Employer, the Employer hereby agrees to pay the Employee
compensation and reimbursements as set forth in Exhibit "A" attached hereto and
made a part hereof.
3. Conduct of Employee.
--------------------
Employee does hereby accept said employment under the terms and
conditions herein set forth, and further agrees that during the term hereof
Employee will devote full time, attention and energies to the business of the
Employer, and will not, without the prior written consent of Employer, actively
engage in any other business, employment or undertaking whatsoever, during the
said period of time. Employee further agrees to, at all times during the term
hereof, abide by and comply with the directions, instructions and decisions of
the Employer and, during the term hereof, to dutifully and faithfully carry out
and perform the duties and obligations of Employee's position, as herein set
forth.
Employer acknowledges that Employee has an ownership interest in
another business, which is operated by another member of Employee's family.
Employer agrees that provided that this business does not affect Employee's
performance of his duties, responsibilities and obligations under this
Agreement, and provided also that such business will not represent, sell or
market products or services directly competitive with those currently offered by
Employer or by entities currently affiliated with Employer, then Employee may
continue his ownership interest in such other business. To the extent such
business represents or sells Employer's products or services, or products or
services of Employer's affiliates, Employee will not be directly involved on
behalf of Employer, or on behalf of entities currently affiliated with Employer,
in any business and pricing discussions, negotiations or decisions involving
such other business.
4. Limitations Upon Acts of Employee. Employee agrees: (A) That Employee
---------------------------------
will not draw, accept or make any bill of exchange or promissory note for or on
behalf of the Employer; nor shall Employee otherwise pledge the credit of the
Employer, nor execute or deliver any contracts or documents for or on behalf of
the Employer, except to the extent of the Employer's written policies consented
to by its General Partner.
(B) That Employee will make available when requested such information
and fully advise the Employer, of all matters in which Employee shall become
involved, and acts which Employee shall perform, for or on the account of the
Employer; and that Employee shall also promptly inform the Employer of any
matters coming to Employee's attention or knowledge that may materially affect
the interests of the Employer, or its business operations.
(C) The policies of operation of the business of the Employer shall,
from time to time, be determined by the Employer or by its General Partner; and
the Employee agrees to conform to and execute all reasonable policies of
Employer as so determined.
<PAGE>
5. Termination of Employment.
-------------------------
The Employer shall have the right to cancel and terminate this
Agreement, and to discharge the Employee for "good cause", or, after Employment
Year 1, without cause upon seven (7) days' prior written notice to Employee. For
purposes of this Article 5, "good cause" shall be construed to mean proven
dishonesty in a material matter, habitual intoxication, continued and repeated
failure to devote proper time and attention to the business of the Employer,
repeated failure (after receipt of written notice from Employer and reasonable
opportunity to cure) by Employee to carry out the reasonable directions and
instructions of the Employer or its General Partner, conviction of a crime
involving moral turpitude or requiring imprisonment of Employee, repeated and
unexcused absenteeism after reasonable notice from Employer, death of the
Employee, or the material breach by Employee of any of Employee's obligations or
agreements contained in Sections 7 or 8 below, or the making of any
representation or warranty pursuant to Article 6 hereinbelow which shall prove
to be inaccurate, incorrect or false in any respect. Upon termination of
Employee's employment by Employer without cause, the Employer agrees to pay
Employee as severance pay and in full and final settlement all claims between
the parties (excluding any claim by Employee for wages or other compensation
previously earned and fully vested and not paid) an amount equal to nine (9)
months of the base salary of Employee thereafter.
6. Employee's Representations.
---------------------------
Employee hereby represents and warrants to Employer that there are not
now operative and in force any employment agreements or other instruments of any
nature, to which Employee is a party or under which Employee may be otherwise
bound or subject, which contain any terms or provisions that in any manner
restrict, limit, prevent, prohibit or make unlawful the execution of Employee of
this Agreement, or the performance by Employee of any or all of Employee's
obligations, covenants and duties herein specified, or Employee's employment by
Employer hereunder or otherwise. In the event the representatives and warranties
made by Employee under this Article 6 should prove to be inaccurate, incorrect
or false in any respect, whether through inadvertence or willful
misrepresentation by Employee, Employer may, at its option, upon discovering
such inaccuracy or the falsity of said representations, terminate this Agreement
for good cause and Employee's employment hereunder.
7. Trade Secrets.
--------------
The Employee agrees that during the term of employment with the
Employer and at all times after expiration thereof, Employee will not
communicate or divulge, for the benefit of any competitor, rival or other
person, firm, association, or corporation, whether associated with the Employee
or not, any trade secrets, client lists, employee information or any other
confidential information or material matters of any nature relating to the
business of affairs of the Employer, which may be utilized by Employer in or
about its business and which trade secrets, information or other matters are
communicated or otherwise become known to the Employee by reason of Employee's
employment hereunder, or otherwise. This provision shall expressly survive any
termination or other expiration of this Agreement.
<PAGE>
8. Agreement Not to Compete.
-------------------------
Employee acknowledges that the services to be rendered hereunder are of
a special and unusual character which have a unique value to the Employer, the
loss of which cannot adequately be compensated by damages in an action at law.
Because of the unique value to the Employer of the services of Employee for
which the Employer has contracted hereunder, and because of the confidential
information to be obtained by Employee, as aforesaid, Employee agrees and
covenants as follows:
(A) Employee agrees that after Employee ceases to be employed by the
Employer, Employee will not, directly or indirectly, for a period of twenty-four
(24) months next following such cessation of employment, solicit business from,
divert business from, or attempt to convert to other methods of performing
functions related to the services provided by the Employer, any client, account
or customer of the Employer which for purposes hereof shall be defined as
client, account or customer having done business with the Employer on a sole
supplier basis at any time during the one (1) year period immediately preceding
the date of the cessation of Employee's employment by the Employer.
(B) Employee agrees that for a period of twenty-four (24) months
after Employee ceases to be employed by the Employer, Employee will not,
directly or indirectly, solicit for employment or employ for Employee's own or
for another's benefit any employee of the Employer.
9. Injunction.
-----------
Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited in Articles 7 and 8 hereof, it is agreed
that the Employer shall be entitled to recover any damages incurred by it as a
result of such engagement or violation by Employee in an action at law, and to
full injunctive relief, to be issued by any competent court of equity, enjoining
and restraining the Employee and each and every person, firm, organization,
association, or corporation concerned therein, from the continuance of such
violative acts. The provisions of this Article 9 and or Article 8 above shall
expressly survive any termination or other expiration of this Agreement.
10. Non-Assignability.
-----------------
The Employee shall have no right to assign this Agreement, or any of
his or her rights or obligations hereunder, to another party or parties.
Employer shall have the right to assign this Agreement to any successor entity
provided that such entity agrees to assume all of Employer's obligations
hereunder.
11. Law Applicable.
---------------
This Agreement shall be construed in accordance with the laws of the
District of Columbia.
<PAGE>
12. Non-Waiver of Breach.
---------------------
No waiver by the Employer of any breach of any covenant or obligation
hereof on the part of the Employee to be kept and performed shall be considered
to be a waiver of any such covenant or provision, or of any future breach
thereof.
13. Arbitration.
-----------
Except as herein otherwise provided, any claim or controversy arising
out of or relating to this Agreement or any breach hereof shall, upon the
request of either the Employer or Employee, be submitted to and settled by
arbitration in accordance with the rules of the American Arbitration Association
then in effect. Any decision made pursuant to such arbitration shall be binding
and conclusive upon the Employer and the Employee and judgment upon such
decision may be entered in any court having jurisdiction thereof. This Section
13 shall not apply with respect to any breach or threatened breach of Section 7
or 8.
14. Entire Agreement.
-----------------
This instrument contains all of the agreements and understandings
between the parties hereto with respect to the employment of the Employee by the
Employer, and no oral agreements or written correspondence shall be held to
affect the provisions hereof and shall be binding upon Employer's successors and
assigns. All subsequent changes and modifications, to be valid, shall be by
written instrument executed by the Employer and the Employee.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
on its behalf by its duly authorized officers and the Employee has hereunto set
his hand and seal, all done on the day and in the year first hereinabove
written.
EMPLOYER:
--------
ATTEST: CAIS, INC.
/s/ William M. Caldwell, IV By: /s/ Ulysses G. Auger, II (SEAL)
----------------------------- --------------------------
Name: Ulysses G. Auger, II
Title: Chief Executive Officer
EMPLOYEE:
--------
/s/ Evans K. Anderson (SEAL)
---------------------------
Evans K. Anderson
<PAGE>
EXHIBIT "A"
-----------
COMPENSATION
------------
1. Base Compensation. During the term of the Agreement, Employee shall
-----------------
receive a base salary of $125,000.00 per Employment Year, and beginning November
1, 1997, and thereafter, shall receive a base salary of $150,000.00 per
Employment Year. Base salary shall be paid during an Employment Year in twenty-
six (26) equal installments, less applicable social security and withholding
taxes. Employee's base salary will be subject to such periodic increases as may
be determined by the Employer.
2. Employee Benefits. Employer shall reimburse Employee for all expenses
-----------------
reasonably incurred by him in the performance of his duties hereunder, with such
reimbursement to be made upon submission by Employee of itemized statements and
receipts in form reasonably satisfactory to Employer. Employee shall be
entitled to such amount of vacation as is normal and usual for an executive of
his position with the Employer and shall be eligible to participate in all
hospitalization, 401k Plan, insurance and other employee benefit plans for non-
union executive employees which may be maintained wholly or partially funded by
Employer.
3. Equity Incentive Compensation.
------------------------------
(A) Option to Acquire Equity Interest.
(1) Subject to the vesting and forfeiture provisions set forth
below, as an inducement to entering into this Agreement, Employee is hereby
granted an option to purchase: (1) a limited partnership interest in CAIS
Limited Partnership equal to 3% of the total limited partnership interest in
CAIS Limited Partnership and a limited partnership interest in Cleartel
Communications Limited Partnership equal to 3% of the total limited partnership
interest in Cleartel Communications Limited Partnership, or, in the event that
Cleartel and CAIS are combined into a single successor entity ("CGX"), (2) a
limited partnership/stock interest (as applicable) in CGX equal to 3% of the
total limited partnership/stock interest in CGX. Such 3% interest, subject to
adjustment as provided in sections 3(A)(2), below, shall hereafter be referred
to as the Target Equity Percentage ("TEP"). The purchase price for the TEP
limited partnership/stock interest shall be three hundred sixty thousand Dollars
($360,000). The option is exercisable by Employee (or his Estate) in whole (but
not in part) by written notice to Employer at any time after the date hereof,
provided that at the time of exercise the Employee is an employee of the
Employer (or the Employee was an employee of the Employer at the time of his
death). Such limited partnership/stock interest(s) shall be issued to Employee
subject to the terms and conditions of limited partnership/shareholders (as
applicable) agreement(s) on terms no less favorable than those enjoyed by other
limited partners/stockholders (as applicable) of CAIS Limited Partnership and
Cleartel Communications Limited Partnership or of CGX under such limited
partnership/shareholders (as applicable) agreement(s).
(2) Adjustment of TEP - Acquisition/Merger/Capital Investment.
The parties further agree that in the event and to the extent CAIS/Cleartel or
CGX is acquired by, merges with or is otherwise combined with another entity
that is not controlled by the parties that
<PAGE>
currently control the equity of CAIS and Cleartel, or receives outside capital
investment through a private placement and/or public offering of the stock or
debt instrument of CAIS/Cleartel or CGX, or the stock or debt instrument of any
successor entity, then thereafter Employee's TEP limited partnership/stock
interest (and his option to purchase same, if not previously exercised) will be
reduced on the same basis and in the same proportions as all other
shareholders/limited partners except as otherwise provided elsewhere in this
Agreement.
(B) Vesting and Forfeiture of Equity Interest.
-----------------------------------------
(1) Normal Vesting.
a. The first 1% limited partnership/stock interest shall
become fully vested at the end of Employment Year 3 provided that Employee then
remains employed by the Employer. Except as provided otherwise herein, should
Employee not remain employed by the Employer at the end of Employment Year 3,
the Employer shall have the right and option to reacquire from Employee and
Employee shall be obligated to sell to the Employer all non-vested TEP limited
partnership/stock interest previously acquired by the Employee upon payment to
Employee of an amount equal to the Purchase Price paid by Employee for such
interest.
b. The remaining 2% limited partnership/stock interest
shall become fully vested at the end of Employment Year 4 provided that Employee
then remains employed by the Employer. Except as provided otherwise herein,
should Employee not remain employed by the Employer at the end of Employment
Year 4, the Employer shall have the right and option to reacquire from Employee
and Employee shall be obligated to sell to the Employer all non-vested TEP
limited partnership/stock interest previously acquired by the Employee upon
payment to Employee of an amount equal to the Purchase Price paid by Employee
for such interest.
(2) Accelerated Vesting.
If, prior to the vesting dates set forth in subparagraph
3(B)(1), a merger or a sale of substantially all of CAIS/Cleartel's or CGX's
assets occurs that results in the removal of current management or a change of
ownership control of CAIS from current ownership control, then the vesting of
Employee's TEP limited partnership/stock interest will accelerate and become
effective as of one day prior to the effective day of such merger or sale;
provided, however, that in the event that an Initial Public Offering of the
stock of CAIS, Cleartel or CGX occurs prior to the end of Employment Year 3, and
provided that Employee then remains employed by the Employer, then the first 1%
limited partnership/stock interest shall vest one day prior to the first date of
such Initial Public Offering, and the remaining 2% limited partnership/stock
interest shall vest at the end of Employment Year 4 provided that Employee then
remains employed by the Employer, and otherwise such interest shall be forfeited
and revert back to the Employer.
<PAGE>
(3) Employee's rights with respect to any non-vested portion of
any TEP limited partnership/stock interest previously purchased pursuant to the
option granted herein, shall immediately terminate upon termination of
Employee's employment hereunder for any reason other than the following
circumstance:
If, during Employment Year 1, prior to full vesting,
Employee is terminated by Employer for a reason other than for good cause, then
in such event any non-vested portion of Employee's TEP limited partnership/stock
interest shall thereupon be and be deemed to be fully vested.
If, subsequent to the End of Employment Year 1 but prior
to the end of Employment Year 4, and prior to full vesting of Employee's TEP
limited partnership/stock interest Employee is terminated by Employer for a
reason other than for good cause, or (ii) for performance where Employee's
performance, through the date of Employee's notice of termination to Employer,
has been below 60% of the actual budgeted Performance Target for revenue growth
(pro-rated as appropriate), then in either such event any non-vested portion of
Employee's TEP limited partnership/stock interest shall thereupon be and be
deemed to be fully vested.
(4) Upon request by Employer, Employee shall execute
amendment(s) to Employer's limited partnership agreement or shareholders
agreement(s), as applicable, containing such reasonable terms and conditions as
may be required by the Employer, and on terms no less favorable than those
enjoyed by other limited partners/stockholders under such agreement(s).
(5) Within the above parameters, the parties agree to cooperate
to structure the conferral, vesting and forfeiture provisions with respect to
Employee's limited partnership/stock interest, so as to minimize the federal
income tax consequences to both the Employer and Employee of such provisions.
(C) Purchase of Employee's Vested Partnership/Stock Interest in the
---------------------------------------------------------------
Event of Termination of Employment Where Employer has Remained a Privately Held
- -------------------------------------------------------------------------------
Limited Partnership or Corporation.
- ----------------------------------
(1) Upon Employee's termination of employment with Employer for
any reason (including without limitation, termination upon expiration of the
term hereof), other than death of Employee, and provided that the Employer at
the time of such termination remains a privately held limited partnership or
corporation, the Employer shall have the option, but not the obligation, to
purchase, and Employee shall be obligated upon exercise of such option by the
Employer, to sell, all of the Employee's limited partnership/stock interests in
the Employer, if any, theretofore earned by Employee pursuant to the terms of
this Agreement and fully vested in Employee after consideration of subparagraph
3(B)(5) above. The purchase price of such partnership/stock interest shall equal
Employee's Proportionate Share (defined below) of the Incremental Value (defined
below) of the Employer. For purposes hereof, the term "Employee's Proportionate
Share" shall mean and refer to the percentage of limited partnership/stock
interest which has been earned by Employee and fully vested under the terms of
this Agreement as of the
<PAGE>
date of Employee's termination of employment. The term "Incremental Value" shall
mean the positive difference between (a) the Employer's net worth as of the last
day of the Employer's fiscal year immediately preceding Employee's commencement
of employment hereunder, and (b) the Employer's net worth as of the last day of
the Employer's fiscal year immediately preceding Employee's termination of
employment with Employer. For purposes of this provision, the determination of
Employer's outside accountant as to the Employer's net worth shall be binding on
both parties. The purchase price, as so determined, shall be paid in cash at the
time of transfer and assignment of the limited partnership interests. Closing on
such purchase shall occur on a date designated in writing by Employer to the
Employee which date must be within twelve (12) months after the termination of
Employee's employment hereunder.
(2) Upon Employee's termination of employment with Employer due
to the death of Employee, and provided that Employer at the time of such
termination remains a privately held limited partnership or corporation,
Employer shall have the option, but not the obligation, to purchase, and the
executor, administrator or personal representative of the deceased Employee
shall be obligated upon exercise of such option by the Employer, to sell, all of
the Employee's limited partnership/stock interests in the Employer, if any,
theretofore earned by Employee pursuant to the terms of this Agreement and fully
vested in Employee. The purchase price of such partnership/stock interests shall
equal Employee's Proportionate Share of the Incremental Value of the Employer
(as such terms are defined above). The purchase price, as so determined, shall
be paid in cash at the time of transfer and assignment of the limited
partnership/stock interests. Closing on such purchase shall occur on a date
designated in writing by Employer to the executor, administrator or personal
representative of the deceased Employee, which date must be within twelve (12)
months after the date of Employee's death.
<PAGE>
Exhibit B
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT made as of the 2nd day of October, 1998, by and
between CGX COMMUNICATIONS, INC., (hereinafter referred to as the "Employer" or
the "Corporation"), and EVANS K. ANDERSON (hereinafter referred to as the
"Employee").
WITNESSETH:
WHEREAS, the Employer is engaged, inter alia, in the business of providing
-----------
Internet services and related activities and operations throughout the United
States of America; and
WHEREAS, the Employee is an employee of the Employer; and
WHEREAS, the Employer desires to grant to the Employee the opportunity to
purchase shares of the Employer's common stock in accordance with the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the premises, which are incorporated
into and made part of this Agreement, and of the mutual covenants and agreements
herein contained, the parties hereby agree entirety as follows:
1. Stock Option.
-------------
(A) Grant of Option.
---------------
Subject to the vesting and forfeiture provisions set forth below,
the Company hereby grants Employee an option to purchase (the "Option") all or
any part of a total of Three Hundred One Thousand Four Hundred Twenty (301,420)
shares of the Company's Common Stock (the "Option Shares") upon the terms and
conditions set forth herein. The purchase price of the Option Shares which
Employee elects to purchase under this Agreement shall be $1.1942 per share.
Employee shall, upon delivery to him of any Option Shares which he elects to
purchase hereunder, pay the Company the full purchase price for such Option
Shares on the date of exercise. The Option is exercisable in whole or in part by
written notice to Employer at any time after the date hereof, provided that at
the time of exercise the Employee is an employee of the Employer (or the
Employee was an employee of the Employer at the time of his death). Such Common
Stock shall be issued to Employee subject to the terms and conditions of any
shareholder agreement(s) generally applicable to the shareholders of the Company
on terms no less favorable than those enjoyed by other shareholders of the
Company under such shareholder agreement(s).
(B) Vesting and Forfeiture of Equity Interest.
-----------------------------------------
(1) Normal Vesting.
--------------
a. One-third (1/3) of the Option Shares shall become fully
vested at the end of Employment Year 3 provided that Employee then remains
employed by the Employer. For purposes hereof, the term "Employment Year" shall
mean and refer to each
<PAGE>
successive period of twelve calendar months commencing from and after the date
Employee first commenced employment with the Company (which employment shall
include any periods during which Employee was employed by CAIS, Inc.). Except as
provided otherwise herein, should Employee not remain employed by the Employer
at the end of Employment Year 3, the Employer shall have the right and option to
reacquire from Employee and Employee shall be obligated to sell to the Employer
all non-vested Option Shares previously acquired by the Employee upon payment to
Employee of an amount equal to the Purchase Price paid by Employee for such
Option Shares.
b. The remaining two-thirds (2/3) of the Option Shares
shall become fully vested at the end of Employment Year 4 provided that Employee
then remains employed by the Employer. Except as provided otherwise herein,
should Employee not remain employed by the Employer at the end of Employment
Year 4, the Employer shall have the right and option to reacquire from Employee
and Employee shall be obligated to sell to the Employer all non-vested Option
Shares previously acquired by the Employee upon payment to Employee of an amount
equal to the Purchase Price paid by Employee for such Option Shares.
(2) Accelerated Vesting.
If, prior to the vesting dates set forth in subparagraph
1(B)(1), a merger or a sale of substantially all of the Company's assets occurs
that results in the removal of current management or a change of ownership
control of the Company from current ownership control, then the vesting of
Employee's Option Shares will accelerate and become effective as of one day
prior to the effective day of such merger or sale; provided, however, that in
the event that an Initial Public Offering of the stock of the Company occurs
prior to the end of Employment Year 3, and provided that Employee then remains
employed by the Employer, then one-third (1/3) of the Option Shares shall vest
one day prior to the first date of such Initial Public Offering, and the
remaining two-thirds (2/3) of the Option Shares shall vest at the end of
Employment Year 4 provided that Employee then remains employed by the Employer,
and otherwise such Option Shares shall be forfeited and revert back to the
Employer.
(3) Employee's rights with respect to any non-vested portion of
any Option Shares previously purchased pursuant to the option granted herein,
shall immediately terminate upon termination of Employee's employment hereunder
for any reason other than the following circumstance:
If, during Employment Year 1, prior to full vesting,
Employee is terminated by Employer for a reason other than for good cause, then
in such event any non-vested portion of the Option Shares shall thereupon be and
be deemed to be fully vested.
If, subsequent to the End of Employment Year 1 but prior to
the end of Employment Year 4, and prior to full vesting of Employee's Option
Shares, Employee is terminated by Employer (i) for a reason other than for good
cause, or (ii) for performance where Employee's performance, through the date of
Employee's notice of termination to Employer, has not been below 60% of the
actual budgeted Performance Target for revenue growth (pro-rated as
appropriate), then in either such event any non-vested portion of the Option
Shares shall thereupon be and be deemed to be fully vested.
2
<PAGE>
(4) Upon request by Employer, Employee shall execute
amendment(s) to Employer's shareholders agreement(s) containing such reasonable
terms and conditions as may be required by the Employer, and on terms no less
favorable than those enjoyed by other stockholders under such agreement(s).
(5) Within the above parameters, the parties agree to cooperate
to structure the conferral, vesting and forfeiture provisions with respect to
Employee's Option Shares, so as to minimize the federal income tax consequences
to both the Employer and Employee of such provisions.
(C) Purchase of Employee's Vested Option Shares in the Event of
-----------------------------------------------------------
Termination of Employment Where Employer has Remained a Privately Held
- ----------------------------------------------------------------------
Corporation.
- -----------
(1) Upon Employee's termination of employment with Employer for
any reason (including without limitation, termination upon expiration of the
term hereof), other than death of Employee, and provided that the Employer at
the time of such termination remains a privately held corporation, the Employer
shall have the option, but not the obligation, to purchase, and Employee shall
be obligated upon exercise of such option by the Employer, to sell, all of the
Employee's Option Shares in the Employer, if any, theretofore acquired by
Employee pursuant to the terms of this Agreement and fully vested in Employee
after consideration of subparagraph 1(B)(5) above. The purchase price of such
Option Shares shall equal Employee's Proportionate Share (defined below) of the
Incremental Value (defined below) of the Employer. For purposes hereof, the term
"Employee's Proportionate Share" shall mean and refer to the percentage that (a)
the number Option Shares which has been acquired by Employee and fully vested
under the terms of this Agreement as of the date of Employee's termination of
employment, bears to (b) the total number of shares of Common Stock of the
Company issued and outstanding as of such date. The term "Incremental Value"
shall mean the positive difference between (a) the Employer's net worth as of
the last day of the Employer's fiscal year immediately preceding Employment Year
1, and (b) the Employer's net worth as of the last day of the Employer's fiscal
year immediately preceding Employee's termination of employment with Employer.
For purposes of this provision, the determination of Employer's outside
accountant as to the Employer's net worth shall be binding on both parties. The
purchase price, as so determined, shall be paid in cash at the time of transfer
and assignment to the Company of the Option Shares. Closing on such purchase
shall occur on a date designated in writing by Employer to the Employee which
date must be within twelve (12) months after the termination of Employee's
employment hereunder.
(2) Upon Employee's termination of employment with Employer due
to the death of Employee, and provided that Employer at the time of such
termination remains a privately held corporation, Employer shall have the
option, but not the obligation, to purchase, and the executor, administrator or
personal representative of the deceased Employee shall be obligated upon
exercise of such option by the Employer, to sell, all of the Employee's Option
Shares previously exercised by the Employee, and fully vested in Employee. The
purchase price of such Option Shares shall equal Employee's Proportionate Share
of the Incremental Value of the Employer (as such terms are defined above). The
purchase price, as so determined, shall be paid in cash at the time of transfer
and assignment to the Company of the Option Shares. Closing on
3
<PAGE>
such purchase shall occur on a date designated in writing by Employer to the
executor, administrator or personal representative of the deceased Employee,
which date must be within twelve (12) months after the date of Employee's death.
2. Non-Assignability.
-----------------
The Employee shall have no right to assign this Agreement, or any of
his or her rights or obligations hereunder, to another party or parties. The
Option granted hereunder is not assignable by operation of law or subject to
execution, attachment or similar process. Employer shall have the right to
assign this Agreement to any successor entity provided that such entity agrees
to assume all of Employer's obligations hereunder.
3. Law Applicable.
---------------
This Agreement shall be construed in accordance with the laws of the
District of Columbia.
4. Compliance with Securities Laws.
-------------------------------
Unless a registration statement under the Securities Act of 1933 is
then in effect with respect to the Option Shares the Employee may receive upon
the exercise of his Option, the Employee agrees to acquire such Option Shares
for investment and not for resale or distribution, and further consents to such
other agreements as the Company, in its discretion, may deem necessary to comply
with the requirements of the Securities Act of 1933 or any applicable state
securities laws. The Employee acknowledges that the Company has no obligation to
file a registration statement with respect to any of the Option Shares.
5. Entire Agreement.
-----------------
This instrument contains all of the agreements and understandings
between the parties hereto with respect to the employment of the Employee by the
Employer, and no oral agreements or written correspondence shall be held to
affect the provisions hereof and shall be binding upon Employer's successors and
assigns. All subsequent changes and modifications, to be valid, shall be by
written instrument executed by the Employer and the Employee.
4
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
on its behalf by its duly authorized officers and the Employee has hereunto set
his hand and seal, all done on the day and in the year first hereinabove
written.
EMPLOYER:
--------
ATTEST: CGX COMMUNICATIONS, INC.
/s/ William M. Caldwell, IV By: /s/ Ulysses G. Auger, II
- ------------------------- -----------------------------(SEAL)
Name:
Title:
EMPLOYEE:
--------
/s/ Evans K. Anderson
--------------------------------(SEAL)
Evans K. Anderson
5
<PAGE>
Exhibit 10.8
AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amendment to the Amended and Restated Employment Agreement (this
"Agreement") is made as of February 22, 1999, by and among CAIS Internet, Inc.,
a Delaware corporation, (the "Company"), and Evans K. Anderson (the "Employee").
RECITALS:
--------
1. The Company is party to a certain amended and restated employment
agreement (the "Employment Agreement"), dated as of June 3, 1997
between CAIS, Inc., a Virginia corporation, and Employee.
2. The Company and the Employee are parties to a certain stock option
agreement (the "Stock Option Agreement"), dated as of October 2, 1998.
3. The Company, the Employee and CAIS, Inc. are parties to a certain
assignment and assumption agreement and release (the "Assignment"),
dated as of October 2, 1998, pursuant to which CAIS, Inc. assigned all
of its rights and obligations under the Employment Agreement to the
Company.
4. In February 1999, the Company transferred all of its limited
partnership interests in Cleartel Communications Limited Partnership
("Cleartel LP") to Cleartel Communications, Inc. ("Cleartel") and
Cleartel LP was dissolved. The Company then completed the spin-off of
Cleartel by means of a distribution of all of its shares in Cleartel to
the Company's stockholders pro rata based on their percentage ownership
of the outstanding shares of the Company (the "Spin-offf").
5. Pursuant to the Spin-off, options granted by the Company to persons
prior to the Spin-off, represent rights to purchase shares in both the
Company and Cleartel (the "Options").
6. Pursuant to the Employment Agreement, the Stock Option Agreement and
the Assignment, the Employee was granted Options.
7. The Company and the Employee desire to modify and clarify certain
terms of the Employment Agreement, the Stock Option Agreement and the
Assignment, including (i) the Employee's title, and (ii) the
accelerated vesting provisions of the Options.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
1. Amendment to Duties of Employment in Section 1(A). The Employment
Agreement is hereby amended by deleting Section 1(A) in its entirety
and substituting in lieu thereof the following new section:
"(A) The Employer does hereby employ the Employee in the capacity of
Chief
<PAGE>
Operating Officer and Executive Vice President of Sales and
Marketing, to manage the overall business interests of CAIS
Internet, Inc., to manage the Employer's sales, to develop new
business opportunities and to perform such other duties as the
Employer may from time to time designate."
2. Amendment to Section 2 of the Employment Agreement. The Employment
Agreement is hereby amended by deleting Section 2 in its entirety and
substituting in lieu thereof the following new section:
"2. Compensation of Employee.
-------------------------
As the sole compensation for the all of the Employee's services
rendered hereunder to the Employer, the Employer hereby agrees to
pay the Employee compensation and reimbursements as set forth in
Exhibits "A" and "B," attached hereto and made a part hereof.
3. Amendment to Section 3 of Exhibit A to the Employment Agreement. The
Employment Agreement is hereby amended by deleting Section 3 of
Exhibit A in its entirety.
4. Amendment to Vesting and Forfeiture of Equity Interest in Section 1
(B)(2) of Exhibit B to the Employment Agreement. The Employment
Agreement is hereby amended by deleting Section 1( B)(2) of Exhibit B
in its entirety and substituting in lieu thereof the following new
section:
"(2) Accelerated Vesting.
If, prior to the vesting dates set forth in subparagraph 1(B)(1), a
merger or a sale of substantially all of the Company' s assets occurs
that results in the removal of current management or a change of
ownership control of the Company from current ownership control, then
the vesting of Employee' s Option Shares will accelerate and become
effective as of one day prior to the effective day of such merger or
sale; provided, however, that in the event that an Initial Public
Offering of the stock of the Company occurs prior to the end of
Employment Year 3, and provided that Employee then remains employed by
the Employer, then one-third (1/3) of the Option Shares shall vest on
the date immediately prior to the earliest to occur of: (i) the
effective date of a Registration Statement; or (ii) the pricing of the
Initial Public Offering; or (iii) the execution and delivery of an
underwriting agreement related to an Initial Public Offering, and the
remaining two-thirds (2/3) of the Option Shares shall vest at the end
of Employment Year 4 provided that Employee then remains employed by
the Employer, and otherwise such Option Shares shall be forfeited and
revert back to the Employer."
5. Addition of Section 6 Regarding Expiration of Equity Interest in
Exhibit B to the Employment Agreement. The Employment Agreement is
hereby amended by adding a new section to Exhibit B which shall read as
follows:
<PAGE>
"6. Expiration.
-----------
The Option Shares shall terminate ten years from the date of
issuance."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
[Signatures appear on the following page]
<PAGE>
THE COMPANY:
CAIS INTERNET, INC.
By: /s/ Ulysses G. Auger, II
-------------------------------
Ulysses G. Auger, II
Chief Executive Officer
EMPLOYEE:
/s/ Evans K. Anderson
_________________________________
Evans K. Anderson
<PAGE>
EXHIBIT 10.9
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AGREEMENT made effective for all purposes as of the 8th day of September,
1997, by and between CAIS, Inc. and Cleartel Communications, Inc., (hereinafter
jointly referred to as the "Employer"), and William M. Caldwell, IV (hereinafter
referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer is engaged, inter alia, in the business of providing
-----------
Internet services, communications services and related activities and operations
throughout the World including the United States of America; and
WHEREAS, the Employee is experienced in the marketing, finance, and management
of communications services; and
WHEREAS, Employer and Employee heretofore entered into a certain Employment
Agreement (the "Employment Agreement") dated as of September 8, 1997; and
WHEREAS, pursuant to Section 3(B)(5) of Exhibit "A" to the Employment
Agreement, Employer and Employee agreed that they would each respectively
cooperate to structure the conferral, vesting and forfeiture provisions of the
Employment Agreement to minimize the federal income tax consequences to both
such parties; and
WHEREAS, consistent with that intent both Employer and Employee desire hereby
to amend and restate the Employment Agreement in its entirety as hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises, which are incorporated into
and made part of this Agreement, and of the mutual covenants and agreements
herein contained, the parties hereby amend and restate the Employment Agreement
in its entirety as follows:
1. Duties and Term of Employment.
------------------------------
(A) The Employer does hereby employ the Employee in the capacity of Vice-
Chairman of Cleartel and CAIS to assist in management of Employer's businesses,
to develop new business opportunities and to perform such other duties as
Employer may from time to time designate. Employer reserves the right during the
term of this Agreement to change the capacity in which Employee is employed as
well as the duties which the Employee is required to perform for the Employer,
provided that the duties to be performed by Employee are substantially similar
to the duties and responsibilities contemplated by this agreement. The parties
agree that in the event that Cleartel and CAIS are combined into a single
successor entity ("CGX"), that the rights and obligations of this Agreement
shall be assigned to CGX, which shall become the Employer for all purposes
hereunder, and Employee shall be employed in the capacity of Vice-Chairman of
CGX.
<PAGE>
(B) The Employee's employment hereunder commences as of September 8, 1997
and shall continue for a period of four (4) years thereafter, unless sooner
terminated as hereinafter provided.
2. Compensation of Employee.
-------------------------
As the sole compensation for all of the Employee's services rendered
hereunder to the Employer, the Employer hereby agrees to pay the Employee
compensation and reimbursements as set forth in Exhibit "A" attached hereto and
made a part hereof.
3. Conduct of Employee.
--------------------
Employee does hereby accept said employment under the terms and conditions
herein set forth, and further agrees that during the term hereof Employee will
devote full time, attention and energies to the business of the Employer, and
will not, without the prior written consent of Employer, actively engage in any
other business, employment or undertaking whatsoever, during the said period of
time. Employee is not restricted from ownership in passive investments and from
other passive activities that do not interfere with duties to be performed by
Employee under this Agreement. Employee further agrees to, at all times during
the term hereof, abide by and comply with the directions, instructions and
decisions of the Employer and, during the term hereof, to dutifully and
faithfully carry out and perform the duties and obligations of Employee's
position, as herein set forth.
4. Limitations Upon Acts of Employee. Employee agrees:
----------------------------------
(A) That Employee will not draw, accept or make any bill of exchange or
promissory note for or on behalf of the Employer; nor shall Employee otherwise
pledge the credit of the Employer, nor execute or deliver any contracts or
documents for or on behalf of the Employer, except to the extent of the
Employer's written policies consented to by its General Partner.
(B) That Employee will make available such information and fully advise
the Employer when requested, of all matters in which Employee shall become
involved, and acts which Employee shall perform, for or on the account of the
Employer; and that Employee shall also promptly inform the Employer of any
matters coming to Employee's attention or knowledge that in Employee's business
judgment may materially affect the interests of the Employer, or its business
operations.
(C) The policies of operation of the business of the Employer shall, from
time to time, be determined by the Employer; and the Employee agrees to conform
to and execute all reasonable and lawful policies of Employer as so determined.
<PAGE>
Termination of Employment.
-------------------------
(A) The Employer shall have the right to cancel and terminate this
Agreement, and to discharge the Employee for "good cause", or, after Employment
Year 1, without cause upon thirty (30) days' prior written notice to Employee.
For purposes of this Article 5, "good cause" shall be construed to mean proven
dishonesty in a material matter, habitual intoxication, continued and repeated
failure to devote proper time and attention to the business of the Employer,
repeated failure (after receipt of written notice from Employer and reasonable
opportunity to cure) by Employee to carry out the reasonable directions and
instructions of the Employer or its General Partner, conviction of a crime
involving moral turpitude or requiring imprisonment of Employee, repeated and
unexcused absenteeism after reasonable notice from Employer and reasonable
opportunity to cure, death of the Employee, or the material breach by Employee
of any of Employee's obligations or agreements contained in Sections 7 or 8
below, or the making of any representation or warranty pursuant to Article 6
hereinbelow which shall prove to be materially inaccurate, incorrect or false in
any respect. Upon termination of Employee's employment by Employer without
cause, the Employer agrees to pay Employee as severance pay and in full and
final settlement all claims between the parties (excluding any claim by Employee
for wages or other compensation previously earned and fully vested and not paid)
an amount equal to (i) six (6) months of the base salary of Employee if
termination occurs during the first twelve months of the term hereof, or (ii)
nine (9) months of the base salary of Employee thereafter.
(B) If Ulysses G. Auger, II, for reasons other than his illness,
incapacity or death, no longer is involved in the management of Employer, then
Employee shall have the option to resign from his employment with Employer, and
in such event no severance pay shall be due from Employer to Employee.
6. Employee's Representations.
---------------------------
Employee hereby represents and warrants to Employer that there are not
now operative and in force any employment agreements or other instruments of any
nature, to which Employee is a party or under which Employee may be otherwise
bound or subject, which contain any terms or provisions that in any manner
restrict, limit, prevent, prohibit or make unlawful the execution of Employee of
this Agreement, or the performance by Employee of any or all of Employee's
obligations, covenants and duties herein specified, or Employee's employment by
Employer hereunder or otherwise. In the event the representatives and warranties
made by Employee under this Article 6 should prove to be inaccurate, incorrect
or false in any material respect, whether through inadvertence or willful
misrepresentation by Employee, Employer may, at its option, upon discovering
such inaccuracy or the falsity of said representations, terminate this Agreement
for good cause and Employee's employment hereunder.
<PAGE>
7. Trade Secrets.
--------------
The Employee agrees that during the term of employment with the
Employer and at all times after expiration thereof, Employee will not
communicate or divulge, for the benefit of any competitor, rival or other
person, firm, association, or corporation, whether associated with the Employee
or not, any trade secrets, client lists, employee information or any other
confidential information or material matters of any nature relating to the
business of affairs of the Employer, which may be utilized by Employer in or
about its business and which trade secrets, information or other matters are
communicated or otherwise become known to the Employee by reason of Employee's
employment hereunder, or otherwise, unless such information is generally known
to the public or unless employee is required to disclose same pursuant to a
valid court order. This provision shall expressly survive any termination or
other expiration of this Agreement.
8. Agreement Not to Compete.
-------------------------
Employee acknowledges that the services to be rendered hereunder are
of a special and unusual character which have a unique value to the Employer,
the loss of which cannot adequately be compensated by damages in an action at
law. Because of the unique value to the Employer of the services of Employee for
which the Employer has contracted hereunder, and because of the confidential
information to be obtained by Employee, as aforesaid, Employee agrees and
covenants as follows:
(A) Employee agrees that after Employee ceases to be employed
by the Employer, Employee will not, directly or indirectly, for a period of
twenty-four (24) months next following such cessation of employment, solicit
business from, divert business from, or attempt to convert to other methods of
performing functions related to the services provided by the Employer, any
client, account or customer of the Employer which for purposes hereof shall be
defined as client, account or customer having done business with the Employer on
a sole supplier basis at any time during the one (l) year period immediately
preceding the date of the cessation of Employee's employment by the Employer.
(B) Employee agrees that for the same period after Employee
ceases to be employed by Employer as specified in Article 8(A) above, Employee
will not, in any part of the United States of America, directly or indirectly
undertake employment with, or to be associated with, as owner, partner, joint
venturer, stockholder, employer, employee, agent or contractor, or in any other
manner be connected or identified either directly or indirectly with, any
person, business, organization, firm, association or corporation which shall
actively solicit or attempt to solicit or do business with any of the Employer's
clients, accounts or customers as defined in Article 8(A) above.
(C) Employee agrees that for a period of twenty-four (24)
months after Employee ceases to be employed by the Employer, Employee will not,
directly or indirectly, solicit for employment or employ for Employee's own or
for another's benefit any employee of the Employer.
<PAGE>
(D) If Employer exercises its rights under Article 5(A) to
terminate the Employee without cause after Employment Year 1, the Employee will
be bound by the restrictions contained in Articles 8(A), (B) and (C) only for
the duration of his severance pay period provided for in Article 5(A).
9. Injunction.
-----------
Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited in Articles 7 and 8 hereof, it is agreed
that the Employer shall be entitled to recover any damages incurred by it as a
result of such engagement or violation by Employee in an action at law, and to
full injunctive relief, to be issued by any competent court of equity, enjoining
and restraining the Employee and each and every person, firm, organization,
association, or corporation concerned therein, from the continuance of such
violative acts. The provisions of this Article 9 and or Article 8 above shall
expressly survive any termination or other expiration of this Agreement.
10. Non-Assignability.
-----------------
The Employee shall have no right to assign this Agreement, or any of
his or her rights or obligations hereunder, to another party or parties;
provided, however, that with the prior written consent of Employer, which
consent shall not be unreasonably withheld, and if not inconsistent with any
applicable statute, regulation, or contractual or other obligation of Employer
or Employee (e.g., any restrictions contained in a partnership or shareholders
agreement), Employee shall have the right to assign or otherwise transfer any
vested equity ownership interest in Employer to a trust or similar legal entity
of Employee's designation. Employer shall have the right to assign this
Agreement to any successor entity provided that such entity agrees to assume all
of Employer's obligations hereunder.
11. Law Applicable.
---------------
This Agreement shall be construed in accordance with the laws of the
District of Columbia.
12. Non-Waiver of Breach.
---------------------
No waiver by the Employer of any breach of any covenant or obligation
hereof on the part of the Employee to be kept and performed shall be considered
to be a waiver of any such covenant or provision, or of any future breach
thereof.
<PAGE>
13. Arbitration.
-----------
Except as herein otherwise provided, any claim or controversy arising
out of or relating to this Agreement or any breach hereof shall, upon the
request of either the Employer or Employee, be submitted to and settled by
arbitration in accordance with the rules of the American Arbitration Association
then in effect. Any decision made pursuant to such arbitration shall be binding
and conclusive upon the Employer and the Employee and judgment upon such
decision may be entered in any court having jurisdiction thereof. The arbitrator
shall be entitled to make any award, including an award for punitive damages,
that the arbitrator shall determine is appropriate. This Section 13 shall not
apply with respect to any breach or threatened breach of Section 7 or 8.
14. Entire Agreement.
-----------------
This instrument contains all of the agreements and understandings
between the parties hereto with respect to the employment of the Employee by the
Employer, and no oral agreements or written correspondence shall be held to
affect the provisions hereof and shall be binding upon Employer's successors and
assigns. All subsequent changes and modifications, to be valid, shall be by
written instrument executed by the Employer and the Employee.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
on its behalf by its duly authorized officers and the Employee has hereunto set
his hand and seal, all done on the day and in the year first hereinabove
written.
EMPLOYER:
--------
ATTEST: CLEARTEL COMMUNICATIONS, INC.
/s/ Evans K. Anderson By: /s/ Ulysses G. Auger, II (SEAL)
- ----------------------- ------------------------------
Name: Ulysses G. Auger, II
Title: Chief Executive Officer
EMPLOYER:
--------
ATTEST: CAIS, INC.
/s/ Evans K. Anderson By: /s/ Ulysses G. Auger, II (SEAL)
- ----------------------- ---------------------------
Name: Ulysses G. Auger, II
Title: Chief Executive Officer
EMPLOYEE:
--------
/s/ Evans K. Anderson /s/ William M. Caldwell, IV (SEAL)
- ----------------------- ----------------------------
William M. Caldwell, IV
<PAGE>
EXHIBIT "A"
-----------
COMPENSATION
------------
1. Base Compensation. During the term of the Agreement, Employee shall
-----------------
receive a base salary of $175,000.00 per Employment Year. Base salary shall be
paid during an Employment Year in twenty-six (26) equal installments, less
applicable social security and withholding taxes. Employee's base salary will
be subject to such periodic increases as may be determined by the Employer.
2. Employee Benefits. Employer shall reimburse Employee for all expenses
-----------------
reasonably incurred by him in the performance of his duties hereunder, with such
reimbursement to be made upon submission by Employee of itemized statements and
receipts in form reasonably satisfactory to Employer. Employee shall be
entitled to such amount of vacation as is normal and usual for an executive of
his position with the Employer and shall be eligible to participate in all
hospitalization, 401k Plan, insurance and other employee benefit plans for non-
union executive employees which may be maintained wholly or partially funded by
Employer.
3. Equity Incentive Compensation.
------------------------------
(A) Option to Acquire Equity Interest.
(1) Subject to the vesting and forfeiture provisions set forth
below, as an inducement to entering into this Agreement, Employee is hereby
granted an option to purchase: (1) a limited partnership interest in CAIS
Limited Partnership equal to 14% of the total limited partnership interest in
CAIS Limited Partnership and a limited partnership interest in Cleartel
Communications Limited Partnership equal to 14% of the total limited partnership
interest in Cleartel Communications Limited Partnership, or, in the event that
Cleartel and CAIS are combined into a single successor entity ("CGX"), (2) a
limited partnership/stock interest (as applicable) in CGX equal to 14% of the
total limited partnership/stock interest in CGX. Such 14% interest, subject to
adjustment as provided in sections 3(A)(2), below, shall hereafter be referred
to as the Target Equity Percentage ("TEP"). The purchase price for the TEP
limited partnership/stock interest shall be one million six hundred eighty
thousand Dollars ($1,680,000). The option is exercisable by Employee (or his
estate) in whole (but not in part) by written notice to Employer at any time
after the date hereof, provided that at the time of exercise the Employee is an
employee of the Employer (or the Employee was an employee of the Employer at the
time of his death). Such limited partnership/stock interest(s) shall be issued
to Employee subject to the terms and conditions of limited
partnership/shareholders (as applicable) agreement(s) on terms no less favorable
than those enjoyed by other limited partners/stockholders (as applicable) of
CAIS Limited Partnership and Cleartel Communications Limited Partnership or of
CGX under such limited partnership/shareholders (as applicable) agreement(s).
Employee's existing one percent (1%) interest in CAIS Limited Partnership shall
be disregarded for purposes of this Agreement and shall not be affected by or
governed by the terms of this Agreement.
Employee acknowledges that in the event that all or any
portion of the limited partnership/stock interest of any other CAIS/Cleartel or
CGX equity holder is forfeited
<PAGE>
for any reason, such interest shall not be allocated pro-rata to all remaining
CAIS/Cleartel or CAIS equity holders, but rather shall be allocated exclusively
to Ulysses G. Auger Sr. and Ulysses G. Auger, II.
(2) Adjustment of TEP - Acquisition/Merger/Capital Investment.
The parties further agree that in the event and to the extent CAIS/Cleartel or
CGX is acquired by, merges with or is otherwise combined with another entity
that is not controlled by the parties that currently control the equity of CAIS
and Cleartel, or receives outside capital investment through a private placement
and/or public offering of the stock or debt instrument of CAIS/Cleartel or CGX,
or the stock or debt instrument of any successor entity, then thereafter
Employee's TEP limited partnership/stock interest (and his option to purchase
same, if not previously exercised) will be reduced on the same basis and in the
same proportions as all other shareholders/limited partners except as otherwise
provided elsewhere in this Agreement.
(B) Vesting and Forfeiture of Equity Interest.
-----------------------------------------
(1) Normal Vesting.
a. The first 50% of Employee's TEP limited
partnership/stock interest shall become fully vested at the end of Employment
Year 3 provided that Employee then remains employed by the Employer. Except as
provided otherwise herein, should Employee not remain employed by the Employer
at the end of Employment Year 3, the Employer shall have the right and option to
reacquire from Employee and Employee shall be obligated to sell to the Employer
all non-vested TEP limited partnership/stock interest previously acquired by the
Employee upon payment to Employee of an amount equal to the Purchase Price paid
by Employee for such interest.
b. The second 50% of Employee's TEP limited
partnership/stock interest shall become fully vested at the end of Employment
Year 4 provided that Employee then remains employed by the Employer. Except as
provided otherwise herein, should Employee not remain employed by the Employer
at the end of Employment Year 4, the Employer shall have the right and option to
reacquire from Employee and Employee shall be obligated to sell to the Employer
all non-vested TEP limited partnership/stock interest previously acquired by the
Employee upon payment to Employee of an amount equal to the Purchase Price paid
by Employee for such interest.
(2) Accelerated Vesting.
a. In the event and to the extent the Employee, prior
to the end of Employment Year 3, achieves or exceeds Employer's goal of raising
debt and/or equity of $150 million, and provided that the fees and expenses
directly attributable to raising such funds are (i) less than or equal to 8% of
the funds so raised or (ii) less than or equal to 10% of the funds so raised in
the case of funds raised through an initial public offering of Employer's stock,
then the first 50% of Employee's TEP limited partnership/stock interest shall
become fully vested upon receipt of such funds by the Employer, and the second
50% of Employee's TEP limited partnership/stock interest shall become fully
vested at the end of Employment Year 4 provided
<PAGE>
that the Employee then remains employed by the Employer.
If, prior to the vesting dates set forth in
subparagraph 3(B)(1), a merger or a sale of substantially all of CAIS/Cleartel's
or CGX's assets occurs that results in the removal of current management or a
change of ownership control of CAIS from current ownership control, then the
vesting of Employee's TEP limited partnership/stock interest will accelerate and
become effective as of one day prior to the effective day of such merger or
sale; provided, however, that in the event that an Initial Public Offering of
the stock of CAIS, Cleartel or CGX occurs prior to the end of Employment Year 2,
and provided that Employee then remains employed by the Employer, then the first
75% of Employee's TEP limited partnership/stock interest shall vest one day
prior to the first date of such Initial Public Offering, and the remaining 25%
of Employee's limited partnership/stock interest shall vest at the end of
Employment Year 4 provided that Employee then remains employed by the Employer,
and otherwise such interest shall be forfeited and revert back to the Employer.
Employer and Employee agree that in the event that
Cleartel's Operator Services business is spun off into a separate entity,
Employee's pro-rata equity interest in such spun off entity shall be reduced in
conjunction with the formation of such entity on the same basis and in the same
proportions as are the equity interests of all other CAIS/Cleartel
shareholders/limited partners. Employer and Employee agree that the formation of
such spun off entity, even if undertaken in conjunction with unrelated entities,
shall not trigger the accelerated vesting provisions of subparagraph 3(B)(2)(b).
Any event as described in subparagraph 3(B)(2)(b) occurring subsequent to the
formation of the spun off entity and affecting only such spun off entity shall
trigger the accelerated vesting provisions of subparagraph 3(B)(2)(b) only with
respect to Employee's interest in the spun off entity, and shall not trigger the
accelerated vesting provisions of subparagraph 3(B)(2)(b) with respect to
Employee's interest in the CAIS/Cleartel or CGX entity.
(3) Employee's rights with respect to any non-vested portion
of any TEP limited partnership/stock interest previously purchased pursuant to
the option granted herein, shall immediately terminate upon termination of
Employee's employment hereunder for any reason other than the following
circumstance:
If, prior to the end of Employment Year 2, and prior to
full vesting of Employee's TEP limited partnership/stock interest, (i) Employee
is terminated by Employer for a reason other than for good cause, or (ii)
Employee elects to resign from and terminate his employment with Employer
pursuant to and consistent with the terms of Article 5(B) of this Employment
Agreement, then in either such event 50% of any non-vested portion of Employee's
TEP limited partnership/stock interest shall thereupon be and be deemed to be
fully vested.
If, subsequent to the End of Employment Year 2 but
prior to the end of Employment Year 4, and prior to full vesting of Employee's
TEP limited partnership/stock interest, (i) Employee is terminated by Employer
for a reason other than for good cause, or (ii) Employee elects to resign from
and terminate his employment with Employer pursuant to and consistent with the
terms of Article 5(B) of this Employment Agreement, then in either such event
any non-vested portion of Employee's TEP limited partnership/stock interest
<PAGE>
shall thereupon be and be deemed to be fully vested.
(4) Upon request by Employer, Employee shall execute
amendment(s) to Employer's limited partnership agreement or shareholders
agreement(s), as applicable, containing such reasonable terms and conditions as
may be required by the Employer, and on terms no less favorable than those
enjoyed by other limited partners/stockholders under such agreement(s).
(5) Within the above parameters, the parties agree to
cooperate to structure the conferral, vesting and forfeiture provisions with
respect to Employee's limited partnership/stock interest, so as to minimize the
federal income tax consequences to both the Employer and Employee of such
provisions.
(C) Purchase of Employee's Vested Partnership/Stock Interest in the
---------------------------------------------------------------
Event of Termination of Employment Where Employer has Remained a Privately
- ---------------------------------------------------------------------------
Held Limited Partnership or Corporation.
- ----------------------------------------
(1) Upon Employee's termination of employment with Employer
for any reason (including without limitation, termination upon expiration of the
term hereof), other than death of Employee, and provided that the Employer at
the time of such termination remains a privately held limited partnership or
corporation, the Employer shall have the option, but not the obligation, to
purchase, and Employee shall be obligated upon exercise of such option by the
Employer, to sell, all of the Employee's limited partnership/stock interests in
the Employer, if any, theretofore acquired by Employee pursuant to the option
granted under this Agreement and fully vested in Employee. The purchase price of
such partnership/stock interest shall equal Employee's Proportionate Share
(defined below) of the Incremental Value (defined below) of the Employer. For
purposes of this subsection 3(C)(1), the term "Employee's Proportionate Share"
shall mean and refer to the percentage of limited partnership/stock interest
which has been earned by Employee and fully vested under the terms of this
Agreement as of the date of Employee's termination of employment. For purposes
of this subsection 3(C)(1), the term "Incremental Value" shall mean the positive
difference between (a) the Employer's net worth as of the last day of the
Employer's fiscal year immediately preceding Employee's commencement of
employment hereunder, and (b) the Employer's net worth as of the last day of the
Employer's fiscal year for the fiscal year that includes the date that is 180
days after the date of Employee's termination of employment with Employer. For
purposes of this provision, the determination of Employer's outside accountant
as to the Employer's net worth shall be binding on both parties. The purchase
price, as so determined, shall be paid in cash at the time of transfer and
assignment of the limited partnership/stock interests. Closing on such purchase
shall occur on a date designated in writing by Employer to the Employee which
date must be within twelve (12) months after the last day of the Employer's
fiscal year for the fiscal year that includes the date that is 180 days after
the date of Employee's termination of employment with Employer.
(2) Upon Employee's termination of employment with Employer
due to the death of Employee, and provided that Employer at the time of such
termination remains a privately held limited partnership or corporation,
Employer shall have the option, but not the obligation, to purchase, and the
executor, administrator or personal representative of the deceased
<PAGE>
Employee shall be obligated upon exercise of such option by the Employer, to
sell, all of the Employee's limited partnership/stock interests in the Employer,
if any, theretofore acquired by Employee pursuant to the option granted under
this Agreement and fully vested in Employee. The purchase price of such limited
partnership/stock interests shall equal Employee's Proportionate Share (defined
below) of the Incremental Value (defined below) of the Employer. For purposes of
this subsection 3(C)(2), the term "Employee's Proportionate Share" shall mean
and refer to the percentage of limited partnership/stock interest which has been
earned by Employee and fully vested under the terms of this Agreement as of the
date of Employee's death. For purposes of this subsection 3(C)(2), the term
"Incremental Value" shall mean the positive difference between (a) the
Employer's net worth as of the last day of the Employer's fiscal year
immediately preceding Employee's commencement of employment hereunder, and (b)
the Employer's net worth as of the last day of the Employer's fiscal year
immediately preceding the date of Employee's death. For purposes of this
provision, the determination of Employer's outside accountant as to the
Employer's net worth shall be binding on both parties. The purchase price, as so
determined, shall be paid in cash at the time of transfer and assignment of the
limited partnership/stock interests. Closing on such purchase shall occur on a
date designated in writing by Employer to the executor, administrator or
personal representative of the deceased Employee, which date must be within
twelve (12) months after the date of Employee's death.
<PAGE>
Exhibit B
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT made as of the 2nd day of October, 1998,
by and between CGX COMMUNICATIONS, INC., (hereinafter referred to as the
"Employer" or the "Corporation"), and WILLIAM M. CALDWELL, IV (hereinafter
referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employer is engaged, inter alia, in the business of providing
-----------
Internet services and related activities and operations throughout the United
States of America; and
WHEREAS, the Employee is an employee of the Employer; and
WHEREAS, the Employer desires to grant to the Employee the opportunity
to purchase shares of the Employer's common stock in accordance with the terms
and conditions set forth below.
NOW, THEREFORE, in consideration of the premises, which are incorporated
into and made part of this Agreement, and of the mutual covenants and agreements
herein contained, the parties hereby agree entirety as follows:
1. Stock Option.
-------------
(A) Grant of Option.
---------------
Subject to the vesting and forfeiture provisions set forth below,
the Company hereby grants Employee an option to purchase (the "Option") all or
any part of a total of One Million Six Hundred Thirty-Five Thousand Six Hundred
Ten (1,635,610) shares of the Company's Common Stock (the "Option Shares") upon
the terms and conditions set forth herein. The purchase price of the Option
Shares which Employee elects to purchase under this Agreement shall be $0.9732
per share. Employee shall, upon delivery to him of any Option Shares which he
elects to purchase hereunder, pay the Company the full purchase price for such
Option Shares. The Option is exercisable in whole or in part by written notice
to Employer at any time after the date hereof, provided that at the time of
exercise the Employee is an employee of the Employer (or the Employee was an
employee of the Employer at the time of his death). Such Common Stock shall be
issued to Employee subject to the terms and conditions of any shareholder
agreement(s) generally applicable to the shareholders of the Company on terms no
less favorable than those enjoyed by other shareholders of the Company under
such shareholder agreement(s).
<PAGE>
(B) Vesting and Forfeiture of Equity Interest.
-----------------------------------------
(1) Normal Vesting.
--------------
a. One-half (1/2) of the Option Shares shall become fully
vested at the end of Employment Year 3 provided that Employee then remains
employed by the Employer. For purposes hereof, the term "Employment Year" shall
mean and refer to each successive period of twelve calendar months commencing
from and after the date Employee first commenced employment with the Company
(which employment shall include any periods during which Employee was employed
by CAIS, Inc. and/or Cleartel Communications, Ins.). Except as provided
otherwise herein, should Employee not remain employed by the Employer at the end
of Employment Year 3, the Employer shall have the right and option to reacquire
from Employee and Employee shall be obligated to sell to the Employer all non-
vested Option Shares previously acquired by the Employee upon payment to
Employee of an amount equal to the Purchase Price paid by Employee for such
Option Shares.
b. The remaining one-half (1/2) of the Option Shares shall
become fully vested at the end of Employment Year 4 provided that Employee then
remains employed by the Employer. Except as provided otherwise herein, should
Employee not remain employed by the Employer at the end of Employment Year 4,
the Employer shall have the right and option to reacquire from Employee and
Employee shall be obligated to sell to the Employer all non-vested Option Shares
previously acquired by the Employee upon payment to Employee of an amount equal
to the Purchase Price paid by Employee for such Option Shares.
(2) Accelerated Vesting.
a. In the event and to the extent the Employee, prior to the
end of Employment Year 3, achieves or exceeds Employer's goal of raising debt
and/or equity of $150 million, and provided that the fees and expenses directly
attributable to raising such funds are (i) less than or equal to 8% of the funds
so raised or (ii) less than or equal to 10% of the funds so raised in the case
of funds raised through an initial public offering of Employer's stock, then the
first one-half (1/2) of the Option Shares shall become fully vested upon receipt
of such funds by the Employer, and the remaining one-half (1/2) of the Option
Shares shall become fully vested at the end of Employment Year 4 provided that
the Employee then remains employed by the Employer.
If, prior to the vesting dates set forth in subparagraph
1(B)(1), a merger or a sale of substantially all of the Company's assets occurs
that results in the removal of current management or a change of ownership
control of the Company from current ownership control, then the vesting of the
Option Shares will accelerate and become effective as of one day prior to the
effective day of such merger or sale; provided, however, that in the event that
an Initial Public Offering of the stock of the Company occurs prior to the end
of Employment Year 2, and provided that Employee then remains employed by the
Employer, then seventy-five percent (75%) of the Option Shares shall vest one
day prior to the first date of such Initial Public Offering, and the remaining
twenty-five percent (25%) of the Option Shares shall vest at the end of
Employment Year 4 provided that Employee then remains employed by the Employer,
and otherwise such interest shall be forfeited and revert back to the Employer.
2
<PAGE>
Employer and Employee agree that in the event that the
Company's Operator Services business is spun off into a separate entity,
Employee's pro-rata equity interest in such spun off entity shall be reduced in
conjunction with the formation of such entity on the same basis and in the same
proportions as are the equity interests of all other shareholders of the
Company. Employer and Employee agree that the formation of such spun off entity,
even if undertaken in conjunction with unrelated entities, shall not trigger the
accelerated vesting provisions of subparagraph 1(B)(2)(a). Any event as
described in subparagraph 1(B)(2)(a) occurring subsequent to the formation of
the spun off entity and affecting only such spun off entity shall trigger the
accelerated vesting provisions of subparagraph 1(B)(2)(a) only with respect to
Employee's interest in the spun off entity, and shall not trigger the
accelerated vesting provisions of subparagraph 1(B)(2)(b) with respect to
Employee's interest in the Company.
(3) Employee's rights with respect to any non-vested portion of
any Option Shares previously purchased pursuant to the option granted herein,
shall immediately terminate upon termination of Employee's employment hereunder
for any reason other than the following circumstance:
If, prior to the end of Employment Year 2, and prior to
full vesting of the Option Shares, (i) Employee is terminated by Employer for a
reason other than for good cause, or (ii) Employee elects to resign from and
terminate his employment with Employer pursuant to and consistent with the terms
of Employee's employment agreement with the Company, then in either such event
50% of any non-vested portion of the Option Shares shall thereupon be and be
deemed to be fully vested.
If, subsequent to the End of Employment Year 2 but prior
to the end of Employment Year 4, and prior to full vesting of the Option Shares,
(i) Employee is terminated by Employer for a reason other than for good cause,
or (ii) Employee elects to resign from and terminate his employment with
Employer pursuant to and consistent with the terms of Employee's employment
agreement with the Company, then in either such event any non-vested portion of
the Option Shares shall thereupon be and be deemed to be fully vested.
(4) Upon request by Employer, Employee shall execute
amendment(s) to Employer's shareholders agreement(s) containing such reasonable
terms and conditions as may be required by the Employer, and on terms no less
favorable than those enjoyed by other stockholders under such agreement(s).
(5) W ithin the above parameters, the parties agree to cooperate
to structure the conferral, vesting and forfeiture provisions with respect to
Employee's Option Shares, so as to minimize the federal income tax consequences
to both the Employer and Employee of such provisions.
3
<PAGE>
(C) Purchase of Employee's Vested Option Shares in the Event of
-----------------------------------------------------------
Termination of Employment Where Employer has Remained a Privately Held
- ----------------------------------------------------------------------
Corporation.
- -----------
(1) Upon Employee's termination of employment with Employer for
any reason (including without limitation, termination upon expiration of the
term hereof), other than death of Employee, and provided that the Employer at
the time of such termination remains a privately held corporation, the Employer
shall have the option, but not the obligation, to purchase, and Employee shall
be obligated upon exercise of such option by the Employer, to sell, all of the
Employee's Option Shares in the Employer, if any, theretofore acquired by
Employee pursuant to the terms of this Agreement and fully vested in Employee
after consideration of subparagraph 1(B)(5) above. The purchase price of such
Option Shares shall equal Employee's Proportionate Share (defined below) of the
Incremental Value (defined below) of the Employer. For purposes hereof, the term
"Employee's Proportionate Share" shall mean and refer to the percentage that (a)
the number Option Shares which has been acquired by Employee and fully vested
under the terms of this Agreement as of the date of Employee's termination of
employment, bears to (b) the total number of shares of Common Stock of the
Company issued and outstanding as of such date. The term "Incremental Value"
shall mean the positive difference between (a) the Employer's net worth as of
the last day of the Employer's fiscal year immediately preceding Employment Year
1, and (b) the Employer's net worth as of the last day of the Employer's fiscal
year that includes the date that is 180 days after the date of Employee's
termination of employment with Employer. For purposes of this provision, the
determination of Employer's outside accountant as to the Employer's net worth
shall be binding on both parties. The purchase price, as so determined, shall be
paid in cash at the time of transfer and assignment to the Company of the Option
Shares. Closing on such purchase shall occur on a date designated in writing by
Employer to the Employee which date must be within twelve (12) months after the
last day of the Employer's fiscal year that includes the date that is 180 days
after the date of Employee's termination of employment with Employer.
(2) Upon Employee's termination of employment with Employer due
to the death of Employee, and provided that Employer at the time of such
termination remains a privately held corporation, Employer shall have the
option, but not the obligation, to purchase, and the executor, administrator or
personal representative of the deceased Employee shall be obligated upon
exercise of such option by the Employer, to sell, all of the Option Shares, if
any, theretofore acquired by Employee pursuant to the option granted under this
Agreement and fully vested in Employee. The purchase price of such Option Shares
shall equal Employee's Proportionate Share (defined below) of the Incremental
Value (defined below) of the Employer. For purposes of this subsection 1(C)(2),
the term "Employee's Proportionate Share" shall mean and refer to the percentage
that (a) the number Option Shares which has been acquired by Employee and fully
vested under the terms of this Agreement as of the date of Employee's
termination of employment, bears to (b) the total number of shares of Common
Stock of the Company issued and outstanding as of such date. The term
"Incremental Value" shall mean the positive difference between (a) the
Employer's net worth as of the last day of the Employer's fiscal year
immediately preceding Employment Year 1, and (b) the Employer's net worth as of
the last day of the Employer's fiscal year immediately preceding the date of
Employee's death. For purposes of this provision, the determination of
Employer's outside accountant as to the Employer's net worth shall be binding on
both parties. The purchase price, as so determined, shall be paid in cash at the
time of transfer
4
<PAGE>
and assignment of the limited partnership/stock interests. Closing on such
purchase shall occur on a date designated in writing by Employer to the
executor, administrator or personal representative of the deceased Employee,
which date must be within twelve (12) months after the date of Employee's
death.
2. Non-Assignability.
-----------------
The Employee shall have no right to assign this Agreement, or any of
his or her rights or obligations hereunder, to another party or parties. The
Option granted hereunder is not assignable by operation of law or subject to
execution, attachment or similar process. Employer shall have the right to
assign this Agreement to any successor entity provided that such entity agrees
to assume all of Employer's obligations hereunder.
3. Law Applicable.
---------------
This Agreement shall be construed in accordance with the laws of the
District of Columbia.
4. Compliance with Securities Laws.
-------------------------------
Unless a registration statement under the Securities Act of 1933 is
then in effect with respect to the Option Shares the Employee may receive upon
the exercise of his Option, the Employee agrees to acquire such Option Shares
for investment and not for resale or distribution, and further consents to such
other agreements as the Company, in its discretion, may deem necessary to comply
with the requirements of the Securities Act of 1933 or any applicable state
securities laws. The Employee acknowledges that the Company has no obligation to
file a registration statement with respect to any of the Option Shares.
5. Entire Agreement.
-----------------
This instrument contains all of the agreements and understandings
between the parties hereto with respect to the employment of the Employee by the
Employer, and no oral agreements or written correspondence shall be held to
affect the provisions hereof and shall be binding upon Employer's successors and
assigns. All subsequent changes and modifications, to be valid, shall be by
written instrument executed by the Employer and the Employee.
5
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
on its behalf by its duly authorized officers and the Employee has hereunto set
his hand and seal, all done on the day and in the year first hereinabove
written.
EMPLOYER:
--------
ATTEST: CGX COMMUNICATIONS, INC.
/s/ Evans K. Anderson By: /s/ Ulysses G. Auger, II
- --------------------------- ----------------------------(SEAL)
Name:
Title:
EMPLOYEE:
--------
/s/ William M. Caldwell, IV
------------------------------(SEAL)
William M. Caldwell, IV
6
<PAGE>
Exhibit 10.11
AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amendment to the Amended and Restated Employment Agreement (this
"Agreement") is made as of February 22, 1999, by and among CAIS Internet, Inc.,
a Delaware corporation, (the "Company"), and William M. Caldwell, IV (the
"Employee").
RECITALS:
--------
1. The Company is party to a certain amended and restated employment
agreement (the "Employment Agreement"), dated as of September 8, 1997
between CAIS, Inc., a Virginia corporation, and Employee.
2. The Company and the Employee are parties to certain stock option
agreements (the "Stock Option Agreements"), dated as of October 2, 1998.
3. The Company, the Employee and CAIS, Inc. are parties to a certain
assignment and assumption agreement and release (the "Assignment"),
dated as of October 2, 1998, pursuant to which CAIS, Inc. assigned all
of its rights and obligations under the Employment Agreement to the
Company.
4. In February 1999, the Company transferred all of its limited partnership
interests in Cleartel Communications Limited Partnership ("Cleartel LP")
to Cleartel Communications, Inc. ("Cleartel") and Cleartel LP was
dissolved. The Company then completed the spin-off of Cleartel by means
of a distribution of all of its shares in Cleartel to the Company's
stockholders pro rata based on their percentage ownership of the
outstanding shares of the Company (the "Spin-offf").
5. Pursuant to the Spin-off, options granted by the Company to persons
prior to the Spin-off, represent rights to purchase shares in both the
Company and Cleartel (the "Options").
6. Pursuant to the Employment Agreement, the Stock Option Agreements and
the Assignment, the Employee was granted Options.
7. The Company and the Employee desire to modify and clarify certain
terms of the Employment Agreement, the Stock Option Agreements and the
Assignment, including (i) the Employee's title, and (ii) the
accelerated vesting provisions of the Options.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
1. Amendment to Duties of Employment in Section 1(A). The Employment
Agreement is hereby amended by deleting Section 1(A) in its entirety and
substituting in lieu thereof the following new section:
1
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"(A) The Employer does hereby employ the Employee in the capacity of
President, to supervise and control all of the business and
affairs of the Employer and perform all duties incident to the
office of President and such other duties as the Employer may
from time to time designate."
2. Amendment to Section 2 of the Employment Agreement. The Employment
Agreement is hereby amended by deleting Section 2 in its entirety and
substituting in lieu thereof the following new section:
"2. Compensation of Employee.
-------------------------
As the sole compensation for the all of the Employee's services
rendered hereunder to the Employer, the Employer hereby agrees to
pay the Employee compensation and reimbursements as set forth in
Exhibits "A" and "B," attached hereto and made a part hereof."
3. Amendment to Section 3 of Exhibit A to the Employment Agreement. The
Employment Agreement is hereby amended by deleting Section 3 of Exhibit
A in its entirety.
4. Amendment to Vesting and Forfeiture of Equity Interest in Section 1(
B)(2) of Exhibit B to the Employment Agreement. The Employment Agreement
is hereby amended by deleting Section 1( B)(2) of Exhibit B in its
entirety and substituting in lieu thereof the following new section:
"(2) Accelerated Vesting.
a. In the event and to the extent the Employee, prior to the end
of Employment Year 3, achieves or exceeds Employer's goal of raising
debt and/or equity of $150 million, and provided that the fees and
expenses directly attributable to raising such funds are (i) less than
or equal to 8% of the funds so raised or (ii) less than or equal to
10% of the funds so raised in the case of funds raised through an
initial public offering of Employer's stock, then the first one-half
(1/2) of the Option Shares shall become fully vested upon receipt of
such funds by the Employer, and the remaining one-half ( 1/2) of the
Option Shares shall become fully vested at the end of Employment Year
4 provided that the Employee then remains employed by the Employer.
If, prior to the vesting dates set forth in subparagraph 1(B)(1),
a merger or a sale of substantially all of the Company' s assets
occurs that results in the removal of current management or a change
of ownership control of the Company from current ownership control,
then the vesting of the Option Shares will accelerate and become
effective as of one day prior to the effective day of such merger or
sale; provided, however, that in the event that an Initial Public
Offering of the stock of the Company occurs prior to the end of
Employment Year 2, and provided that
2
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Employee then remains employed by the Employer, then seventy-five
percent (75%) of the Option Shares shall vest on the date immediately
prior to the earliest to occur of: (i) the effective date of a
Registration Statement; or (ii) the pricing of the Initial Public
Offering; or (iii) the execution and delivery of an underwriting
agreement related to an Initial Public Offering, and the remaining
twenty-five percent (25%) of the Option Shares shall vest at the end of
Employment Year 4 provided that Employee then remains employed by the
Employer, and otherwise such interest shall be forfeited and revert back
to the Employer.
Employer and Employee agree that in the event that the Company's
Operator Services business is spun off into a separate entity,
Employee's pro-rata equity interest in such spun off entity shall be
reduced in conjunction with the formation of such entity on the same
basis and in the same proportions as are the equity interests of all
other shareholders of the Company. Employer and Employee agree that the
formation of such spun off entity, even if undertaken in conjunction
with unrelated entities, shall not trigger the accelerated vesting
provisions of subparagraph 1(B)(2)(a). Any event as described in
subparagraph 1(B)(2)(a) occurring subsequent to the formation of the
spun off entity and affecting only such spun off entity shall trigger
the accelerated vesting provisions of subparagraph 1(B)(2)(a) only with
respect to Employee's interest in the spun off entity, and shall not
trigger the accelerated vesting provisions of subparagraph1(B)(2)(b)
with respect to Employee's interests in the Company."
5. Addition of Section 6 Regarding Expiration of Equity Interest in Exhibit
B to the Employment Agreement. The Employment Agreement is hereby
amended by adding a new section to Exhibit B which shall read as
follows:
"6. Expiration.
-----------
The Option Shares shall terminate ten years from the date of
issuance."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
[Signatures appear on the following page]
THE COMPANY:
CAIS INTERNET, INC.
By: /s/ Ulysses G. Auger, II
--------------------------------
Ulysses G. Auger, II
Chief Executive Officer
3
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EMPLOYEE:
/s/ William M. Caldwell, IV
-----------------------------------
William M. Caldwell, IV
4
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EXHIBIT 10.27
HILTON HOTELS CORPORATION
MASTER LICENSE AGREEMENT
FOR
CAIS, INC.
<PAGE>
TABLE OF CONTENTS
Paragraph Page No.
- --------- --------
1. LICENSE............................................................1
2. USE OF LICENSED AREA...............................................2
3. TERM OF INDIVIDUAL HOTELS..........................................2
4. FEES...............................................................3
5. INSTALLATION AND OPERATING PROCEDURES..............................4
6. INTERFERENCE.......................................................6
7. MAINTENANCE AND REMOVAL OF LICENSEE'S EQUIPMENT; SITE MAINTENANCE..7
8. HAZARDOUS SUBSTANCES...............................................8
9. INSURANCE..........................................................9
10. INDEMNITIES........................................................9
11. LIMITATION ON CONSEQUENTIAL DAMAGES; DISCLAIMER OF WARRANTIES.....11
12. LIENS.............................................................11
13. OWNERSHIP.........................................................12
14. LICENSOR RIGHT TO ENTER OR GRANT ENTRY............................12
15. LICENSEE'S PROPERTY...............................................12
16. TERMINATION.......................................................12
17. HOLDING OVER......................................................14
18. SUBLICENSING AND ASSIGNMENT.......................................14
<PAGE>
19. RELOCATIONS OF LICENSED AREA AND OR THE EQUIPMENT.................15
20. NATURE OF LICENSE.................................................15
21. NOTICES...........................................................16
22. DEFAULT UNDER OTHER LICENSE.......................................16
23. ACCESS TO THE SERVICES............................................16
24. REPRESENTATIONS AND WARRANTIES OF LICENSEE........................17
25. INDEPENDENT CONTRACTOR............................................17
26. DRAFTING AND PREPARATION..........................................17
27. MISCELLANEOUS.....................................................17
28. SEVERABILITY......................................................19
29. ENTIRE AGREEMENT..................................................19
EXHIBIT A LIST OF EQUIPMENT..........................................A-1
EXHIBIT B ARBITRATION PROVISIONS.....................................B-1
SCHEDULE 1 LIST OF HOTELS............................................S-1
OPTION ADDENDUM.....................................................OD-1
<PAGE>
MASTER LICENSE AGREEMENT
THIS MASTER LICENSE AGREEMENT dated for reference purposes only,
December 23, 1998, by and between Hilton Hotels Corporation, a Delaware.
corporation, (hereinafter referred to as "Licensor"), and CAIS, Inc. a Virginia
corporation (hereinafter referred to as "Licensee").
W I T N E S S E T H:
-------------------
WHEREAS, Licensor operates a national chain of hotels in various cities
of the United States commonly known as the Hilton Hotels; and
WHEREAS, Licensee has devised a commercial, high speed data
communications service as more particularly defined in Paragraph 2 (the
"Service") and desires to make the Service available to Licensor and third
parties at Licensor Hotels: and
WHEREAS, Licensor has agreed to license to Licensee the nonexclusive
right to place equipment for the provision of the Service (the "Equipment") in
certain guest rooms and other areas within the specific hotels named in riders
attached as Participating Hotel Site Acknowledgement (the "Riders") and the
respective Hotels (the "Hotels") included are subject to increase or decrease
from time to time; and
WHEREAS, Licensor desires to grant to Licensee the right to install and
operate the Equipment necessary for the Service at the Hotels and Licensee
desires to acquire such right;
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
---------
1. LICENSE
-------
a. Licensor hereby licenses to Licensee, and Licensee hereby
Licenses from Licensor, the nonexclusive right to use certain areas and existing
telephone wiring for the installation and operation of the Equipment for the
Service in certain guest rooms and other areas to be determined from time to
time by Licensor within the Hotels. The certain area, as they may be changed by
Licensor from time to time hereinafter shall be collectively called the
"Licensed Area".
b. Licensee shall, at it sole cost and expense, install maintain,
operate, repair, upgrade and replace and Equipment and construct any other
improvements necessary including connections for power and telephone lines, as
further defined in Paragraph 5 hereof.
c. At each of the (participating) Hotels, Licensee shall install
the Service
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in all Meeting Rooms and in a minimum of (a) 200 Guest Rooms where the
(participating) Hotel has 400 or greater Guest Rooms, or (b) 50% of the Guest
Rooms where the (participating) Hotel has fewer than 400 Guest Rooms.
d. Costs for use of telephone lines shall be at Licensee's sole
cost and expense.
2. USE OF LICENSED AREA
--------------------
The Licensed Area shall be used by Licensee only for the provision of
the Service. The Service shall mean and is limited to the installation and
operation of a networking system including all related components, software,
wiring and communications services as set forth in Exhibit A, whereby Guests in
---------
separate Guest Rooms or Meeting Rooms at the Hotel will be able to connect
Ethernet-capable laptop computers, servers, and other Ethernet-capable computer
equipment to a network provided by Licensee. The Service shall allow networking
and interoperation of computer equipment within the Hotels (respectively) and
shall allow computers connected to the Licensee supplied network within the
Hotels to access the public Internet through dedicated 1.5 Mbps T1 or greater
telecommunications line provided by Licensee. No other Service or use of the
Licensed Area is permitted without Licensor's prior written approval.
3. TERM OF INDIVIDUAL HOTELS
-------------------------
a. For each of the (participating) Hotels having 1,000 or greater
Guest Rooms, the Initial Term shall be two (2) years and the optional Extended
Term shall be three (3) years. For each of the (participating) Hotels having
fewer than 1,000 Guest Rooms, the Initial Term shall be three (3) Years and the
Extended Term shall be two (2) years. The commencement and termination dates for
the individual Hotels are defined in the Rider(s). Notwithstanding the
foregoing, the Initial Terms shall not extend beyond (i) December 31, 2001 (for
participating Hotels having 1,000 Guest Rooms or greater) or (ii) December 31,
2002 (for participating Hotels having less than 1,000 Guest Rooms), and the
optional Extended Terms shall expire no later than December 31, 2004.
b. Hilton Hotels Corporation must specifically and individually
approve the extension of the dates as defined above in subparagraph 3a in the
event Licensee and individual Hotels are planning to execute the Rider(s) after
December 31, 1999.
c. Licensor's exercise of the Extended Term(s) shall be at its
sole discretion. Licensor shall provide ninety (90) days prior written notice of
its intention to exercise the Extended Term(s).
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<PAGE>
4. FEES
----
a. Allocation of Usage Fees
------------------------
For each participating Hotels, the allocation of Usage Fees is as
defined in Schedule A attached to the Riders.
b. Fee and Payment Term Procedure
------------------------------
(i) Based upon daily information reported by the Service
monitoring equipment (provided and installed by Licensee at no cost to Licensor)
the Hotels shall charge Guests on a per-use or other basis for access to the
System an amount (the "Usage Fee") based on a pricing schedule mutually agreed
to by Licensee and Licensor and defined in the Riders. Usage Fees shall include
---------------------
Set-Up Fees. Access Fees, and or other billed amounts derived directly from or
in relation to use of the Service by Guests.
(ii) The Service monitoring equipment shall generate an accurate
record ("Access Record") of the usage and access to the Service by any Guests,
including a record of the usage charges for each individual Guest's bill or
account. Licensee shall be responsible for the costs associated with the
programming of the computer within the Service monitoring equipment to enable it
to provide the aforesaid data.
(iii) Licensee shall make available to the Hotels information
sufficient to ensure proper billing of Guests and other information on Service
usage reports as the Hotels may reasonably request to track Service usage.
(iv) Licensee may review and use the Access Record for such
purposes as Licensee may reasonable deem appropriate, except that Licensee shall
not disclose any such information to third parties except as agreed to by the
Hotels. In the event of any such disclosure by Licensee, Licensee shall
indemnify and hold harmless the Hotels and Licensor from all claims, loss,
damages or actions arising from such disclosure.
(v) The Hotels may, in their sole discretion, adjust the Usage
Fee as to any Guest of the Hotel in conjunction with any dispute with such Guest
in which case the "Usage Fee" shall mean the Usage Fee for such Guest as so
adjusted, Licensee understands and agrees that the Hotel shall generally refund
the Usage Fee to the Guest in the event the Guest disputes the charge or
expresses dissatisfaction with the Service.
(vi) During the Term of the Agreement, the Hotels shall be
responsible for billing and collection of Usage Fees from Guests. Usage Fees
shall be
3
<PAGE>
allocated to the Hotel and Licensee respectively, in accordance with the
percentages set forth above. The Hotels shall pay Licensee's allocation of the
Usage Fees to Licensee on a monthly basis with in twenty (20) days following the
Hotel's receipt of a monthly invoice from Licensee. The Hotel shall provide
Licensee with a monthly statement of any credits issued to Guests.
(vii) If requested by Licensee, the Hotels shall collect from
Guests any applicable taxes levied on or measured by the Usage Fees and forward
them as set forth in the monthly invoice from Licensee. Licensee shall remit all
such taxes to the appropriate taxing jurisdictions. Licensee shall notify the
Hotels of the appropriate tax base, tax rate and exemption policy ("Tax
Elements") to apply to the Usage Fee and of any changes to these Tax Elements.
The Hotel will incorporate these Tax Elements into its billing systems and cause
them to be applied to the Usage Fees. The ultimate responsibility for the
collection and/or payment of any taxes, interest, and/or penalty levied on or
measured by the Usage Fees shall be that of Licensee.
(viii) If Licensor collects Licensee's Usage Fee through a
collection agency or through legal action, Licensor need only remit to Licensee
the net amount collected after deducting Licensor's costs of collection and the
Hotel's appropriate allocation of Fees.
(ix) Notwithstanding anything to the contrary contained in this
Agreement, the addenda, riders or schedules, the parties agree to adjust Usage
Fees as necessary at either the individual hotels or collectively as the case
may be to accurately reflect the "market rate" for the Service.
5. INSTALLATION AND OPERATING PROCEDURES
------------------------
a. Licensee shall operate the Equipment during the Term hereof in
compliance with all present and future rules and regulations imposed by any
local, state or federal authority having jurisdiction with respect thereto
(including, without limitation the rules and regulations of the FCC and the
Federal Aviation Administration (the "FAA"). Licensee shall promptly forward to
Licensor copies of all applications for all FCC operating licenses (if required)
and copies of other licenses which it has been issued pertinent to this License.
Licensee shall have at all times any licenses, permits and approvals necessary
for the installation or operation of the Equipment. Licensor shall cooperate
with Licensee in securing licenses, permits and approvals. Prior to installation
of the Equipment, or any modification or changes to or removal of the Equipment,
if any, Licensee shall comply with the following:
(i) Licensee shall submit in writing all plans for such
installations, modifications or changes for Licensor's approval. No other
equipment shall be added to the Licensed Area without Licensor's prior written
consent.
4
<PAGE>
(ii) Prior to commencement of any work, Licensee shall
obtain Licensor's prior written approval and any required approvals of all
federal, state and local agencies. If requested, Licensee shall promptly deliver
to Licensor written proof of compliance with all applicable federal, state and
local laws, rules and regulations in connection with any installations,
modifications or changes to or removal of the Equipment.
(iii) All of such modifications, installations, changes or
removal work shall conform to Licensor's design specifications, weight and
windload requirements, and shall not interfere with any other radio
communications systems and equipment located in and upon the Licensed Area, and
shall be in compliance with all applicable local, state and federal government
requirements, including but not limited to zoning, FAA and FCC specifications.
(iv) All of the wireless access Equipment shall be clearly
marked with waterproof lables to show Licensee's name, address, telephone number
and the name of the person to contact in case of emergency, FCC call sign,
frequency and location (if any). All coaxial cable relating to the wireless
access Equipment shall be identified in the same manner at the bottom and top of
the line. The Equipment shall be installed in a manner so as to be reasonably
inaccessible to unauthorized persons and to pose no hazard to safety of life or
property with respect to persons or property on or about the site.
b. Licensor reserves the absolute right to withhold approval in
all matters where Licensor's approval is required, if Licensor should determine
(in its sole discretion), that a possibility or a threat of interference or
other disruption to the business of the Hotel or Licensor or to other existing,
licensee(s) or tenants exists.
c. Licensor shall provide at its sole cost electric power in
accordance with Paragraph 8 of the Riders.
d. In the event a zoning variance is required at any Hotel in
connection with the installation or modification of Licensee's wireless access
Equipment, Licensor shall have the right, at its sole discretion, to either
(i) cancel this Agreement as to that specific Hotel, or (ii) allow Licensee at
Licensee's sole cost and expense, to obtain such variance. Should Licensee not
obtain such variance within thirty (30) days, Licensor shall have the right to
cancel this Agreement at the end of such thirty (30) days.
e. In order to assure Licensee's compliance with the provisions of
this Agreement, the plans and specifications for Licensee's wireless access
Equipment and any modifications thereto shall be submitted to engineers and
consultants selected by Licensor for review and approval. Licensee shall
reimburse Licensor for Licensor's reasonable out of pocket expenses incurred in
connection with such review and approval. All work performed at the site
5
<PAGE>
in connection with the installation and modification of Licensee's wireless
access Equipment shall be performed in a workmanlike manner by contractors
approved by Licensor, at Licensee's expense and all subcontractors shall be
properly licensed.
f. If access is required by Licensee to the Licensed Area in the
Hotels, Licensee shall provide twenty-four (24) hours prior notice to the
Director of Property Operations or the Manager on Duty at such Hotel for such
access. In the event of an emergency Licensee may have access to the Equipment
on a twenty-four (24) hour basis with reasonable notice to the above Hotel
officials. Access shall not be unreasonably denied by Licensor.
6. INTERFERENCE
------------
a. The installation, operation and/or removal of Licensee's
Equipment shall not interfere by way of electromagnetic, radio, microwave or
any other transmission or emission, electrically, or in any other manner
whatsoever, including health effects with the equipment, facilities, operations
or guests of Licensor, any present or future licensee, tenant of Licensor in
the Hotel at which the site is located, or any other third party, including,
but not limited to, any radio systems operated by the Hotel, no matter where
or when such systems are installed. Notwithstanding anything in this Agreement
to the contrary, it is expressly understood and agreed that if the
installation, operation or removal of Licensee's Equipment shall interfere
with Licensor's facilities or operations, or any other radio communications
systems and equipment at any time, Licensee shall, upon request (verbal or
otherwise), immediately suspend its operations and do whatever Licensor deems
necessary to eliminate or remedy such interference. If Licensee is unable to
rectify the interference within thirty (30) days, then Licensor, upon the
expiration of the thirty (30) day cure period, at its option, may terminate
this Agreement as to that specific Hotel, disconnect power and require
Licensee to remove any and all of the Equipment at Licensee's sole cost and
expense, or Licensor may (without termination of the Agreement) eliminate or
remedy such interference at Licensee's sole cost and expense. Licensee's duty
to pay all fees required under this Agreement shall continue through any cure
period and despite any suspension of Licensee's operations pursuant to this
paragraph.
b. Nothwithstanding the provisions of subparagraph c. below,
Licensee acknowledges that Licensor has licensed, and/or will continue to
license access for other types of equipment and services at the Hotels to third
parties. Licensee accepts this License with this knowledge and waives any and
all claims against Licensor resulting from or attributable to interference
caused by presently existing facilities or methods of operation employed by
Licensor in its business upon any Hotel. Licensee also waives any and all claims
against Licensor and against any other licensee or tenant of Licensor because of
interference resulting to Licensee by virtue of equipment, facilities or
operations employed by Licensor or by any other licensee or tenant of Licensor
in its business upon the site. In the event that any such interference occurs,
Licensee's sole remedy, in lieu of any and all other remedies at law, or in
equity, shall be to
6
<PAGE>
terminate this Agreement as to that specific Hotel at any time thereafter by
giving Licensor thirty (30) days prior written notice to that effect, and such
termination shall be effective at the end of such thirty (30) day period.
Licensee shall pay to Licensor any fees due for the period up to the termination
of this Agreement. Any advance fee payments for periods after the termination
of this Agreement will be reimbursed to Licensee.
c. The foregoing notwithstanding and without modifying Licensee's
sole remedy listed above, Licensor shall use commercially reasonable efforts to
prevent future installations from interfering with Licensee's Equipment or the
provisions of the Service.
7. MAINTENANCE AND REMOVAL OF LICENSEE'S EQUIPMENT: SITE MAINTENANCE
-----------------------------------------------------------------
a. Licensee, at its sole cost and expense, shall be responsible
for the maintenance of the Equipment and improvements, if any, at the Hotels and
shall keep all areas neat and clean, in accordance with all applicable laws and
regulations and this Agreement. Licensee shall not create any nuisance,
interfere with, annoy or disturb any other licensee of Licensor or any licensee,
tenant or guest of the Hotels. Licensor, at its sole cost shall maintain the
site in good repair to permit Licensee to use the Licensed Area at the site as
intended by the parties as embodies in this Agreement. Licensor shall have no
obligation to obtain licenses for Licensee, maintain, insure, operate or
safeguard Licensee's Equipment. All maintenance work shall be subject to prior
approval of Licensor and shall be performed by contractors, previously approved
by Licensor, such approvals not be unreasonably withheld or delayed. In the
event Licensor, in its opinion, determines that any structural modifications or
repairs need to be made to any portion of a specific Hotel as a result to the
presence of Licensee's Equipment or other improvements, Licensor shall have the
right to (i) terminate this Agreement as to that specific Hotel by giving
written notice to Licensee, or (ii) notify Licensee of needed modifications and
repairs, and Licensee at its sole cost and expense shall immediately make all
such noticed modifications or repairs in accordance with the terms of this
Agreement.
b. Provided that Licensee is not in default in the performance of
its obligations hereunder, at the expiration of this Agreement or earlier
termination thereof, Licensee may remove all Licensee's Equipment at Licensee's
sole cost and expense in accordance with the terms of this Agreement. Any and
all removal of Licensee's Equipment shall be performed by a contractor
previously approved in writing by Licensor and in accordance with a previously
approved removal plan, performed in a workmanlike manner, without creating any
interference, damage or destruction to any other equipment, structures or
operations at the Hotels or to any other equipment of other licensees thereon
ordinary wear and tear excepted. If Licensee fails to remove such Equipment
within sixty (60) days following termination of this License, Licensor may in
each instance remove the Equipment at Licensee's expense. All such interference
or damage caused to the Hotels or Equipment of other licensees shall be
immediately repaired or
7
<PAGE>
eliminated by Licensee. In the event Licensee fails to make such repairs within
five (5) days Licensor may perform all the necessary repairs at Licensee's cost
and expense and such sum shall be immediately due upon the rendering of an
invoice as an additional fee hereunder.
The foregoing notwithstanding, Licensee shall not remove jacks placed
in Guest Rooms or wiring installed in electrical closets, subceilings or attic
spaces. In all instances, such wiring and jacks shall become property of
Licensor.
8. HAZARDOUS SUBSTANCES
--------------------
a. Licensee represents, warrants and covenants that it will
conduct its activities at the Hotels in compliance with all applicable
Environmental Laws (as hereinafter defined). Licensor represents, warrants and
agrees that it will conduct its activities at the Hotels in compliance with all
applicable Environmental Laws.
b. Licensee agrees to defend, indemnify and hold Licensor
harmless from and against any and all claims, causes of action, demands and
liability including but not limited to damages, costs, expenses, assessments,
penalties, fines, losses,judgments and attorneys' fees that Licensor may suffer
due to the existence or discovery of any Hazardous Substance (as hereinafter
defined) at the Hotels or the migration of any Hazardous Substance to other
properties or released into the environment, that are caused by or result from
Licensee's activities at the Hotels.
c. Licensor agrees to defend, indemnify and hold Licensor
harmless from and against any and all claims, causes of action, demands and
liability including but not limited to damages, costs, expenses, assessments,
penalties, fines, losses,judgments and attorneys' fees that Licensor may suffer
due to the existence or discovery of any Hazardous Substance (as hereinafter
defined) at the Hotels or the migration of any Hazardous Substance to other
properties or released into the environment, that are caused by or result from
Licensee's activities at the Licensed Area.
d. The indemnifications in this Paragraph 8 shall survive the
expiration or earlier termination of this Agreement.
e. As used in Paragraph 8, "Environmental Laws" means all
federal, state and local environmental laws, rules, regulations, ordinaces,
judicial or administrative decrees, orders, decisions authorizations or permits
pertaining to the protection of human health and/or the environment, incuding
but not limited to, the Resource Conservation and Recovery Act, 42 U.S.C.
(Section) 6901 et seq., the Clean Air Act, 42 U.S.C. (Section) 7401 et seq.,
the Emergency Planning and Community Right to Know Act 42, U.S.C. (Section) 1101
et seq., the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. (Section) 9601 et seq., the Toxic Substances Control Act, 15
U.S.C. (Section) 2601 et seq., the Oil Pollution Control Act, 33 U.S.C. and any
other
8
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comparable local, state or federal statute or ordinance pertaining to the
environment or natural resources and all regulations pertaining thereto. This
definition includes all federal, state and local land use laws dealing with
environmental sensitivity, including, but not limited to, laws regarding
wetlands, steep slopes, aquifers, critical or sensitive areas, shore lines, fish
and wildlife habitats or historical or archeological significance.
f. As used in this Paragraph 8, "Hazardous Substance" means any
hazardous substances as defined by the Comprehensive Environmental Response,
Compensation and Liability Act, as amended from time to time; any hazardous
waste as defined by the Resource Conservation and Recovery Act of 1976, as
amended from time to time; any and all materials or substances defined as
hazardous pursuant to any federal, state or local laws or regulations or orders
and any substance which is or becomes regulated by any federal, state or local
governmental authority; any oil petroleum products and their by-products.
9. INSURANCE
---------
For each of the (applicable) Hotels, Licensee shall maintain in force
during the term of this License Agreement, at its own expense with responsible
insurance companies that have an A.M. Best Company rating of "A VIII" or better,
policies public liability insurance, including commercial general and automobile
liability insurance, insuring the contractual liability of Licensee under this
Paragraph, in an amount not less than TWO MILLION AND NO/100THS DOLLARS
($2,000,000) per occurrence. Licensee shall also provide worker's compensation
in an amount not less than the statutory requirements required by the State and
employers liability coverage in the amount of ONE MILLION DOLLARS ($1,000,000)
per accident, per disease policy limit and per disease per employee covering all
employees of Licensee.
All policies will name Hilton Hotels Corporation, the Hotels and other
entity listed on each of the Riders as may be executed by the Parties from time
to time, as "Additional Insureds." All policies of insurance shall be considered
primary of any existing similar insurance carried by Licensor, Hotel or
Licensee. Licensee shall provide the Licensor with Certificates of Insurance
carried by Licensee. If requested by the Hotels, Licensee shall furnish
certified copies of insurance carried. Copies of said Certificates of Insurance
or certified policies of Insurance shall be delivered to the offices of Licensor
and the Hotel by Licensee and must be kept current during the term of this
Agreement. No Policy of Insurance shall be canceled or materially changed
without thirty (30) days prior written notice to the Hotel.
10. INDEMNITIES
-----------
a. Licensee hereby agrees to indemnify, defend and hold
Licensor, their hotels, partners, subsidiaries, affiliates, franchises, and
allied companies and each of their officers, directors, agents, contractors,
subcontractors and employees (collectively,
9
<PAGE>
"Indemnitees") harmless from and against any and all claims, liabilities,
damages, fines penalties or costs of whatsoever nature (including reasonable
attorneys' fees), and whether or not occurring during the term hereof or
occasioned or contributed to by the negligence of Licensor, a Hotel, or any
agent or employee of the Indemnitees, or any of them (except as and to the
extent otherwise prohibited by applicable law), arising out of or in any way
connected with, and whether by reason of death of or injury to any person or
loss of or damage to any property or otherwise, arising out of or in any way
connected with actions or omissions of Licensee under this Agreement. Licensee's
representations, warranties, covenants agreements and licenses hereunder, the
services provided by Licensee or any Licensees or other subcontractors, of
Licensee hereunder or any related act of failure to act by Licensee, its agents,
licensees, subcontractors, servants employees or invitees, including without
limitation the use of the Licensed Area and any allegation that the Equipment or
any part of them infringes any rights of any other person, including without
limitation copyright, patent, trade secret, trademark, artist rights, droit
moral, privacy, publicity or other intellectual property laws, whether or not
occurring during the term hereof or occasioned or contributed to by the
negligence of an Indemnitee or an agent or employee of the Indemnitees, or any
of them (except as and to the extent prohibited by applicable law). In the event
that any claim is made or any action or proceeding is brought against the
Indemnitees, or any of them, arising out of or connected with this Agreement,
any such Indemnitees may be notice to Licensee, elect to require Licensee, at
Licensee's expense, to resist such claim or take over the defense of any such
action or proceeding and employ counsel for such purpose, such counsel to be
subject to the prior approval of such Indemnitee.
b. If the Service's system or any part thereof, furnished by
Licensee to the Hotels becomes, or in the opinion of Licensee may become, the
subject of any claim, suit or proceeding for infringement of any United States
patent or copyright, or in the event of an adjudication that such product or
part infringes any United States patent or copyright, or if the use, lease or
sale of such product or part is enjoined, Licensee shall elect and implement one
of the following options at its expense: (1) procure for the Hotel the right
under such patent or copyright to use, lease or sell, as appropriate, such
system or part, or (2) replace, modify, or remove such system or part. If the
Hotels or Licensor determines, in its sole discretion, that such replacement,
modification, or removal of the system or part has a significant negative impact
on the overall functioning of the Service, the Hotels or Licensor have the right
to terminate this Agreement thirty (30) days after giving written notification
to Licensee of such intention to terminate. In the event of such termination,
Licensee agrees to remove the Service as provided herein.
c. Licensee represents and warrants that (i) the Client-Server
Software does not contain any viruses, disabling code, or similar devices which
are designed to damage the Hotel's data, software, or hardware, or to interfere
with the Hotel's use of the Client Server-Software, (ii) the Client-Server
Software will function substantially in accordance with its
10
<PAGE>
specifications, (iii) Licensee has all rights necessary to grant the rights set
forth in this Agreement, and (iv) the Client-Server Software will, without
adverse effect, (A) function on and after January 1, 2000, and (B) process,
store and otherwise handle data containing or depending upon dates and after
January 1, 2000.
d. Licensor shall indemnify and hold Licensee harmless from and
against any and all claims which the Licensee may suffer, sustain or incur
arising from, or based upon Licensor's gross negligence, willful misconduct or
failure to act in good faith.
11. LIMITATION ON CONSEQUENTIAL DAMAGES: DISCLAIMER OF WARRANTIES
-------------------------------------------------------------
EXCEPT AS EXPRESSLY PROVIDED HEREIN, NO EXPRESS OR IMPLIED WARRANTY IS
MADE WITH RESPECT TO THE SERVICES TO BE SUPPLIED BY LICENSEE HEREUNDER,
INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, AND LICENSEE DOES NOT WARRANT THE RESULTS OF ANY
SERVICES. In particular, Licensor agrees that Licensee will in no event be
responsible for any losses or damages of any and every nature (including, but
not limited to, consequential losses incurred by Licensor, by any
subcontractors, marketing agents, sales representatives, affiliates or employees
utilized by Licensor, by any Guests, or by any other party) to the extent due to
service outages or interruptions, delays, failure to provide service, or
discontinuance of service, and not caused by the fault or negligence of Licensee
and/or Licensee's agents, subcontractors, representatives, or affiliates
(including, but not limited to, losses or damages of any nature resulting from
the loss of data, inability to access the Internet, or inability to transmit or
receive information). Except for indemnified claims and except to the extent
Licensee, any of its employees, agents and/or contractors are held liable for
gross negligence or intentional misconduct, neither party, the Indemnitees, or
each of their subsidiaries shall be liable for loss of profits, or indirect,
special, incidental or consequential damages, even if such party has been
advised of the possibility of such damages. This paragraph shall survive
termination of this agreement.
12. LIENS
-----
In every instance at the Hotels, Licensee covenants and agrees to keep
the equipment and property of Licensor and the Hotels free and clear from any
and all liens for work performed or materials furnished hereunder and Licensee
agrees to indemnify the Indemnitees from and against any and all costs,
expenses, losses and all damage resulting from the filing of any such liens
against Licensor and the Hotels or the Licensed Area of Licensor and the Hotels.
As a condition to payment hereunder. Licensee shall from time to time, upon
request by Licensor or the Hotel, furnish waivers or releases of such liens or
receipts in full for all claims for such work or
11
<PAGE>
materials and an affidavit that all such claims have been fully satisfied.
13. OWNERSHIP
---------
Ownership of the Equipment and related systems providing the Service
shall at all times be and remain vested in Licensee. Any proposed use by
Licensor or by any third party of the System or of the Equipment for additional
applications shall require the prior approval of Licensee. The Equipment shall
not under any circumstances constitute, be or be deemed to be fixtures annexed
to Licensor's real property and the Equipment shall at all times be and remain
free and clear of any claims, liens, or encumbrances created by Licensor.
14. LICENSOR RIGHT TO ENTER OR GRANT ENTRY
--------------------------------------
Licensor shall have the right, without liability to Licensee, to allow a
duly authorized officer or agent of a federal, state or local governmental
agency, admittance to the Licensed Area at any time and from time to time, as
needed or requested by such agency. It is specifically understood that such
agency need not obtain a search warrant or provide a subpoena.
15. LICENSEE'S PROPERTY
-------------------
All property belonging to Licensee, its employees, agents, or invitees,
or any occupant of the Licensed Area that is in the Hotels, or the Licensed
Area, shall be there at the risk of Licensee or other person only, and Licensor
shall not be liable for damage thereto for theft or misappropriation thereof;
further, Licensee shall indemnify and hold harmless Licensor and the Hotels from
any claims, causes of action arising from theft or misappropriation of the
property belonging to the aforementioned. Nothing herein to the contrary shall
require Licensee to indemnify or hold harmless Licensor for the intentional
tortious acts of Licensor's employees or agents. The burden of proving such
intent shall be upon Licensee.
16. TERMINATION
-----------
a. This Agreement shall be subject to termination by Licensor
either at each of the (applicable) Hotels or in general as defined below upon
the occurrence of any of the following events:
(i) At the Hotels, if Licensee shall fail to pay the sums to
Licensor called for in Paragraph 4 hereof and such failure continues for five
(5) business days after written notice that the same is due;
(ii) At the Hotels, if Licensee shall violate or breach any of
the material terms, conditions or covenants hereof and shall not remedy such
violation or breach
12
<PAGE>
within ten (10) days after written notice by Licensor to Licensee of such
violation or breach.
(iii) At the Hotels, if Licensee's operation and use of the
Licensed Area shall at any time violate or fail to conform to covenants and
conditions established herein or reasonable standards and practices as may be
modified or supplemented by Licensor from time to time in writing to Licensee,
and such noncompliance is not cured within ten (10) days after written notice by
Licensor to Licensee of such noncompliance (provided that if the nature of such
noncompliance is curable but that the same cannot with due diligence be cured
within ten (10) days. Licensee shall not be deemed to be subject to termination,
if it shall within such ten (10) day period commence curing and thereafter
diligently prosecutes the same to completion;
(iv) In general, if Licensee shall make an assignment for the
benefit of creditors or file a voluntary petition in bankruptcy or be adjudged
insolvent or shall admit in writing its inability to meet its obligations as
they mature, or if a permanent receiver of all or any portion of Licensee's
property shall be appointed in any judicial proceeding, or there shall be
entered against it an order adjudicating it a bankrupt or insolvent or an order
appointing a liquidator, receiver or trustee for it or all or substantially all
of its assets or approving as properly filed against it a petition seeking
reorganization, arrangement or other proceeding under any bankruptcy or other
law for the relief or debtors, which order shall continue unstayed and in effect
for, or which proceeding shall not be terminated and Licensee released from such
proceeding within thirty (30) days, or if Licensee shall attempt to assign or
encumber this Agreement or permit any other person, firm or corporation to
conduct the business or Services provided for hereunder;
(v) At the Hotels, if any statute, ordinance, rule or
regulation hereafter promulgated by any legislative body or agency having
jurisdiction over the Licensee shall prohibit the operation of the Licensed Area
by Licensee as provided for herein, provided that Licensee shall first be given
a reasonable opportunity to modify its operation of the Licensed Area so as to
comply with any such statute, ordinance, rule, or regulation; or,
(vi) At the Hotels, in the event that: (1) The premises upon
which the Licensed Area is located should be sold; (2) Licensor should assign
its rights to the site to a third party, or (3) Licensor proposes, or is
required for any reason to structurally renovate or demolish the Hotel or a
substantial portion thereof which includes all or a portion of the Licensed
Area, then Licensor shall have the right, upon not less than one hundred eighty
(180) days prior written notice to Licensee, to terminate this Agreement. In
such event Licensor shall reimburse Licensee's unamortized installation expense
calculated at an initial expense of $185.00 per installed room (guest or
meeting), such amortizaiton shall be "straight line" method using the Initial
Term as the period of full amortization.
13
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(vi) In general, if during the Term or Extended Term or this
Agreement, Licensor reasonably expects to be at a competitive disadvantage
because of a commercially available and nationally available system
substantially similar to the Service that is faster, more reliable, has easier
end-user connectivity, and is less expensive than Licensee's system. If such
failure is curable by upgrading all or a portion of the Equipment, then
Licensee shall have not more than one hundred twenty days (120) to perform such
work at the Hotels and demonstrate to Licensor's reasonable satisfaction, and on
terms acceptable to Licensor, that the system is technologically equivalent and
reasonably competitive.
b. At the Hotels, this Agreement shall be subject to termination
by Licensee upon the occurrence of a violation or breach of any of the material
terms, conditions or covenants hereof by Licensor and shall not remedy such
violation or breach within thirty (30) days after written notice by Licensee of
such violation.
17. HOLDING OVER
------------
In every instance at the Hotels, if Licensee, with Licensor's consent,
leave the Equipment in the Licensed Area after expiration or termination of the
Term, or after the date in any notice given by Licensor to Licensee terminating
this License, such event shall be deemed to be a month-to-month holdover
terminable on thirty (30) days notice given at any time by either party. All
provisions of this License except those pertaining to the term of this License
shall apply to the month-to-month holdover.
In every instance at the Hotels and in general, if Licensee, without
Licensor's consent, leaves its Equipment in the Licensed Area after expiration
or termination of the term, or after the date in any notice given by Licensor to
Licensee terminating this License, Licensee shall pay to Licensor fees at double
the rate as defined in Paragraph 4 hereof, for the time Licensee thus remains in
the Licensed Area, and in addition thereto, shall pay Licensor all direct and
consequential damages sustained by reason of Licensee's retention of the
Licensed Area, including Licensor's attorney's fees.
18. SUBLICENSING AND ASSIGNMENT
---------------------------
Licensee may not sublicense the Licensed Area or assign the Agreement or
any rights and obligations hereunder without prior written consent of the
Licensor given or withheld in its sole discretion, provided, however, that if
Licensee is not in breach hereunder, Licensor shall not unreasonably withhold
its consent to an assignment to and assumption by a proposed sublicensee that
succeeds to substantially all of Licensee's business, operations,
responsibilities and liabilities (as used herein the term "substantially all"
shall include but not be limited to each and every License Agreement by and
between Licensee and Licensor and any Hilton franchised hotels contracting with
Licensee at the time of the proposed assignment or
14
<PAGE>
sublicense), and (a) is in compliance with Paragraph 24, (b) provides reasonably
satisfactory financial, technical and other professional assurances of its
ability to perform throughout the term hereof, (c) is not otherwise restricted
under Licensor's other, third party contracts at the time of proposed
assignment, and (d) executes and delivers to Licensor an assignment and
assumption agreement in Licensor's then standard form. Subject to the foregoing,
the conditions, covenants and agreements in the foregoing Agreement to be kept
and performed by the parties hereto shall bind and inure to the benefit of their
successors and assigns.
In connection with any such transfer to which Licensor may consent.
Licensee agrees to furnish Licensor with copies of all documents, and subsequent
amendments thereto, executed in connection with such transfer. Any consent of
Licensor to a subletting, assignment or transfer of control shall be deemed to
be a consent to the initial subletting, assignment or transfer of control and
shall not be deemed to be a consent to any further subletting, assignment or
transfer of control.
Further, notwithstanding any permitted subletting or assignment, the
Licensee hereunder shall at all times remain fully responsible and liable for
the payment of Fees hereunder and for compliance with all of Licensee's
obligations under the terms, provisions and covenants of this License Agreement.
19. RELOCATION OF LICENSED AREA AND OR THE EQUIPMENT
------------------------------------------------
Licensor hereby reserves the right at the Hotels on ninety (90) days
notice to require Licensee, to relocate all or a portion of the Equipment at any
time during the Term or Extended Term to a reasonably comparable location as
follows: (i) at Licensee's sole cost and expense, for the relocation of any
particular portion of Licensee's Equipment on one (1) occasion per Hotel during
the Initial Term hereof; or (ii) at Licensor's expense for any subsequent
relocation (of such previously relocated Equipment) per Hotel during the Initial
Term.
20. NATURE OF LICENSE
-----------------
The License granted hereby is a non-exclusive license for Licensee to
use the Licensed Area solely as required to perform its obligations hereunder,
revocable according to the terms hereof. In no event shall this License be
deemed or construed to run with the land or create or vest any easements or
other rights in any of Licensor's Hotels or properties. Licensee agrees that no
permanent or possessory interest shall accrue to Licensee or its licensees in
Licensor's Hotels or properties at any time or by exercise of the permission
given hereunder, and that Licensee shall not claim any such interest in any of
Licensor's Hotels or properties. THIS LICENSE DOES NOT CREATE ANY RECORDABLE
INTEREST AND SHALL NOT BE RECORDED IN ANY OFFICIAL RECORDS.
15
<PAGE>
21. NOTICES
-------
Whenever, by the terms of this Agreement, or otherwise, notice is
required or desired to be given, such notice shall be effective only if in
writing and served personally, via facsimile or sent by certified mail or
registered mail, postage prepaid as follows:
(a) If intended for Licensor, addressed to the attention of
General Manager at the Hotel address as listed in the Rider, with a copy to
Licensor's General counsel at:
Hilton Hotels Corporation
9336 Civic Center Drive
Beverly Hills, CA 90210
(310) 278-4321
or such other address as may from time to time hereafter be designated by
Licensee by like notice.
(b) If intended for Licensee, addressed to the attention of
Licensee's General Counsel at:
CAIS, Inc.
1232 22nd St., NW
Washington, D.C. 20037
Phone: (202) 463-8500
Fax: (202) 463-7190
or to such other address as may from time to time hereafter be designated by
Licensee by like notice. All notices utilizing the U.S. Mail shall be deemed
given four (4) business days after the postmark thereof, if by facsimile then it
shall be deemed given one (1) business day after transmission, if served
personally then it shall be deemed given the day served.
22. DEFAULT UNDER OTHER LICENSE
---------------------------
Intentionally omitted.
23. ACCESS TO THE SERVICES
----------------------
16
<PAGE>
Licensee will use its best efforts to insure that usage and access to
the Service is consistently in good operation and is available to the Hotel's
Guests at a minimum of 95% of the time when access or usage is attempted. If
requested by Licensor, within twenty (20) days after the end of each month.
Licensee will provide Licensor with a written report showing the total number of
Usage access connections attempted and completed during the previous month for
the purpose of insuring access availability.
24. REPRESENTATIONS AND WARRANTIES OF LICENSEE
------------------------------------------
Licensee represents and warrants that there are no agreements or
arrangements, whether written or oral, that would be breached by Licensee upon
execution of this Agreement or that would impair or prevent Licensee from
rendering the Services to Licensor during the term hereof, and Licensee further
represents, warrants, covenants and agrees that it has and will maintain
throughout the term hereof all qualifications required to perform its Services
hereunder, and that it has not made and will not make any commitment or do any
act in conflict with this Agreement. Licensee shall promptly provide Licensor
with all information reasonably requested by Licensor or its Compliance
Committee with respect to Licensee and its affiliates including their respective
officers, directors or shareholders. The information requested may include but
not necessarily be limited to financial condition, personal and family
background, litigation, indictment, criminal proceedings and the like in which
any of the aforementioned may have been involved (collectively, the "Requested
Information"), solely in order for Licensor to determine that the Requested
Information does not disclose any fact which might adversely affect, in any
manner, any gaming licenses or permits held by Licensor or its affiliates or the
current stature of Licensor or its affiliates with any gaming commission, board
or similar regulatory agency.
25. INDEPENDENT CONTRACTOR
----------------------
In connection with this Agreement each party is an independent
contractor and as such will not have any authority to bind or commit the other.
Nothing herein shall be deemed or construed to create a joint venture,
partnership or agency relationship between the parties for any purpose.
26. DRAFTING AND PREPARATION
------------------------
Each party has cooperated and participated in the drafting and
preparation of this Agreement. Therefore, if any construction is to be made of
this Agreement of any of its terms, both parties shall be construed to be
equally responsible for the drafting and preparation of same.
27. MISCELLANEOUS
-------------
17
<PAGE>
a. This Agreement is made subject to all local, state and federal
laws and regulations now or hereafter in force, and shall not be modified or
extended (other than as set forth, herein) except by an instrument duly signed
by Licensor and Licensee and approved by Licensor. Waiver of a breach of any
provisions hereof under any circumstances will not constitute a waiver of any
subsequent breach of such provision, or of a breach of any other provision of
this Agreement.
b. Licensor and Licensee represent and warrant to each other than
no broker's involved in connection with this transaction and each party agrees
to indemnify and hold the other harmless from and against the claims of any
broker (if any), made in connection with this transaction.
c. This License shall be governed by and constructed in accordance
with the laws of the state in which the specific Hotel in question is located.
d. This License shall be binding upon the parties, and their
permitted successors and assigns.
e. Licensor and Licensee agree to do any further acts and execute
such additional documents as the other may reasonably require to confirm this
License and carry out the purpose of this License.
f. During the Term, Licensee shall supply the underlying dedicated
Internet connectivity for the Service between Licensee and the Hotels. Licensee
shall be responsible for the costs associated with the installation of the
dedicated connection to the Hotels. In some, but not all instances, depending on
geographic location, topology and other factors, Licensee may provision the
required local dedicated connections to the Hotels through wireless broadband
links. Licensor reserves the right of approval of such wireless systems.
g. The Hotels acknowledge that in the event that Licensee, at any
time, reasonably believes that the System services are being utilized by a Guest
in contravention of the terms and provisions of this agreement, Licensee may, at
its sole discretion, immediately discontinue any such System services to such
Guest without liability.
h. Licensee shall provide to the Hotels and end user Guests a 24
hours per day 365 days per year help desk support manned by Internet experienced
technicians. This help desk support shall include direct access via a toll free
888 access to answer the Hotels and Guest questions and fix problems as needed.
i. Licensee will provide Licensor with an on-site account manager
based at Licensor's corporate headquarters, and hired, employed and trained by
Licensee. Licensor will
18
<PAGE>
endeavor but is not required to make reasonable office space and facilities
available for this account manager at Licensor's offices.
The dedicated account manager will perform the following functions:
1. Serve as Liaison between Licensor and Licensee.
2. Manage overall relationship.
3. Act as single point of contact for Licensor and the Hotels.
4. Promote quality control.
j. Provided that Licensee has fully and faithfully kept and
performed all of the terms, conditions, and covenants contained herein. Licensor
agrees that the Licensee shall be the "preferred" supplier of the Service at the
Hotels and shall receive preferred selection of, and positioning within, the
individual Hotels within the Hilton Hotels Corporation System.
k. Either party's delay in, or failure of, performance under this
Agreement shall not constitute a default where such delay or failure is caused
by elements of nature, fire or other catastrophe, fluctuations in third party
telecommunications equipment and lines and power supplies, organized work
stoppage, or acts of government or agencies thereof outside such party's
reasonable control. In any such event, each party will be excused from any
further performance or observance of the obligations so affected only for as
long as such circumstances prevail and each party continues to use commercially
reasonable efforts to recommence performance or observance as soon as
practicable.
28. SEVERABILITY
------------
It is agreed that if any provision of this License shall be determined
to be void by any court of competent jurisdiction, then such determination shall
not affect any other provision of this License and all such other provisions
shall remain in full force and effect; and it is the intention of the parties
hereto that if any provision of the license is capable of two constructions, one
of which would render the provison void and the other of which would render the
provision valid, then the provision shall have the meaning which renders it
valid.
29. ENTIRE AGREEMENT
----------------
This Agreement including all exhibits, addenda, schedules and riders
contain the full and complete understanding of the parties concerning the
subjects contained herein and supersedes any and all prior written or oral
agreements between the parties and cannot be amended except in writing signed
by both parties.
19
<PAGE>
30. DISPUTE RESOLUTION.
If there is any dispute, claim or controversy, other than one involving
Licensor's right to seek equitable relief, between the parties arising out of or
relating to this Agreement (a "Disputed Matter"), the parties shall attempt to
amicably resolve such Disputed Matter in good faith. If the initial efforts to
resolve such Disputed Matter are not successful, the parties shall submit the
Disputed Matter jointly to the respective senior officers of Licensor and
Licensee. If such senior officers cannot reach a mutually agreeable resolution
of the Disputed Matter within ten (10) business days after reference of the
matter to them, either party may elect to have the Disputed Matter settled in
accordance with the arbitration procedures detailed in Exhibit B attached
hereto. Without limiting the generality of the foregoing, the parties expressly
agree that any and all disagreements regarding whether an issue is a Disputed
Matter under this Section shall be settled in accordance with the arbitration
procedures defined in Exhibit B.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of date first above written.
Hilton Hotels Corporation, CAIS, Inc.,
a Delaware corporation a Virginia corporation
By: By: /s/ Laura Newman
---------------------------- --------------------------
[Signature Illegible] Laura A. Newman
---------------------------- --------------------------
Its: Senior Vice President Its: Vice President
20
<PAGE>
EXHIBIT "A" TO MASTER LICENSE AGREEMENT DATED DECEMBER 23, BY AND BETWEEN HILTON
HOTELS CORPORATION, A DELAWARE CORPORATION, LICENSOR, AND CAIS, INC., A VIRGINIA
CORPORATION, LICENSEE.
LIST OF EQUIPMENT TO BE INSTALLED BY LICENSEE
---------------------------------------------
1. CSU/DSU (Channel Service Unit/Digital Service Unit): This device
---------------------------------------------------
converts the T1 digital signal into a useable data stream that the
router can understand.
2. Router: This is an internetworking device that is responsible for
------
connecting two networks together (i.e. the Hotel network to the Internet
Network).
3. Server: This acts as a gateway between the Internet and the hotel. As
------
a gateway, the server allows for controlling traffic and integration
into the hotels property management system for billing. The server also
provides the necessary services to the end client for seamless Internet
connectivity.
4. Switch/Hub: The switch/hub is responsible for aggregating multiple
----------
Ethernet connections into or vise-versa.
5. OverVoice Wiring Block*: This is a wire-terminating block that
-----------------------
accommodates the Overvoice Control Unit and the telephone wires.
6. OverVoice Control Unit*: This connects to the Overvoice Wiring Block
-----------------------
and is responsible for combining and separating the voice and Ethernet
signals to and from the rooms.
7. OverVoice wall jack(s)*: This houses the patented circuitry that
-----------------------
splits the telephone and Ethernet signals and directs them to 2 jacks, 1
for the telephone, and 1 for the computer.
*Denotes patented technologies specific to the OverVoice system.
A-1
<PAGE>
Exhibit B to Master License Agreement (the "Agreement") dated December 23, 1998,
by and between Hilton Hotels Corporation, a Delaware Corporation ("HHC"), and
CAIS, Inc., a Virginia corporation ("Licensee").
Arbitration Provisions
1. Rules: Jurisdiction. Any Disputed Matter (as defined in the
-------------------
agreement to which this exhibit is attached) shall be settled by final and
binding arbitration in the City of Los Angeles, California, and, except as
herein specifically stated, in accordance with the commercial arbitration rules
of the American Arbitration Association ("AAA Rules") then in effect, subject to
the provisions of the United States Arbitration Act, 9 U.S.C. & 1 et seq.
-------
("Title 9"). To the extent the AAA Rules conflict with, or are supplemented by,
the provisions of Title 9, the provisions of Title 9 shall govern and be
applicable. However, in all events these arbitration provisions shall govern
over any conflicting rules that may now or hereafter be contained in either the
AAA Rules or Title 9. Any judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction of the subject matter thereof.
The arbitrators shall have the authority to grant any equitable and legal
remedies that would be available in any judicial proceeding instituted to
resolve a disputed matter. The parties hereby submit to the in personam
-- --------
jurisdiction of the Superior Court of Los Angeles County and the Federal
District Court for the Central District of California for purposes of confirming
any such award and entering judgment thereon.
2. Compensation of Arbitrators. Any such arbitration shall be
---------------------------
conducted before a panel of three arbitrators who shall be compensated for their
services at a rate to be determined by the parties or by the American
Arbitration Association but based upon normal and reasonable hourly or daily
consulting rates for the neutral arbitrator in the event the parties are not
able to agree upon his or her rate of compensation.
3. Selection of Arbitrators. Within five (5) business days of
------------------------
notice by a party seeking arbitration under this provision, the party requesting
arbitration shall appoint one person as an arbitrator and within fifteen (15)
business days thereafter the other party shall appoint the second arbitrator.
Except with the other party's prior, express and written consent, no arbitrator
may be appointed who is employed by, or who is engaged by, or who has been
engaged within one (1) year by, any entity that is a major competitor of either
party. Within twenty (20) business days after the appointment of the second
arbitrator, the two arbitrators so chosen shall mutually agree upon the
selection of the third impartial and neutral arbitrator. The majority decision
of the arbitrators will be final and conclusive upon the parties hereto.
4. Payment of Costs. Each party hereby agrees to pay one-half (1/2)
----------------
of the compensation to be paid to the arbitrators in any such arbitration and
one-half (1/2) of the costs of transcripts and other expenses of the arbitration
proceedings; provided, however, that the prevailing party in any arbitration
shall be entitled to an award of reasonable attorneys' fees and costs,
arbitrators' fees and costs, fees and costs of expert witnesses and all other
costs of
B-1
<PAGE>
arbitration to be paid by the losing party.
5. Evidence and Discovery. The parties shall be entitled to conduct
----------------------
discovery proceedings to the fullest extent permissible under California law and
the Federal Rules of Evidence.
6. Burden of Proof. For any claim submitted to arbitration, the burden
---------------
of proof shall be as it would be if the claim were litigated in a judicial
proceeding. All testimony of witnesses shall be taken under oath and shall be
subject to the Federal Rules of Evidence.
7. Judgment. Upon the conclusion of any arbitration proceedings,
--------
hereunder, the arbitrators shall render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached by them and shall deliver such documents to each party to the Agreement
along with a signed copy of the award.
8. Terms of Arbitration. The arbitrators chosen in accordance with these
--------------------
provisions shall not have the power to alter, amend or otherwise affect the
terms of these arbitration provisions or the provisions of the Agreement.
9. Exclusive Remedy. Except as specifically provided in this exhibit or
----------------
in the Agreement, arbitration shall be the sole and exclusive remedy of the
parties for any disputed matter arising out of such agreement.
10. Arbitration Confidential. Neither party will disclose the existence
------------------------
of any arbitration proceedings hereunder, nor the outcome thereof, except; (i)
insofar as such disclosure is reasonably necessary to carry out and make
effective the terms of this Agreement, including without limitation, pleadings
or other documents filed seeking entry of judgment upon an award of the
arbitrators; (ii) insofar as a party hereto is required by law to respond to any
demand for information from any court, governmental entity, or governmental
agency, or as may be required by federal or state securities laws; (iii) insofar
as disclosure is necessary to be made to a party's independent accountants for
tax or audit purposes; (iv) insofar as disclosure is necessary to be made to a
party's attorneys for purposes of rendering advice or services relating to this
Agreement; and (v) insofar as the parties may mutually agree in writing.
B-2
<PAGE>
Schedule 1 to Master License Agreement (the "Agreement") dated December 23,
1998, by and between Hilton Hotels Corporation, a Delaware corporation ("HHC"),
and CAIS, Inc., a Virginia corporation ("Licensee").
List of Hotels Corporate Owned or Managed
-----------------------------------------
<TABLE>
<CAPTION>
Legal Name City State Country Total Rms
- ---------- ---- ----- ------- ---------
<S> <C> <C> <C> <C>
More than 1,000 Rooms
Hilton Hawaiin Village Honolulu HI US 2545
Hilton New York & Towers New York NY US 2040
Hilton San Francisco & Towers San Francisco CA US 1896
Palmer House Hilton Chicago IL US 1639
Hilton New Orleans Riverside New Orleans LA US 1600
Hilton Anaheim & Towers Anaheim CA US 1572
Hilton Chicago & Towers Chicago IL US 1544
The Waldorf=Astoria New York NY US 1330
Hilton Waikoloa Village Waikoloa HI US 1240
Hilton Los Angeles Airport Los Angeles CA US 1236
Hilton Atlanta & Towers Atlanta GA US 1222
Fontainebleau Hilton Resort & Towers Miami Beach FL US 1206
Hilton Washington & Towers Washington DC US 1118
500 - 999 Rooms
Hilton Chicago O'Hare Airport Chicago IL US 853
Hilton Minneapolis & Tower Minneapolis MN US 821
Hilton in the WALT DISNEY WORLD RESORT Lake Buena Vista FL US 814
Hilton Pittsburgh & Towers Pittsburgh PA US 713
Pointe Hilton South Mountain Resort Phoenix AZ US 638
Hilton Anchorage Anchorage AK US 591
Pointe Hilton Tapatio Cliffs Resorts Phoenix AZ US 585
Hilton Beverly Hills Beverly Hills CA US 581
Pointe Hilton Squaw Peak Resort Phoenix AZ US 563
Millenium Hilton Next to the World Trade Center New York NY US 561
Capital Hilton Washington DC US 544
Hilton Atlanta Airport & Towers Atlanta GA US 503
Hilton Miami Airport & Towers Miami FL US 500
300 - 499 Rooms
Hilton Burbank Airport & Convention Center Burbank CA US 486
Hilton Turtle Bay Resort Kahuku-Oahu HI US 485
Hilton Palacio del Rio San Antonio TX US 481
Hilton McLean Tysons Corner McLean VA US 458
Hilton Portland Portland OR US 455
Hilton Rye Town Rye Breck NY US 437
Hilton Charlotte & Towers Charlotte NC US 407
Hilton East Brunswick & Towers East Brunswick NJ US 405
Hilton DFW Lakes Executive Conference Center Grapevine TX US 385
Hilton Long Beach Long Beach CA US 366
Hilton Newark Airport Elizabeth NJ US 365
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Legal Name City State Country Total Rms
- ---------- ---- ----- ------- ---------
<S> <C> <C> <C> <C>
Hilton Oakland Airport Oakland CA US 363
Hilton San Diego Resort San Diego CA US 357
Ali'l Tower at the Hilton Hawaiian Village Honolulu, Oahu HI US 348
Hilton New Orleans Airport Kenner LA US 317
Hilton Short Hills Short Hills NJ US 301
Less than 299 Rooms
Hilton Pasadena Pasadena CA US 291
Hilton Tarrytown Tarrytown NY US 246
Hilton Suites Anaheim/Orange Orange CA US 230
Hilton Suites Phoenix Phoenix AZ US 226
Hilton Suites Auburn Hills Auburn Hills MI US 224
Hilton Suites Oakbrook Terrace Oakbrook Terrace IL US 212
Hilton Suites Brentwood Brentwood TN US 203
The Waldorf Towers New York NY US 198
Hilton Inn Southfield Southfield MI US 195
Hilton Seattle Airport Seattle WA US 178
The Fontainbleau Towers Miami Beach FL US
<CAPTION>
List of Hotels Franchised
-------------------------
More than 1,000 Rooms None
500 - 999 Rooms
<S> <C> <C> <C> <C>
Hilton Sandestin Beach & Golf Resort Destin FL US 598
Hilton Washington Dulles Airport Herndon VA US 598
Hilton Parsippany Parsippany NJ US 510
300 - 499 Rooms
Hilton Milwaukee City Center Milwaukee WI US 478
Hilton Universal City & Towers Universal City CA US 469
Hilton Baltimore & Towers Baltimore MD US 439
Hilton Clearwater Beach Resort Clearwater FL US 426
Hilton Guadalajara Guadalajara MX 422
Hilton Arlington Park Arlington Heights IL US 420
Hilton Cherry Hill Cherry Hill NJ US 408
Hilton Montreal Bonaventure Montreal CA 395
Hilton Fort Lauderdale Airport Dania Beach FL US 388
Hilton Hartford Hartford CT US 388
Hilton Crystal City at National Airport Arlington/Crystal VA US 386
Hilton San Antonio Airport & Conference Center San Antonio TX US 386
Hilton Boston Back Bay Boston MA US 385
Hilton Inn Sunnyvale Sunnyvale CA US 372
Hilton Torrance/South Bay Torrance CA US 371
Hilton Springfield Springfield IL US 367
Hilton Salt Lake City Salt Lake City UT US 362
Hilton San Jose & Towers San Jose CA US 354
Hilton San Diego Mission Valley San Diego CA US 350
Hilton Kansas City Airport Kansas City MO US 347
Hilton Harrisburg & Towers Harrisburg PA US 341
Hilton Valley Forge King of Prussia PA US 340
Hilton North Raleigh Raleigh NC US 338
Hilton Woodcliff Lake Woodcliff Lake NJ US 336
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Hilton St. Petersburg St. Petersburg FL US 333
Hilton Philadelphia Airport Philadelphia PA US 331
Hilton Sacramento Arden West Sacramento CA US 331
Hilton Concord Concord CA US 330
Hilton JFK Airport Jamaica NY US 330
Hilton Lafayette & Towers Lafayette LA US 327
Hilton Oceanfront Resort Hilton Head Island Hilton Head SC US 323
Hilton Orlando Altamonte Springs Altamonte FL US 322
The Seelbach Hilton Louisville Louisville KY US 321
Hilton Woodland Hills & Towers Woodland Hills CA US 318
Hilton Knoxville Knoxville TN US 317
Hilton Newark/Fremont Newark CA US 315
Hilton Dallas Parkway Dallas TX US 310
Hilton Arlington Arlington TX US 309
Hilton Lisle/Naperville Lisle IL US 309
Hilton Ontario Airport Ontario CA US 309
Hilton Denver Tech South Englewood CO US 305
Hilton Houston Hobby Airport Houston TX US 305
Hilton College Station & Conference Center College Station TX US 303
Windsor Hilton Windsor ON CA 303
Hilton Huntington Melville NY US 302
Hilton Gaithersburg Gaithersburg MD US 301
Hilton Wichita Airport Executive Conference Center Wichita KS US 301
Hilton Baton Rouge Baton Rouge LA US 300
Hilton Minneapolis/St. Paul Airport Bloomington MN US 300
Less than 299 Rooms
Hilton Fort Lauderdale/Sunrise Sunrise FL US 297
Hilton Cocoa Beach Oceanfront Cocoa Beach FL US 296
Hilton Charleston North North Charleston SC US 296
Meadowlands Hilton Secaucus NJ US 296
Hilton Houston Westchase & Towers Houston TX US 294
Hilton Marco Island Beach Resort Marco Island FL US 294
Hilton Pleasanton at The Club Pleasanton CA US 294
Hilton Tulsa Southern Hills Tulsa OK US 294
Hilton Houston Southwest Houston TX US 292
Hilton Jacksonville & Towers Jacksonville FL US 292
Hilton Waterfront Beach Resort Huntington Beach CA US 290
Hilton Irvine/Orange County Airport Irvine CA US 289
Hilton Salt Lake City Airport Salt Lake City UT US 287
Hilton Beaumont Beaumont TX US 284
Hilton Greensboro Greensboro NC US 281
Hilton Jackson & Conference Center Jackson MS US 278
Hilton Huntsville Huntsville AL US 277
Hilton Atlanta Northeast Norcross GA US 272
Hilton Eugene & Conference Center Eugene OR US 272
Hilton El Paso Airport El Paso TX US 271
Hilton Wilmington Christiana Newark DE US 266
Hilton Albuquerque Albuquerque NM US 264
Hilton East Memphis Memphis TN US 254
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Hilton St. Louis Frontenac St. Louis MO US 264
Hilton Inn Little Rock Little Rock AR US 263
Hilton Mesa Pavilion Mesa AZ US 263
Hilton Palm Springs Resort Palm Springs CA US 260
Hilton Greenville & Towers Greenville SC US 256
Hilton Phoenix Airport Phoenix AZ US 255
Hilton Newark Gateway Newark NJ US 253
Hilton San Bernardino San Bernardino CA US 251
Hilton Fort Wayne Convention Center Fort Wayne IN US 250
Hilton Scottsdale Resort & Villas Scottsdale AZ US 250
Hilton Dedham Place Dedham MA US 249
Hilton Midland & Towers Midland TX US 249
Hilton Norfolk Airport Norfolk VA US 249
Hilton Palm Beach Airport West Palm FL US 247
Hilton Savannah DeSoto Savannah GA US 246
Hilton Sonoma County/Santa Rosa Santa Rosa CA US 246
Hilton San Diego/Del Mar Del Mar CA US 245
Hilton Springfield Springfield VA US 245
Hilton Northbrook Northbrook IL US 244
Hilton Charlotte University Place Charlotte NC US 243
Hilton Houston Nassau Bay & Marina Houston TX US 243
Hilton Danbury & Towers Danbury CT US 242
Hilton Novi Novi MI US 239
Hilton Tampa Airport Westshore Tampa FL US 238
Hilton Melbourne Airport Melbourne FL US 237
Hilton Seattle Seattle WA US 237
Hilton Fort Lee at the George Washington Bridge Fort Lee NJ US 236
Hilton Knoxville Airport Alcoa TN US 236
Hilton Fayetteville Fayetteville AR US 235
Hilton Tucson East Tucson AZ US 233
Hilton Grand Rapids Airport Grand Rapids MI US 226
Hilton Port of Los Angeles/San Pedro San Pedro CA US 226
Hilton Allentown Allentown PA US 224
Hilton Carson Civic Plaza Carson CA US 224
Hilton Atlanta Northwest Atlanta GA US 222
Hilton Deerfield Beach/Boca Raton Deerfield Beach FL US 221
Hilton Inn North Little Rock Riverfront North Little AR US 220
Hilton St. Louis Airport St. Louis MO US 220
Hilton Oklahoma City Northwest Oklahoma City OK US 218
Hilton Lake Lanier Islands Lake Lanier GA US 216
Hilton Daytona Beach Oceanfront Resort Daytona Beach FL US 214
Hilton Toledo Toledo OH US 213
Hilton Arlington & Towers Arlington VA US 209
Hilton Greater Cincinnati Airport Florence KY US 206
Hilton Monterey Monterey CA US 204
Hilton Akron/Fairlawn Akron OH US 203
Hilton Las Cruces Las Cruces NM US 203
Hilton Whittier Whittier CA US 202
Hilton Hot Springs Convention Center Hot Springs AR US 201
</TABLE>
S-4
<PAGE>
Hilton Waco Waco TX US 199
Hilton Southbury Southbury CT US 198
Hilton Woodbridge Iselin NJ US 198
Hilton Ocala Ocala FL US 197
Hilton Durham Durham NC US 194
Hilton Washington Embassy Row Washington DC US 193
Hilton Sioux City Sioux City IA US 193
Hilton Cleveland South Cleveland OH US 191
Hilton Wilmington North Claymont DE US 190
Hilton Santa Maria Santa Maria CA US 190
Hilton Austin North & Towers Austin TX US 189
Hilton Northfield Troy MI US 186
Hilton Mystic Mystic CT US 184
Hilton Houston Plaza Houston TX US 181
Hilton Bellevue Bellevue WA US 180
Hilton Lake Placid Resort Lake Placid NY US 179
Hilton Oshkosh & Convention Center Oshkosh WI US 179
Hilton Charlotte Executive Park Charlotte NC US 178
Hilton Key West Resort & Marina Key West FL US 178
Hilton Wilmington Riverside Wilmington NC US 178
Hilton Oak Lawn Oak Lawn IL US 178
Interstone Partners I, LLP Columbus GA US 177
Hilton Minneapolis North Brooklyn MN US 176
Hilton Suites Lexington Green Lexington KY US 174
Hilton Akron Akron OH US 173
Hilton Pikesville Baltimore MD US 171
Hilton Canton Canton OH US 170
Hilton Lynchburg Lynchburg VA US 167
Houston West Hilton Inn Houston TX US 165
Hilton Milwaukee River Milwaukee WI US 163
Oxnard Hilton Inn Oxnard CA US 160
Hilton Richmond Airport Sandston VA US 160
Hilton Santa Fe Santa Fe NM US 157
Hilton Columbia Columbia MD US 152
Hilton Suites Detroit Metro Airport Romulus MI US 151
Hilton Pearl River Pearl River NY US 150
Hilton Galveston Island Resort Galveston TX US 149
McAllen Airport Hilton Inn McAllen TX US 149
Hilton Greenville Greenville NC US 141
Hilton Palm Beach Oceanfront Resort Palm Beach FL US 134
Hilton Charleston Harbor Resort Mount Pleasant SC US 131
Hilton Mexico City Airport Mexico City MX 129
Hilton Tampa Bay/
North Redington Beach Resort North FL US 125
Hilton Virginia Beach Oceanfront Virginia Beach VA US 124
Hilton Melbourne Beach Oceanfront Indialantic FL US 113
Hilton Longboat Key Beach Resort Longboat Key FL US 102
Hilton University of Houston Houston TX US 86
Sunset Key Guest Cottages at
Hilton Key West Resort Key West FL US 37
S-5
<PAGE>
OPTION ADDENDUM
Option Addendum to Master License Agreement (the "Agreement") dated December 23,
1998, by and between Hilton Hotels Corporation, a Delaware corporation ("HHC"),
and CAIS, Inc., a Virginia corporation ("Licensee").
HHC and Licensee agree that HHC shall have the option (the "Five-Year Option")
to modify certain terms and conditions of the Agreement, as specifically shown
below. The Five-Year Term Option may be exercisable by Hilton any time during
the First Year of the Agreement and shall be exercised by written notice to
Licensee as defined in the Agreement.
1. Paragraph 1c of the Agreement shall be modified by deleting it in its
entirety and substituting the following:
a. At each of the (participating) Hotels, Licensee shall install the
Service in all Meeting Rooms and in all Guest Rooms.
2. Paragraph 3a of the Agreement shall be modified by deleting it in its
entirety and substituting the following:
b. For each of the (participating) Hotels the Term shall be five (5)
years from the date Option was exercised. Notwithstanding the foregoing,
the Terms shall expire no later than December 31, 2005.
3. Paragraph 3b of the Agreement shall be modified by deleting it in its
entirety and substituting the following:
c. Hilton Hotels Corporation must specifically and individually approve
the extension of the December 31, 2005 date as defined above in
subparagraph 3a in the event Licensee and individual Hotels are planning
to execute the Rider(s) after December 31, 1999.
4. Paragraph 3c of the Agreement shall be modified by deleting it in its
entirety.
5. Paragraph 2 of the Rider to the Agreement shall be modified by deleting
references to "Initial Term" and "Option".
/s/ [Initials Illegible] /s/ [Initials Illegible]
------------------------ ------------------------
Initials Initials
0D-1
<PAGE>
PARTICIPATING HILTON HOTELS SITE ACKNOWLEDGEMENT
RIDER
THIS PARTICIPATING HILTON HOTELS SITE ACKNOWLEDGEMENT RIDER (the
"Rider") dated _______________, 1998, is by and between [Hotel Name]
(hereinafter referred to as "Hotel"), and CAIS, Inc., a Virginia corporation
(hereinafter referred to as "Licensee").
W I T N E S S E T H
WHEREAS, Licensee and Hilton Hotels Corporation have entered into that
certain Master License Agreement dated ____________, 199_ (the "Agreement"); and
WHEREAS, the Hotel is situated on the real property located at [Hotel
Address]; and
WHEREAS, Licensee has devised a commercial, high speed data
communications service as more particularly defined in Paragraph 2 of the
Agreement (the "Service") and desires to make the Service available to Licensor
and third parties at Licensor Hotels; and
WHEREAS, Hotel desires to have the Service available and Licensee
desires to provide the Service to joint customers of Hotel and Licensee and
other patrons; and
NOW, THEREFORE, the parties acknowledge and agree as follows:
1. The terms and conditions of the Agreement fully apply in the Hotel (in the
capacity of Licensor) and Licensee, which includes Licensee's obligation to
provide insurance policies as defined in Paragraph 10 of the License
Agreement and naming as "Additional Insureds" the following:
a.
-----------------
b.
-----------------
c.
-----------------
2. Commencement. Initial Term:______ Extended Term:______
Expiration. Initial Term:______ Extended Term:______
3. Allocation of Usage of Fees. Fees shall be paid by Licensee to Hotel in the
---------------------------
manner defined in Paragraph 4 of the Agreement and calculated in accordance
with Schedule A attached hereto and by this reference made an integral part
hereof.
4. Installation. Following appropriate provisions of the Agreement:
------------
a. Licensee will schedule the site survey and equipment installation of
the Hotel at a time
1
<PAGE>
and date convenient to the Hotel.
b. The Hotel shall have the opportunity to review the results of
the site survey and approve plans prior to installation.
c. Licensee will install its equipment at the Hotel at no cost to
the Hotel in accordance with the Agreement.
5. Training. Licensee shall provide training to employees of the
--------
Hotel on the use and operation of the Service. All training will be
provided to the Hotel for posting on the Hotel's intra-net web site
for future reference. Licensee also shall provide Hotel with
training manuals, collateral and help-line (technical support) for
launch and as needed for maintenance. Licensee shall furnish to
Hotel guidebooks for rooms, to include software directions, a
product overview, and contact numbers for help. Personnel of
Licensee shall be available twenty four (24) hours per day, 365 days
per year for telephone consultation to provide further assistance to
Hotel personnel regarding use and operation of the Service at no
charge.
6. Equipment Indentification. The Parties agree that all the jacks
-------------------------
in each unit shall bear the logo(s) of the OverVoice System. The
Parties agree that the start-up screen for Internet service shall
bear the logo of OverVoice, the Hotel and such other logos as
reasonably shall be agreed upon by the Parties as necessary
(including in some cases the logo of the provider of the Client-
Server Software).
7. Usage Fee. Subject to the provisions of Paragraph 4 (ix) of the
---------
Agreement. Hotel and Licensee agree that: A. Guest Room Usage Fee
shall be not less than $7.95 per day nor greater than $9.95 per day
for unlimited use from a Guest Room in any given day with usage
being tracked from noon until noon the next day.
B. Meeting Room Usage Fees and time periods are defined in Schedule
A and are due to Licensee without allocation to Licensor. Licensor
shall be entitled to retain all sums in excess of such amounts it is
able to charge for the Service.
2
<PAGE>
8. Power Consumption. Hotel shall provide at its sole cost electric power
-----------------
supply suitable for the Service including recurring monthly charges to a maximum
of Fifty Cents ($50/100) per installed guest and meeting rooms per month ($6.00
annual). Hotel reserves the right to charge Licensee for electrical usage in
excess of such amount.
9. In the event Hilton Hotels Corporation exercises the Option Addendum, the
Hotel shall be bound by the terms and conditions contained therein.
CAIS, Inc., [Hotel Name]
A Virginia corporation
By: __________________________ By: __________________________
__________________________ __________________________
Its: __________________ Its: __________________
<PAGE>
SCHEDULE A
----------
For Hilton Hotels with 1,000 or More Guest Rooms
------------------------------------------------
a. Usage Fees as defined in Section 4 of the Agreement shall be
allocated between Hotel and Licensee as follows:
i. Guest Room Usage Fee Share
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Hotel Share *% *% *% *% *%
Licensee Share *% *% *% *% *%
</TABLE>
ii. Meeting Room Usage Fee Share
Fixed Payments to Licensee (Rate Applicable in Years 1 through 5):
<TABLE>
<CAPTION>
128Kbps Rate Per day Multi Day Cap**
- ------- ------------ -------------
<S> <C> <C>
CPU 1 $ * $ *
Each Add'l CPU * *
1.5Mbps
- -------
CPU 1 $ * $ *
Each Add'l CPU * *
</TABLE>
Additional bandwidth above 1.5Mbs to be negotiated on an individual property by
property basis.
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
** The Multi-Day Cap is the maximum Usage Fee payable to Licensee with respect
to a customer of the Hotel using the Service in a Meeting Room for more than
one day in sequence (up to a maximum of 30 days).
<PAGE>
SCHEDULE A
For Hilton Hotels with 500-999 Guest Rooms
------------------------------------------
a. Usage Fees as defined in Section 3 of the Agreement shall be
allocated between Hotel and Licensee as follows:
i. Guest Room Usage Fee Share
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Hotel Share *% *% *% *% *%
Licensee Share *% *% *% *% *%
</TABLE>
ii. Meeting Room Usage Fee Share
Fixed Payments to Licensee (Rate Applicable in Years 1 through 5):
<TABLE>
<CAPTION>
128Kbps Rate Per day Multi Day Cap**
- ------- ------------ -------------
<S> <C> <C>
CPU 1 $ * $ *
Each Add'l CPU * *
1.5Mbps
- -------
CPU 1 $ * $ *
Each Add'l CPU * *
</TABLE>
Additional bandwidth above 1.5Mbs to be negotiated on an individual property by
property basis.
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
** The Multi-Day Cap is the maximum Usage Fee payable to Licensee with respect
to a customer of the Hotel using the Service in a Meeting Room for more than one
day in sequence (up to a maximum of 30 days).
<PAGE>
Schedule A
----------
For Hilton Hotels with 300-499 Guest Rooms
------------------------------------------
a. Usage Fees as defined in Section 3 of the Agreement shall be
allocated between Hotel and Licensee as follows:
i. Guest Room Usage Fee Share
Year 1 Year 2 Year 3 Year 4 Year 5
- --------------------------------------------------------------
Hotel Share: *% *% *% *% *%
Licensee Share: *% *% *% *% *%
ii. Meeting Room Usage Fee Share
Fixed Payments to Licensee (Rate Applicable in Years 1 through 5):
128 Kbps Rate Per day Multi Day Cap**
- -------- ------------ ---------------
CPU 1 $ * $ *
Each Add'l CPU * *
1.5Mbps
- -------
CPU 1 $ * $ *
Each Add'l CPU * *
Additional bandwidth above 1.5 Mbs to be negotiated on an individual property by
property basis.
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
** The Multi-Day Cap is the maximum Usage Fee payable to Licensee with respect
to a customer of the Hotel using the Service in a Meeting Room for more than one
day in sequence (up to a maximum of 30 days).
<PAGE>
SCHEDULE A
----------
For Hilton Hotels with fewer than 300 Guest Rooms
-------------------------------------------------
a. Usage Fees as defined in Section 3 of the Standard Terms and
------------------
Conditions shall be allocated between Hotel and Licensee as follows:
- ----------
i. Guest Room Usage Fee Share
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Hotel Share *% *% *% *% *%
Licensee Share *% *% *% *% *%
</TABLE>
ii. Meeting Room Usage Fee Share
Fixed Payments to Licensee (Rate Applicable in Years 1 through 5):
<TABLE>
<CAPTION>
128Kbps Rate Per day Multi Day Cap**
- ------- ------------ -------------
<S> <C> <C>
CPU 1 $ * $ *
Each Add'l CPU * *
1.5Mbps
- -------
CPU 1 $ * $ *
Each Add'l CPU * *
</TABLE>
Additional bandwidth above 1.5Mbs to be negotiated on an individual property by
property basis.
- ---------------------
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
** The Multi-Day Cap is the maximum Usage Fee payable to Licensee with respect
to a customer of the Hotel using the Service in a Meeting Room for more
than one day in sequence (up to a maximum of 30 days).
<PAGE>
Exhibit 10.27.1
First Amendment to Master License Agreement
-------------------------------------------
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Master License Agreement, dated December 23, 1998 (the
"Master Agreement"), between Hilton Hotels Corporation ("Hilton" or "Licensor")
and CAIS, Inc. ("CAIS" or "Licensee") is hereby amended by this First Amendment
to Master License Agreement dated as of this 23 day of April, 1999 between
Hilton, CAIS, Inc. and CAIS Internet, Inc. (the "First Amendment") as follows:
1. As a clarification of the discrete rights and authority of Hilton Hotels
Corporation as distinct from individual hotels that sign a Participating Hilton
Hotels Site Acknowledgement Rider (a "Participating Hotel"), it is understood
that a Participating Hotel is party to the Master Agreement only as to the
rights and obligations specific to the use of the Licensed Area within that
hotel.
A Participating Hotel, in the capacity of Licensor under a Participating
Hilton Hotels Site Acknowledgement Rider (a "Rider"), has no authority to agree
to install a greater number of Guest Rooms than the minimum (defined below in
paragraph 10(b)), exercise options, amend the Master Agreement or bind Hilton
Hotels Corporation or the Participating Hotel in any manner affecting the terms
and conditions of the Master Agreement. Any such agreement between Licensee and
a Participating Hotel shall be null and void, unless approved by Hilton Hotels
Corporation in the manner described in the Master Agreement. All references to
"Hilton" or "Licensor" in this First Amendment refer exclusively to Hilton
Hotels Corporation.
2. Hilton Equity. (a) As an additional contribution by CAIS in support of
-------------
Hilton's marketing of the Service, CAIS Internet, Inc. has agreed to grant
warrants to Hilton to purchase 66,667 shares of the common stock of CAIS
Internet, Inc., at an exercise price of $0.01 per share. If the initial public
offering price of the CAIS Internet, Inc. common stock is less than $15.00 per
share, Hilton shall be entitled to receive warrants for additional shares of
CAIS Internet, Inc.'s common stock in an amount which, when added, to the number
of warrants representing the initial 66,667 shares and multiplied by the IPO
price will have a market value of at least $1 million. The terms and conditions
of the warrants will be set forth in a warrant certificate and related
agreements to be executed by the parties.
(b) (i) Commencing upon the six month anniversary of CAIS Internet, Inc.'s
planned initial public offering, Hilton shall be entitled to certain
registration rights with respect to shares of common stock of CAIS Internet,
Inc. received by Hilton upon the exercise of the warrants. Such registration
rights, and such other customary terms and conditions, shall be included in a
warrant registration rights agreement between Hilton and CAIS Internet, Inc.
that Hilton and CAIS Internet, Inc. shall execute concurrently herewith.
(ii) Commencing upon the effective date of an initial public offering of
the common stock of CAIS Internet, Inc., Hilton shall have a "put" option to
sell all of its warrants, or if exercised, shares of common stock of CAIS
Internet, Inc. (those resulting from the exercise of the above-mentioned
warrants) back to CAIS or CAIS Internet, Inc. and CAIS or CAIS Internet Inc.
shall be required to purchase such securities from Hilton at a price for each
share or each share into which the warrants are then exercisable, equal to the
initial public offering share price. The "put" option shall have an expiration
date ninety (90) days following the
1
<PAGE>
earlier of: (1) the effective date of the first registration statement that
includes any Registrable Securities (as such term is defined in the warrant
agreement of even date herewith between CAIS Internet, Inc. and Hilton) for
resale and (2) the date on which Hilton may sell all of the Warrant Shares (as
such term is defined in the warrant agreement of even date herewith between CAIS
Internet, Inc. and Hilton) within a three-month period pursuant to U.S.
Securities and Exchange Commission Rule 144.
(c) If an initial public offering of CAIS Internet, Inc. does not occur on
or before November 1, 1999, Hilton at its option by written notice to CAIS or
CAIS Internet, Inc., shall be entitled to rescind the provisions of this First
Amendment (i) providing for a fixed term for all hotels expiring on December 31,
2004 (as outlined in paragraphs 2 through 6 below) and (ii) providing certain
exclusive rights to CAIS (as outlined in paragraph 9 below). In such event,
Hilton shall retain its warrants or shares of common stock in CAIS Internet,
Inc. without further obligation to CAIS.
2A. Paragraph 1(c) of the Master Agreement is amended by deleting it in its
entirety and substituting the following:
c. At each of the Participating Hotels, Licensee shall install the Service
in all Meeting Rooms (defined as all public function rooms including but
not limited to meeting rooms, board rooms, training rooms, reception rooms,
banquet rooms and all other such general purpose rooms for hotel use) and
(a) where the Participating Hotel has 400 or greater Guest Rooms, in either
200 Guest Rooms or in such greater number of Guest Rooms as may be mutually
agreed upon by Licensor and Licensee, or (b) where the Participating Hotel
has fewer than 400 Guest Rooms, in either 50% of the Guest Rooms or in such
greater number of Guest Rooms as may be mutually agreed upon by Licensor
and Licensee.
3. Paragraph 3a of the Master Agreement is amended by deleting it in its
entirety and substituting the following:
a. For each of the Participating Hotels (those hotels listed in Schedule
1 as updated by Licensor that execute a Rider) the Term shall be five (5)
years. The commencement and termination dates for the individual Hotels are
defined in the Rider(s). Notwithstanding the foregoing, the Terms shall
expire no later than December 31, 2004.
4. Paragraph 3b of the Master Agreement is amended by deleting it in its
entirety and substituting the following:
b. Hilton Hotels Corporation must specifically and individually approve
the extension of the December 31, 2004 date as defined above in
subparagraph 3a in the event Licensee and individual Hotels are planning to
execute the Rider(s) after December 31, 1999.
5. Paragraph 3c of the Master Agreement is amended by deleting it in its
entirety.
6. Paragraph 2 of the Rider to the Master Agreement is amended by deleting
references to "Initial Term" and "Option".
2
<PAGE>
7. Paragraphs 2, 3, 4, and 5 of the Option Addendum to the Master Agreement are
amended by deleting each such paragraph in its entirety.
8. Installation Dates. CAIS shall complete installation in hotels that sign a
------------------
Rider under the Master Agreement, and that are available for installation as
scheduled by CAIS following execution of their respective Rider, as set forth
below:
(i) 50% of all hotels that have signed a Rider by April 15, 1999 shall be
installed on or before *; then,
(ii) 97% of the balance of hotels that signed a Rider by April 15, 1999
shall be installed by *; and,
(iii) 95% of all hotels that signed a Rider by June 30, 1999 shall be
installed by *.
9. Fees.
----
(a) Usage Fee. Paragraph 4b(i) of the Master Agreement is amended by
-----------
deleting it in its entirety and substituting the following:
(i)(a) Based upon daily information reported by the Service monitoring
equipment (provided and installed by Licensee at no cost to Licensor) the
Hotels shall charge Guests on a per-use or other basis for access to the
System an amount (the "Usage Fee") based on a pricing schedule mutually
agreed to by Licensee and Licensor and defined in the Riders. (b) In
addition, Licensor and Licensee agree: (1) that the start-up screen for
Guests at Participating Hotels shall be in a format approved by Licensor,
provided that such start-up screen shall reference Licensee and its
OverVoice technology as the provider of the Service at the hotel: (2) that
Licensor and Licensee shall work together to develop content and other
opportunities related to the screen page accessed by Guests immediately
following the start-up screen page, subject to Licensor's approval; (3)
that the parties contemplate that Licensee shall develop, subject to
Licensor's approval, revenue opportunities from use of the Service by
Guests at the Participating Hotels related to the following: (A) pass-along
fees from links to third party sites; (B) fees for providing streaming
video to Guests; (C) fees for providing streaming audio to Guests; and (D)
fees for user/visitor information provided on an anonymous basis, with the
revenue share to the Participating Hotel to be no less favorable than the
allocation to the Participating Hotels of Guest Room Usage Fees provided
for in the table following paragraph 9(b) below; and (4) that the parties
agree that once a Guest links to the hilton.com web site, the provisions of
this paragraph 9(a)(i)(b) are not applicable.
(b) Usage Fee Share. Schedule A to the Rider is amended so that the
---------------
Participating Hotel's Guest Room Usage Fee Share during certain years of the
Term (as shown in the chart below) shall be subject to increase as follows. In
the event the Average Gross Revenue at a Participating Hotel (defined as (i) the
gross Guest Room Usage Fees from all Service-installed Guest Rooms at such
Participating Hotel divided by (ii) the minimum number of Service-installed
Guest Rooms at such hotel, as defined in paragraph 10(b) below) exceeds $*.00
per Service-installed Guest Room during each such year, then the percentage rate
shall increase
3
*Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
during the balance of each such year to the increased percentage rates listed in
parentheses as shown below (with the balance of the Usage Fees allocated to
Licensee). The Participating Hotels' Usage Fee Shares listed on the four
respective Schedule A's are so amended.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Number of Guest Hotel Share Hotel Share Hotel Share Hotel Share Hotel Share
Rooms Year 1 Year 2 Year 3 Year 4 Year 5
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,000 + *% (*%) *% (*%) *% *% *%
- ---------------------------------------------------------------------------------------------------------------
500 - 999 *% (*%) *% (*%) *% *% *%
- ---------------------------------------------------------------------------------------------------------------
300 - 499 *% (*%) *% (*%) *% (*%) *% *%
- ---------------------------------------------------------------------------------------------------------------
1 - 299 *% (*%) *% (*%) *% (*%) *% *%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Market Rate. As a clarification of Paragraph 4(ix) of the Master
-----------
Agreement, the "market rate" for the Service is understood to refer to the
market rate for such services available in comparable hotels, either
individually or collectively.
10. Limited Exclusivity in the Room/Performance Standard. In consideration of
----------------------------------------------------
the grant of limited exclusive rights described in this paragraph 10, Paragraph
27j of the Master Agreement is deleted in its entirety. However, as the first
provider of the Service in a Participating Hotel, CAIS shall have the first
opportunity to select, subject to the Participating Hotel's approval, the Guest
Rooms in which the Service shall be installed. CAIS is hereby granted for the
term of the Master Agreement a limited exclusive right (the "Exclusive") to
provide the Service (defined as wired high speed data communication system for
laptop computers and as further defined in the Master Agreement), as follows:
(a) A "wired" system for laptop computers includes only a system delivering
high speed data to such laptop computers through a wireline, *, connection,
including but not limited to those utilizing telephone wire, Category 5 wire,
and/or coaxial cable/cable modem. Therefore, it is understood that the Exclusive
does not apply to wired low speed (56 Kbs or less) data systems, wired systems
that do not connect to laptop computers *.
(b) The Exclusive is granted only for the minimum number of rooms required
at each hotel (defined as all Meeting Rooms and either 200 Guest Rooms where the
Participating Hotel has 400 or greater Guest Rooms, or, 50% of the Guest Rooms
where the Participating Hotel has fewer than 400 Guest Rooms), in which CAIS's
equipment is installed. The Exclusive is limited to those minimum rooms and is
not granted for any greater number of rooms that CAIS and Licensor may agree to
install; except in the following instances: (i) In the event Licensor exercises
its option to require installation in all hotel rooms, as defined in paragraph 1
of the Option Addendum to the Master Agreement, the Exclusive shall be granted
to all installed rooms.(ii) In the event Licensor grants and approves in writing
the Exclusive for a greater number of rooms than the minimum at a particular
hotel.
(c) The Exclusive does not apply to, and in no manner affects, Hilton's
right to install any current or future in-room gaming systems accessed by laptop
computers.
(d) In the event CAIS fails to attain and thereafter maintain a * percent
(*%) "take rate" averaged over the period from * through *, Hilton shall have
4
*Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
the right, upon written notice to CAIS, to rescind the Exclusive. The *% take
rate is based on a system wide average of the entire number of Guest Rooms
(wired with the Service) in all participating hotels that have signed a Rider by
*.
Hilton shall use commercially reasonable efforts to direct those Guests
likely to use the services to rooms with the Service. In the event Hilton
elects to exercise the Option Addendum to the Master Agreement pursuant to which
CAIS would install the Service in all Guest Rooms, CAIS shall not be required to
attain the above described *% take rate in order to retain the Exclusive.
11. Marketing. Hilton and CAIS shall develop a joint marketing and advertising
---------
("JMA") program to promote through a national campaign the launch of CAIS's high
speed data communication system services at Hilton hotel properties. *
Hilton's marketing department shall present a proposed advertising and marketing
campaign, including a media plan, to CAIS's marketing department within 90 days
of the date of this First Amendment for Hilton's and CAIS's mutual consideration
and discussion, with the end result to be a mutually agreed upon national
campaign and roll out schedule. The anticipated roll out for the national
campaign shall occur following *.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the date first above written.
Hilton Hotels Corporation, CAIS, Inc.,
a Delaware corporation a Virginia corporation
By: /s/ Dennis Koci By: /s/ William M. Caldwell, IV
------------------------ ---------------------------
Name: Dennis Koci Name: William M. Caldwell, IV
---------------------- --------------------------
Title: SVP-HHC Title: President
--------------------- -------------------------
Consenting for purposes of the provisions of Paragraph 1:
CAIS Internet, Inc.,
a Delaware corporation
By: /s/ William M. Caldwell, IV
---------------------------
Name: William M. Caldwell, IV
--------------------------
Title: President
-------------------------
5
*Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
EXHIBIT 10.27.2
MARKETING/ADMINISTRATION FUND AND INCENTIVE AGREEMENT
-----------------------------------------------------
THIS MARKETING/ADMINISTRATION FUND AND INCENTIVE AGREEMENT dated for reference
purposes only, December 23, 1998, by and between Hilton Hotels Corporation, a
Delaware corporation (herein after referred to as "HHC"), and CAIS, Inc., a
Virginia corporation ("CAIS").
WITNESSETH:
WHEREAS, CAIS and HHC have entered into that certain Master License Agreement
dated 199_ (the "Master Agreement"); and
WHEREAS, the parties desire to promote and advertise the services described in
Master Agreement (the "Services") to HHC's customers; and,
WHEREAS, CAIS desires to contribute funds for such promotions and advertising;
and
NOW, THEREFORE, the parties acknowledge and agree as follows:
1. Corporate Incentive Payments. An Incentive Payment shall be paid
----------------------------
to HHC based on the number of corporate owned or managed Hotels
that participate in the Services during the term of the Agreement
as provided below:
a. For each corporate owned or managed Hotel Property having 1,000
or greater Guest Rooms (a current example of which is listed on
Schedule 1), HHC shall be eligible for the Incentive Plan
Payments set forth below in years 3-5. The parties agree that
HHC shall from time to time update Schedule 1 to include all
HHC corporate owned or managed hotel properties. HHC will
notify CAIS if there are changes to Schedule 1.
b. For corporate owned or managed Hotel Properties having fewer
than 1,000 Guest Rooms, HHC shall be eligible for the Incentive
Plan Payments in years 4-5. The parties agree that HHC shall
from time to time update Schedule 1 to include all HHC
corporate owned or managed hotel properties.
c. The Incentive Payment percentage within each size category
shall be multiplied by the aggregate Usage Fees (as defined in
paragraph 4 of Master Agreement) for the participating
corporate owned or managed hotels in that size category, and
the resulting total shall be paid directly to HHC at its
offices in Beverly Hills on the fifteenth (15th) day of each
month applicable to the month immediately preceding.
d. For purposes of the Payment Matrix below, the participation
percentage
1
<PAGE>
shall be based on (i) corporate owned or managed Hotels in a
particular Room Size category that are operating the Service
during the month for which the incentive payment would apply, as a
percentage of (ii) all corporate owned or managed Hotels in that
Room Size Category.
Corporate Incentive Payment Matrix
- ----------------------------------
<TABLE>
<CAPTION>
Corporate Owned or Managed Hotel Properties Operating the
Service as Percentage of all Schedule 1 Corporate Owned or
Managed Hotel Properties in Size Category
*% *% *%
-------------------------------------------
Incentive
---------
<S> <C> <C> <C>
Room Size
- ---------
1,000 and greater *% *% *%
500 - 1,000 *% *% *%
300 - 500 *% *% *%
299 and fewer *% *% *%
</TABLE>
2. Marketing and Administration Fund. In a manner approved by HHC,
---------------------------------
CAIS shall set up an account (The "Account") to pay advertising
and administration costs and fees incurred by HHC and third
parties as mutually approved HHC and CAIS. CAIS shall provide
funds for the Account with monthly contributions as follows:
a. For any 1,000 and greater Room Size Hotels (e.g. owned, managed
or franchised), (i) during the first 2 Years of the term
following installation and deployment of Service at such Hotel,
$* per month for each wired Guest Room and Meeting Room (up to
a maximum of 200 rooms per hotel), (ii) during the subsequent 3
Years of the term, $* per month for each wired Guest Room and
Meeting Room (up to a maximum or 200 rooms per hotel);
b. For all other participating Hotels, during the first 2 Years of
the term following installation and deployment of the Service
at such Hotel Property, $* per month for each wired Guest Room
and Meeting Room (up to a maximum of 200 rooms per hotel).
- ---------------------
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
2
<PAGE>
c. For each participating Hotel that is not corporate owned or
managed, during years 3 through 5, in the event the occurrence or use by
customers in Guest Rooms (only) meets or exceeds * (*%) percent with respect to
wired Guest Rooms at such Hotel, $ * per month per wired Guest and Meeting
Room (up to maximum of 200 rooms per Hotel) during each month such *% rate is
achieved.
Monthly contributions would be due and payable to the Account from CAIS by
the 15th of the month applicable to the month immediately preceding. The
marketing program would be administered by CAIS with HHC's prior written
approval, to ensure that advertising content is consistent with the content of
each Parties' advertising program. Each party shall have the right to review and
approve the program's advertising and marketing materials for this purpose. The
advertising fund shall be used by the Parties exclusively for purposes of
promoting and marketing the CAIS service.
3. Marketing and Public Relations.
------------------------------
a. Public Relations Program. The Parties agree to implement a
------------------------
joint public relations program including a series of joint
press release, media interviews, and on-going handling of media
inquiries, as determined and mutually agreed to by the
Parties. This program is to include the joint announcement of
the Parties Agreement through traditional press releases,
postings on each Party's web site(s), and the establishment of
appropriate hyperlinks between both Parties' web sites.
b. HHC shall be permitted to identify the Services in HHC's
marketing and related material to promote the Services. Except
for such use and for use for the purposes of identification of
the Services, no right, title, interest, or license in or to
any trademark for service mark of either party or of its
agents, subcontractors, representatives, affiliates and/or of
any third party involved with any aspect of the Service is
granted to the other party under this Agreement. CAIS shall be
permitted to identify the participating Hotels as "OverVoice
Hotels" in marketing and related material to promote the CAIS'
services. Except as provided herein, no party may otherwise use
the name, logos, trade names, service marks, trademarks,
printed materials, or art work of any other party, or of any
third party, in any promotional or advertising material without
the prior consent of such party or such third party.
4. MISCELLANEOUS
--------------------
a. This Agreement is made subject to all local, state and
federal laws and
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
3
<PAGE>
regulations now or hereafter in force, and shall not be modified or extended
(other than as set forth herein) except by an instrument duly signed by HHC and
CAIS and approved by HHC. Waiver of a breach of any provisions hereof under any
circumstances will not constitute a waiver of any subsequent breach of such
provision or of a breach of any other provision of this Agreement.
b. HHC and CAIS represent and warrant to each other that no
broker is involved in connection with this transaction and each party agrees to
indemnify and hold the other harmless from and against the claims of any broker
(if any), made in connection with this transaction.
c. This Agreement shall be governed by and constructed in
accordance with the laws of the state of California.
d. This Agreement shall be binding upon the parties, and their
permitted successors and assigns.
e. HHC and CAIS agree to do any further acts and execute such
additional documents as the other may reasonably require to confirm this
Agreement and carry out the purpose of this Agreement.
5. SEVERABILITY
------------
It is agreed that if any provision of this Agreement shall be determined
to be void by any court of competent jurisdiction, then such determination shall
not affect any other provision of this Agreement and all such other provisions
shall remain in full force and effect, and it is the intention of the parties
hereto that if any provision of the license is capable of two constructions, one
of which would render the provision void and the other of which would render the
provision valid, then the provision shall have the meaning which renders it
valid.
6. DISPUTE RESOLUTION
------------------
A. If there is any dispute, claim or controversy, other than one
involving HHC's right to seek equitable relief, between the parties arising out
of or relating to this Agreement (a "Disputed Matter"), the parties shall
attempt to amicably resolve such Disputed Matter in good faith. If the initial
efforts to resolve such Disputed Matter are not successful, the parties shall
submit the Disputed Matter jointly to the respective senior officers of HHC and
CAIS. If such senior officers cannot reach a mutually agreeable resolution of
the Disputed Matter within ten (10) business days after reference of the matter
to them, either party may elect to have the Disputed Matter settled in
accordance with the arbitration procedures detailed in Paragraph B attached
hereto. Without limiting the generality of the foregoing, the parties expressly
agree that any and all disagreements regarding whether an issue is a Disputed
Matter under this Section shall
4
<PAGE>
be settled in accordance with the arbitration procedures defined in Paragraph B.
B. Arbitration Procedures
----------------------
(i) Rules Jurisdiction. Any Disputed Matter (as defined in the
------------------
agreement in which this exhibit is attached) shall be settled by final and
binding arbitration in the City of Los Angeles, California, and, except as
herein specifically stated, in accordance with the commercial arbitration rules
of the American Arbitration Association ("AAA Rules") then in effect, subject to
the provisions of the United States Arbitration Act 9 U.S.C. and 1 et seq.
-------
("Title 9"). To the extent the AAA Rules conflict with, or are supplemented by,
the provisions of Title 9, the provisions of Title 9 shall govern over any
conflicting rules that may now or hereafter be contained in either the AAA Rules
or Title 9. Any judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction of the subject matter thereof. The
arbitrators shall have the authority to grant any equitable and legal remedies
that would be available in any judicial proceeding instituted to resolve a
disputed matter. The parties hereby submit to the in personam jurisdiction of
-- --------
the Superior Court of Los Angeles County and the Federal District Court for the
Central District of California for purposes of confirming any such award and
entering judgment thereon.
(ii) Compensation of Arbitrators. Any such arbitration shall be
---------------------------
conducted before a panel of three arbitrators who shall be compensated for their
services at a rate to be determined by the parties or by the American
Arbitration Association but based upon normal and reasonable hourly or daily
consulting rates for the neutral arbitrator in the event the parties are not
able to agree upon his or her rate of compensation.
(iii) Selection of Arbitrators. Within five (5) business days of notice
------------------------
by a party seeking arbitration under this provision, the party requesting
arbitration shall appoint one person as an arbitrator and within fifteen (15)
business days thereafter the other party shall appoint the second arbitrator.
Except with the other party's prior, express and written consent, no arbitrator
may be appointed who is employed by, or who is engaged by, or who has been
engaged within one (1) year by, any entity that is a major competitor of either
party. Within twenty (20) business days after the appointment of the second
arbitrator, the two arbitrators so chosen shall mutually agree upon the
selection of the third impartial and neutral arbitrator. The majority decision
of the arbitrators will be final and conclusive upon the parties hereto.
(iv) Payment of Costs. Each party hereby agrees to pay one-half (1/2)
----------------
of the compensation to be paid to the arbitrators in any such arbitration and
one-half (1/2) of the costs of transcripts and other expenses of the arbitration
proceedings; provided, however, that the prevailing party in any arbitration
shall be entitled to an award of reasonable attorneys' fees and costs,
arbitrators' fees and costs, fees and costs of expert witnesses and all other
costs of arbitration to be paid by the losing party.
5
<PAGE>
(v) Evidence and Discovery. The parties shall be entitled to conduct
----------------------
discovery proceedings to the fullest extent permissible under California law and
the Federal Rules of Evidence.
(vi) Burden of Proof. For any claim submitted to arbitration, the
---------------
burden of proof shall be as it would be if the claim were litigated in a
judicial proceeding. All testimony of witnesses shall be taken under oath and
shall be subject to the Federal Rules of Evidence.
(vii) Judgement. Upon the conclusion of any arbitration proceedings,
---------
hereunder, the arbitrators shall render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached by them and shall deliver such documents to each party to the Agreement
along with a signed copy of the award.
(viii) Terms of Arbitration. The arbitrators chosen in accordance with
--------------------
these provisions shall not have the power to alter, amend or otherwise affect
the terms of these arbitration provisions or the provisions of the Agreement.
(ix) Exclusive Remedy. Except as specifically provided in this
----------------
Agreement, arbitration shall be the sole and exclusive remedy of the parties for
any disputed matter arising out of such agreement.
(x) Arbitration Confidential. Neither party will disclose the
------------------------
existence of any arbitration proceedings hereunder, nor the
outcome thereof, except: (i) insofar as such disclosure is
reasonably necessary to carry out and make effective the terms of
this Agreement, including without limitation, pleadings or other
documents filed seeking entry of judgement upon an award of the
arbitrators; (ii) insofar as a party hereto is required by law to
respond to any demand for information from any court,
governmental entity, or governmental agency, or as may be
required by federal or state securities laws; (iii) insofar as
disclosure is necessary to be made to a party's independent
accountants for tax or audit purposes; (iv) insofar as disclosure
is necessary to be made to a party's attorneys for purposes of
rendering advice or services relating to this Agreement; and (v)
insofar as the parties may mutually agree in writing.
6
<PAGE>
7. TERM
----
This Agreement shall commence and terminate on the same dates the Master
Agreement commences and terminates.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of date first above written.
Hilton Hotels Corporation, CAIS, Inc.,
a Delaware corporation a Virginia corporation
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ Laura A. Newman
--------------------------- ---------------------------
Laura A. Newman
--------------------------- ---------------------------
Its: Senior Vice President Its: Vice President
---------------------------
7
<PAGE>
Schedule 1 to Marketing/Administration Fund and Incentive (the "Agreement")
dated December 23, 1998, by and between Hilton Hotels Corporation. a Delaware
corporation ("HHC), and CAIS, Inc., a Virginia corporation ("CAIS).
List of Hotels Corporate Owned or Managed
-----------------------------------------
<TABLE>
<CAPTION>
Legal Name City State Country Total Rooms
- ---------- ---- ----- ------- -----------
<S> <C> <C> <C> <C>
MORE THAN 1000 ROOMS
Hilton Hawaiian Village Honolulu HI US 2545
Hilton New York & Towers New York NY US 2040
Hilton San Francisco & Towers San Francisco CA US 1896
Palmer House Hilton Chicago IL US 1639
Hilton New Orleans Riverside New Orleans LA US 1600
Hilton Anaheim & Towers Anaheim CA US 1572
Hilton Chicago & Towers Chicago IL US 1544
The Waldorf-Astoria New York NY US 1380
Hilton Waikoloa Village Waikoloa HI US 1240
Hilton Los Angeles Airport Los Angeles CA US 1236
Hilton Atlanta & Towers Atlanta GA US 1222
Fontainebleau Hilton Resort & Towers Miami Beach FL US 1206
Hilton Washington & Towers Washington DC US 1118
500 - 999 ROOMS
Hilton Chicago O'Hara Airport Chicago IL US 853
Hilton Minneapolis & Towers Minneapolis MN US 821
Hilton in the WALT DISNEY WORLD Resort Lake Buena Vista FL US 814
Hilton Pittsburgh & Towers Pittsburgh PA US 713
Pointe Hilton South Mountain Resort Phoenix AZ US 638
Hilton Anchorage Anchorage AK US 591
Pointe Hilton Tapatio Cliffs Resort Phoenix AZ US 585
Hilton Beverly Hills Beverly Hills CA US 581
Pointe Hilton Squaw Peak Resort Phoenix AZ US 563
Millenium Hilton Next to the World Trade Center New York NY US 561
Capital Hilton Washington DC US 544
Hilton Atlanta Airport & Towers Atlanta GA US 503
Hilton Miami Airport & Towers Miami FL US 500
300 - 499 ROOMS
Hilton Burbank Airport & Convention Center Burbank CA US 486
Hilton Turtle Bay Resort Kahuku-Oahu HI US 485
Hilton Palacio del Rio San Antonio TX US 481
Hilton McLean Tysons Corner McLean VA US 458
Hilton Portland Portland OR US 455
Hilton Rye Town Rye Brook NY US 437
Hilton Charlotte & Towers Charlotte NC US 407
Hilton East Brunswick & Towers East Burnswick NJ US 405
Hilton DFW Lakes Executive Conference Center Grapevine TX US 395
Hilton Long Beach Long Beach CA US 393
Hilton Newark Airport Elizabeth NJ US 375
Hilton Oakland Airport Oakland CA US 363
Hilton San Diego Resort San Diego CA US 357
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
All'l Tower at the Hilton Hawaiian Village Honolulu, Oahu HI US 348
Hilton New Orleans Airport Kenner LA US 317
Hilton Short Hills Short Hills NJ US 301
LESS THAN 299 ROOMS
Hilton Pasadena Pasadena CA US 291
Hilton Tarrytown Tarrytown NY US 246
Hilton Suites Anaheim Orange Orange CA US 230
Hilton Suites Phoenix Phoenix AZ US 226
Hilton Suites Auburn Hills Auburn Hills MI US 224
Hilton Suites Oakbrook Terrace Oakbrook Terrace IL US 212
Hilton Suites Brentwood Brentwood TN US 203
The Waldorf Towers New York NY US 198
Hilton Inn Southfield Southfield MI US 195
Hilton Seattle Airport Seattle WA US 173
The Fontainbleau Towers Miami Beach FL US
List of Hotels Franchised.
-------------------------
MORE THAN 1000 ROOMS None
590 - 999 Rooms
Hilton Sandestin Beach & Golf Resort Destin FL US 598
Hilton Washington Duiles Airport Herndon VA US 598
Hilton Parsippany Parsippany NJ US 510
300 - 400 ROOMS
Hilton Milwaukee City Center Milwaukee WI US 478
Hilton Universal City & Towers Universal City CA US 469
Hilton Baltimore & Towers Baltimore MD US 439
Hilton Clearwater Beach Resort Clearwater FL US 426
Hilton Guadalajara Guadalajara MX 422
Hilton Arlington Park Arlington Heights IL US 420
Hilton Cherry Hill Cherry Hill NJ US 408
Hilton Montreal Bonaventure Montreal CA 395
Hilton Fort Lauderdale Airport Dania Beach FL US 388
Hilton Hartford Hartford CT US 388
Hilton Crystal City at National Airport Arlington/Crystal VA US 386
Hilton San Antonio Airport & Conference Center San Antonio TX US 386
Hilton Boston Back Bay Boston MA US 385
Hilton Inn Sunnyvale Sunnyvale CA US 372
Hilton Torrance/South Bay Torrance CA US 371
Hilton Springfield Springfield IL US 367
Hilton Salk Lake City Salt Lake City UT US 362
Hilton San Jose & Towers San Jose CA US 354
Hilton San Diego Mission Valley San Diego CA US 350
Hilton Kansas City Airport Kansas City MO US 347
Hilton Harrisburg & Towers Harrisburg PA US 341
Hilton Valley Forge King of Prussia PA US 340
Hilton North Raleigh Raleigh NC US 338
Hilton Woodcliff Lake Woodcliff Lake NJ US 336
Hilton St. Petersburg St. Petersburg FL US 333
Hilton Philadelphia Airport Philadelphia PA US 331
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Hilton Sacramento Arden West Sacramento CA US 331
Hilton Concord Concord CA US 330
Hilton JFK Airport Jamaica NY US 330
Hilton Lafayette & Towers Lafayette LA US 327
Hilton Oceanfront Resort Hilton Head Island Hilton Head SC US 323
Hilton Orlando/Altamonte Springs Altamonte FL US 322
The Seelbach Hilton Louisville Louisville KY US 321
Hilton Woodland Hills & Towers Woodland Hills CA US 318
Hilton Knoxville Knoxville TN US 317
Hilton Newark/Freemont Newark CA US 315
Hilton Dallas Parkway Dallas TX US 310
Hilton Arlington Arlington TX US 309
Hilton Lisle/Naperville Lisle IL US 309
Hilton Ontario Airport Ontario CA US 309
Hilton Denver Tech South Englewood CO US 305
Hilton Houston Hobby Airport Houston TX US 305
Hilton College Station & Conference Center College Station TX US 303
Windsor Hilton Windsor ON CA 303
Hilton Huntington Melville NY US 302
Hilton Gaithersburg Gaithersburg MD US 301
Hilton Wichita Airport Executive Conference Center Wichita KS US 301
Hilton Baton Rouge Baton Rouge LA US 300
Hilton Minneapolis/St Paul. Airport Bloomington MN US 300
Less Than 299 Rooms
Hilton Fort Lauderdale/Sunrise Sunrise FL US 297
Hilton Cocoa Beach Oceanfront Cocoa Beach FL US 296
Hilton Charleston North North Charleston SC US 296
Meadowlands Hilton Secaucas NJ US 296
Hilton Houston Westchase & Towers Houston TX US 294
Hilton Marco Island Beach Resort Marco Island FL US 294
Hilton Pleasanton at The Club Pleasanton CA US 294
Hilton Tulsa Southern Hills Tulsa OK US 294
Hilton Houston Southwest Houston TX US 292
Hilton Jacksonville & Towers Jacksonville FL US 292
Hilton Waterfront Beach Resort Huntington Beach CA US 290
Hilton Irvine/Orange County Airport Irvine CA US 289
Hilton Salt Lake City Airport Salt Lake City UT US 287
Hilton Beaumont Beaumont TX US 284
Hilton Greensboro Greensboro NC US 281
Hilton Jackson & Conference Center Jackson MS US 278
Hilton Huntsville Huntsville AL US 277
Hilton Atlanta Northeast Norcross GA US 272
Hilton Eugene & Conference Center Eugene OR US 272
Hilton El Paso Airport El Paso TX US 271
Hilton Wilmington/Christiana Newark DE US 266
Hilton Albuquerque Albuquerque NM US 264
Hilton East Memphis Memphis TN US 264
Hilton St. Louis Frontenne St. Louis MO US 264
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Hilton Inn Little Rock Little Rock AR US 263
Hilton Mesa Pavilion Mesa AZ US 263
Hilton Palm Springs Resort Palm Springs CA US 260
Hilton Greenville & Towers Greenville SC US 256
Hilton Phoenix Airport Phoenix AZ US 255
Hilton Newark Gateway Newark NJ US 253
Hilton San Bernardino San Bernardino CA US 251
Hilton Fort Wayne Convention Center Fort Wayne IN US 250
Hilton Scottsdale Resort & Villas Scottsdale AZ US 250
Hilton Dedham Place Dedham MA US 249
Hilton Midland & Towers Midland TX US 249
Hilton Norfolk Airport Norfolk VA US 249
Hilton Palm Beach Airport West Palm FL US 247
Hilton Savannah DeSoto Savannah GA US 246
Hilton Sonoma County/Santa Rosa Santa Rosa CA US 246
Hilton San Diego/Del Mar Del Mar CA US 245
Hilton Springfield Springfield VA US 245
Hilton Northbrook Northbrook IL US 244
Hilton Charlotte University Place Charlotte NC US 243
Hilton Houston Nassau Bay & Marina Houston TX US 243
Hilton Danbury & Towers Danbury CT US 242
Hilton Novi Novi MI US 239
Hilton Tampa Airport Westshere Tampa FL US 238
Hilton Melbourne Airport Melbourne FL US 237
Hilton Seattle Seattle WA US 237
Hilton Fort Lee at the George Washington Bridge Fort Lee NJ US 236
Hilton Knoxville Airport Aicoa TN US 236
Hilton Fayetteville Fayetteville AR US 235
Hilton Tucson East Tucson AZ US 233
Hilton Grand Rapids Airport Grand Rapids MI US 226
Hilton Port of Los Angeles/San Pedro San Pedro CA US 226
Hilton Allentown Allentown PA US 224
Hilton Carson Civic Plaza Carson CA US 224
Hilton Atlanta Northwest Atlanta GA US 222
Hilton Deerfield Beach/Boca Raton Deerfield Beach FL US 221
Hilton Inn North Little Rock Riverfront North Little AR US 220
Hilton St. Louis Airport St. Louis MO US 220
Hilton Oklahoma City Northwest Oklahoma City OK US 218
Hilton Lake Lanier Islands Lake Lanier GA US 216
Hilton Daytona Beach Oceanfront Resort Daytona Beach FL US 214
Hilton Toledo Toledo OH US 213
Hilton Arlington & Towers Arlington VA US 209
Hilton Greater Cincinnati Airport Florence KY US 206
Hilton Monterey Monterey CA US 204
Hilton Akron/Fairlawn Akron OH US 203
Hilton Las Crucas Las Crucas NM US 203
Hilton Whittier Whittier CA US 202
Hilton Hot Springs Convention Center Hot Springs AR US 200
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Hilton Waco Waco TX US 199
Hilton Southbury Southbury CT US 193
Hilton Woodbridge Iselin NJ US 198
Hilton Ocala Ocala FL US 197
Hilton Durham Durham NC US 194
Hilton Washington Embassy Row Washington DC US 193
Hilton Sioux City Sioux City IA US 193
Hilton Cleveland South Cleveland OH US 191
Hilton Wilmington North Claymont DE US 190
Hilton Santa Maria Santa Maria CA US 190
Hilton Austin North & Towers Austin TX US 189
Hilton Northfield Troy MI US 186
Hilton Mystic Mystic CT US 184
Hilton Houston Plaza Houston TX US 181
Hilton Bellevue Bellevue WA US 180
Hilton Lake Placid Resort Lake Placid NY US 179
Hilton Oshkosh & Convention Center Oshkosh WI US 179
Hilton Charlotte Executive Park Charlotte NC US 178
Hilton Key West Resort & Marina Key West FL US 178
Hilton Wilmington Riverside Wilmington NC US 178
Hilton Oak Lawn Oak Lawn IL US 178
Interstone Partners I, LLP Columbus GA US 177
Hilton Minneapolis North Brooklyn MN US 176
Hilton Suites Lexington Green Lexington KY US 174
Hilton Akron Akron OH US 173
Hilton Pikesville Baltimore MD US 171
Hilton Canton Canton OH US 170
Hilton Lynchburg Lynchburg VA US 167
Houston West Hilton Inn Houston TX US 165
Hilton Milwaukee River Milwaukee WI US 163
Oxnard Hilton Inn Oxnard CA US 160
Hilton Richmond Airport Sandston VA US 160
Hilton Santa Fe Santa Fe NM US 157
Hilton Columbia Columbia MD US 152
Hilton Suites Detroit Metro Airport Romulus MI US 151
Hilton Pearl River Pearl River NY US 150
Hilton Galveston Island Resort Galveston TX US 149
McAllen Airport Hilton Inn McAllen TX US 149
Hilton Greenville Greenville NC US 141
Hilton Palm Beach Oceanfront Resort Palm Beach FL US 134
Hilton Charleston Harbor Resort Mount Pleasant SC US 131
Hilton Mexico City Airport Mexico City MX 129
Hilton Tampa Bay/North Redington Beach Resort North FL US 125
Hilton Virginia Beach Oceanfront Virginia Beach VA US 124
Hilton Melbourne Beach Oceanfront Indialantic FL US 113
Hilton Longboat Key Beach Resort Longboat Key FL US 102
Hilton University of Houston Houston TX US 86
Sunset Key Guest Cottages at Hilton Key West Key West FL US 37
Resort
</TABLE>
<PAGE>
EX 10.27.3
First Amendment to Marketing/Administration Fund and Incentive Agreement
------------------------------------------------------------------------
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Marketing/Administration Fund and Incentive Agreement,
dated December 23, 1998 (the "Marketing Agreement"), between Hilton Hotels
Corporation ("HHC") and CAIS, Inc. ("CAIS" ) is hereby amended as of this 23 day
of April, 1999, as follows:
1. The Marketing Agreement is amended by adding new Paragraph 1A as follows:
1A. Penetration Rate Incentive.
(i) A Penetration Rate Incentive Payment shall be paid to HHC during certain
years of the Term with respect to corporate owned or managed Hotels that
participate in the Services.
(ii) In the event the "Average Gross Revenue" (defined as (a) the gross Guest
Room Usage Fees from all Service-installed Guest Rooms at a participating
hotel divided by (b) the minimum number of Service-installed Guest Rooms at
such hotel, as defined in Paragraph 10(b) of the First Amendment to Master
License Agreement of even date herewith) at a participating corporate owned
or managed hotel exceeds $* during each such year, then HHC shall receive
as a Penetration Rate Incentive Payment, a percentage (shown in the chart
below by hotel property size) of Guest Room Usage Fees at such participating
hotel during the balance of each such year, until such time as the Average
Gross Revenue at such hotel exceeds $* per Service-installed Guest Room,
at which threshold the Penetration Rate Incentive Payment shown in
subparagraph 1(A)(iii) would instead apply.
<TABLE>
<CAPTION>
Number of Guest Incent. Pmt. Incent. Pmt. Incent. Pmt.
Rooms Year 1 Year 2 Year 3
- --------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
1,000 + *% *% *
- --------------------- ------------------ ------------------- ------------------
500 - 999 *% *% *
- --------------------- ------------------ ------------------- ------------------
300 - 499 *% *% *%
- --------------------- ------------------ ------------------- ------------------
1 - 299 *% *% *%
- --------------------- ------------------ ------------------- ------------------
</TABLE>
(iii) In the event the Average Gross Revenue at a participating corporate
owned or managed hotel exceeds $* during each such year, then HHC shall
receive as a Penetration Rate Incentive Payment a percentage (shown in the
chart below by hotel property size) of Guest Room Usage Fees at such
participating hotel, during the balance of each such year until such time as
the Average Gross Revenue at such hotel exceeds $* per Service-installed
Guest Room, at which threshold the Penetration Rate Incentive Payment to HHC
would cease.
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
1
<PAGE>
<TABLE>
<CAPTION>
Number of Guest Incent. Pmt. Incent. Pmt. Incent. Pmt.
Rooms Year 1 Year 2 Year 3
- --------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
1,000 + *% *% *
- --------------------- ------------------ ------------------- ------------------
500 - 999 *% *% *
- --------------------- ------------------ ------------------- ------------------
300 - 499 *% *% *%
- --------------------- ------------------ ------------------- ------------------
1 - 299 *% *% *%
- --------------------- ------------------ ------------------- ------------------
</TABLE>
2. The Marketing Agreement is further amended by adding new Paragraph 2A as
follows:
2A. Penetration Rate Marketing Fund Incentive.
(i) A Penetration Rate Marketing Fund Incentive Contribution shall be
contributed by CAIS to the Account referred to in Paragraph 2 during certain
years of the Term with respect to those Hotels that are not corporate owned
or managed that participate in the Services.
(ii) In the event the Average Gross Revenue at a participating hotel that is
not corporate owned or managed exceeds $* during each such year, then CAIS
shall contribute to the Account as a Penetration Rate Marketing Fund
Incentive Contribution a percentage (shown in the chart below by hotel
property size) of Guest Room Usage Fees at such participating hotel during
the balance of each such year, until such time as the Average Gross Revenue
at such hotel exceeds $* per Service-installed Guest Room, at which threshold
the Penetration Rate Marketing Fund Incentive Contribution shown in
subparagraph 2(A)(iii) would instead apply.
<TABLE>
<CAPTION>
Number of Guest Incent. Incent. Incent.
Rooms Contribution Contribution Contribution
Year 1 Year 2 Year 3
- --------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
1,000 + *% *% *
- --------------------- ------------------ ------------------- ------------------
500 - 999 *% *% *
- --------------------- ------------------ ------------------- ------------------
300 - 499 *% *% *%
- --------------------- ------------------ ------------------- ------------------
1 - 299 *% *% *%
- --------------------- ------------------ ------------------- ------------------
</TABLE>
(iii) In the event the Average Gross Revenue at a participating hotel that is
not corporate owned or managed exceeds $* during each such year, then CAIS
shall contribute to the Account as a Penetration Rate Marketing Fund
Incentive Contribution, a percentage (shown in the chart below by hotel
property size) of Guest Room Usage Fees at such participating hotel, during
the balance of each such year until such time as the Average Gross Revenue at
such hotel exceeds $* per Service-installed Guest Room, at which threshold
the Penetration Rate Marketing Fund Incentive Contribution to the Account by
CAIS would cease.
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
2
<PAGE>
<TABLE>
<CAPTION>
Number of Guest Incent. Incent. Incent.
Rooms Contribution Contribution Contribution
Year 1 Year 2 Year 3
- --------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
1,000 + *% *% *
- --------------------- ------------------ ------------------- ------------------
500 - 999 *% *% *
- --------------------- ------------------ ------------------- ------------------
300 - 499 *% *% *%
- --------------------- ------------------ ------------------- ------------------
1 - 299 *% *% *%
- --------------------- ------------------ ------------------- ------------------
</TABLE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the date first above written.
Hilton Hotels Corporation, CAIS, Inc.,
a Delaware corporation a Virginia corporation
By: /s/ Dennis Koci By: /s/ William M. Caldwell, IV
---------------------- ---------------------------
Name: Dennis Koci Name: William M. Caldwell, IV
---------------------- ---------------------------
Title: SVP-HHC Title: President
-------------------- -------------------------
* Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
3
<PAGE>
Exhibit 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
Historic basic and diluted earnings (loss) per share:
- -----------------------------------------------------
Loss from continuing operations $(1,114) $ (4,586) $(11,568)
Income (loss) from discontinued operations 799 1,923 (671)
------- -------- --------
Total Net Loss $ (315) $ (2,663) $(12,239)
======= ======== ========
Weighted-average common shares outstanding:
- -------------------------------------------
Basic and diluted common shares outstanding 9,648 9,648 9,869
======= ======== ========
Basic and diluted earnings (loss) per share:
- -------------------------------------------------------
Continuing operations $ (0.11) $ (0.48) $ (1.17)
Discontinued operations 0.08 0.20 (0.07)
------- -------- --------
Total $ (0.03) $ (0.28) $ (1.24)
======= ======== ========
<CAPTION>
1998
----
(in thousands
except per share amounts)
<S> <C>
Supplemental basic and diluted loss per share(unaudited):
- ---------------------------------------------------------
Loss from continuing operations $(11,568)
Loss from discontinued operations (671)
--------
Total net loss (12,239)
Add: Interest adjustment -- continuing operations 941
Interest adjustment -- discontinued operations 135
--------
Total supplemental net loss -- continuing operations (10,627)
Total supplemental net loss -- discontinued operations (536)
--------
Total supplemental net loss $(11,163)
========
Weighted average common shares outstanding:
- -------------------------------------------
Historical basic and diluted weighted average common
shares outstanding 9,869
Shares assumed to be issued to pay-down debt 717
Series A and B preferred shares assumed to be converted
to common stock 2,931
--------
Total supplemental weighted-average common shares
outstanding basic and diluted 13,517
========
Supplemental loss per share -- basic and diluted
- ----------------------------------------------
Continuing Operations $ (0.79)
Discontinued operations (0.04)
--------
Total $ (0.83)
========
</TABLE>
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND FROM THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 785
<ALLOWANCES> 137
<INVENTORY> 0
<CURRENT-ASSETS> 9,141
<PP&E> 3,427
<DEPRECIATION> 789
<TOTAL-ASSETS> 15,678
<CURRENT-LIABILITIES> 18,515
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> (13,704)
<TOTAL-LIABILITY-AND-EQUITY> 15,678
<SALES> 0
<TOTAL-REVENUES> 5,315
<CGS> 0
<TOTAL-COSTS> 3,118
<OTHER-EXPENSES> 12,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,101
<INCOME-PRETAX> (11,568)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,568)
<DISCONTINUED> (671)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,239)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
